A STUDY ON BUDGETING AND BUDGETARY CONTROL AT TECUMSEH PRODUCTS INDIA PRIVATE LIMITED

A CASE STUDY ON TECUMSEH PRODUCTS INDIA PRIVATE LIMITED HYDERABAD

UNDER PARTIAL FULFILLMENT FOR THE AWARD OF MASTERS DEGREE IN BUSINESS ADMINISTRATION

BY K.ANTHONY JOSEPH (05508119)

ST.JOSEPHS PG COLLEGE
(AFFILIATED TO OSMANIA UNIVERSITY)

(2008-2010)

DE CLARATION

I Mr.K.ANTHONY JOSEPH, a bonafide student of ST.JOSEPHS P.G COLLEGE affiliated to OU, Hyderabad would like to declare that the entitled project work A STUDY ON BUDGETING AND BUDGETARY CONTROL AT TECUMSEH PRODUCTS INDIA PVT LTD is being carried out in original and submitted by me in partial fulfillment for the award of Master of Commerce from OU-Hyderabad.

The results and facts embodied in this thesis work have not been submitted to any other University or Institute for the award of any degree or diploma.

Date : Place : Hyderabad (K.ANTHONY JOSEPH)

ACKNOWLEDGEMENT

I take this opportunity to express my gratitude and wish to thank all those who were responsible in helping me to undertake this project work. I sincerely thank Mr. Sanjay Tangri (Senior Manager-Accounts Dept) Tecumseh products India Pvt. Ltd., for giving me an opportunity to work on my project in consensus to this companys progress and be a part of it for the project work. It is my duty to place on record my deep gratitude for Mr. Sunil Kumar, Finance Manager (Accounts-Dept), Tecumseh Products India Pvt. Ltd., Hyderabad, for permitting me to undertake this project work. I also would like to express my heart felt thanks to him for all the guidance and support he has given me during the course of this project work. I wish to express my cordial thanks to Mr. Raju (Accounts-Dept), my internal guide for his active guidance and well support to cross the difficult ladders in accumulating the information. I also wish to thank Mr. Sambasiva Rao (EOU), for referring me to do the project work, I evenly express my sincere gratitude to Mr. A.Rajeshwara Rao, Manager-HR (Dept of HR), for providing me an opportunity, immediately on my approach. I sincerely thank Mr. Chandrasekhar, and all other staff members of Tecumseh Products India Pvt. Ltd. for giving their at most co-operation and timely help to have better study at the company premises. I wish to convey my sincere thanks to our project guide Ms.Sangeetha and all other faculty members of M.B.A for their sustained help, encouragement, and coordination during the period of my project work.

ABSTRACT
This project titled A Study on Budgeting and Budgetary Control at Tecumseh Products India Pvt. Ltd. is a study conducted at Tecumseh products India Pvt. Limited, Hyderabad. The purpose of the project is to study the budgetary system in a Manufacturing Company. The project work consists of introduction to budgets and budgetary control with various advantages and disadvantages of the same. The study methodology adopted was both, interaction with both the concerned staff at Tecumseh Company and also through various manuals and journals published in-house. The objectives of the study being primarily to understand the budgeting system in a manufacturing company (concern) and the advantages of the same. To assimilate the budgetary control system adopted at Tecumseh, and to see the performance of the company over a period of three years and make suggestions wherever necessary. The study takes into consideration the budgeted estimates, the revised estimates and actual figures for some of the important sources of budgetary variance like, sales, consumption of raw material, salaries and wages etc., The relevant figures are from the years 2007 onwards which have been taken for the analysis. The analysis of the budget variations primarily gives an insight into whether there has been an over estimation or under-estimation of resources allocated, and the reasons for the variations are evaluated through consultations with the concerned managers at Tecumseh. Suggestions have been made as to, how the existing system can be improved to have a better control over the budgetary system in the organization.

INDEX

Particulars
Chapter No Page No.

1.

INTRODUCTION 1.1. Introduction 1.2. Scope of the study 1.3. Objectives of the study 1.4. Research methodology 1.5. Limitations of the study

(1-6)

2.

COMPANY PROFILE

(7-33)

3.

REVIEW OF LITERATURE

(34-53)

4. 5.

DATA ANALYSIS

(54-70)

CONCLUSION & SUGGESTIONS

(71-73)

BIBILIOGRAPHY

(74-75)

LIST OF TABLES
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Page no. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. Budgetary Control Production Budget Production Cost per Unit Actual Production Production Variance Direct Labour Budget Actual Labour Direct Labour Variance Sales Budget Actual Sales Sales Variance Budgeted Income Statement Actual Income Statement Income Statement Variance Material Purchase Budget Quarterly Sales Volume Budget Quarterly Budgeted Income Statement Quarterly Total Material Cost Budget Quarterly Total Labour Absorption Budget 50 55 56 56 57 58 59 59 60 61 61 62 63 63 64 65 67 68 69

CHAPTER-1 INTRODUCTION

1.1. INTRODUCTION

A budget is a comprehensive plan of action expressed in physical and financial terms. Its a blue print of a companys financial estimates for the future. Budgeting forms the most important part of the planning function. Its a system of planning and control covering all the segments of an organization and also giving a sense of direction to the goals and objectives of an organization. A budget constitutes the principal instrument for projecting the future cost revenues, which form an essential part of the management accounting and the foundation of firms financial control.

A budget system should be such that it becomes imperative for the management to establish goals and objectives, define policies, allocate resources, set targets, and try to take corrective action if there are any deviations. A management is said to be effective if it can accomplish the objectives of an organization. But it is equally important for the organization to attain the objectives efficiently with minimum amount of resource utilization. In order to attain these set goals within a given set of constraints is a difficult job; hence with the help of a proper budget one can achieve the organizational goals and objectives.

1.2. SCOPE OF THE STUDY

The study is conducted with the available data from the Annual Reports, Internal Reports, and other available data from several interactions with the staff of Tecumseh Products India Pvt. Ltd., and analysis was made accordingly.

The

data

is

secondary

in

nature

as

the

records

and

statements, which shows their own limitations, and up to a certain extent it is even said to be primary while the collection of data regarding actual facts are collected from the concerned staff.

The budgeting is done only for the next three years and it clearly explains the limitation regarding the duration of the study.

All the budgets are prepared in the Organization by the concerned departments and they share the same as and when they required for proper adjustments and necessary updates. Hence the data collected from them is regarded as fair and absolute. The intension behind preparation of budgets is to forecast the sales and expenses to be incurred in the near future and compare with actuals.

1.3. OBJECTIVES OF THE STUDY

To study the budgetary control system and techniques implemented in Tecumseh Products India Pvt. Ltd. To study the performance of the company and various cost control techniques implemented and their impact. To examine the feasibility of present system in Tecumseh Products India Pvt. Ltd. To compare the present sales, production, raw-materials and others with actuals. To predict the better way of improving the sales forecasted in relation to production. To understand and assimilate the existing system and make suggestions if any.

The organization was following till recent past mostly cost plus system for its product pricing and was a leading manufacturer in cooling across and the refrigeration edges of the compressors globe. Due supplying to not only to and domestic markets but also exports to various international markets Liberalization Globalization, and the increase in competition from private players, the organization is in a situation where it has to control its costs and make proper use of the existing financial resources. Control of costs is possible through an effective budgetary control system.

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1.4. RESEARCH METHODOLOGY

Primary data it is primary data collected from the

company records and one to one interaction with employees of the company

Secondary data it is collected through literary books

annual report of the company and web based resources .

WEBSITES:
www.netmba/finance/capitalbudgeting.com www.tecumsehindia.com

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1.5. LIMITATION OF THE STUDY

The day-todays cut throat competition in the world of business, trade and commerce is leading to many complexities which when is not predicted properly according to the fast growing changes that are taking place in the market situations may result in adverse progress and some times may leads to exit from the industry or domestic markets. To avoid these kinds of threats endangering the survival prospects, there is a compulsion today to have a proper plan of action in predicting the prices, costs, funding the proposals, controlling the same and implementing the framed budgets and utilize the scarce resources avoiding maximum extent of wastages. Budget shows the real need to know the SWOT-analysis which in turn is simply known as Strengths, Weaknesses, Opportunities, and Threats. Following these guidelines it is very simple to make proper budget allocations according to requirement and make timely decisions. Budgeting and Budgetary control helps in this context of dynamism. Preparation of Budgets in various fields like purchases, production, salaries and wages, and sales process of the company on a monthly basis, quarterly and half-yearly basis gives effective

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control system in financial management and thus makes the management aware of the regular price changes.

CHAPTER-2 REVIEW OF LITERATURE

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CONCEPT OF BUDGETNG AND BUDGETARY CONTROL

Budget: A budget is 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 attaining a given objective. It may include income, expenditure and the employment of capital. In other words, a budget is a systematic plan for the utilization of manpower and material resources. In a business organization a budget represents an estimate of the future costs and revenues.

ESSENTIAL FEATURES OF A BUDGET: 1. Its a written plan of activities for the future period of time. 2. It is expressed in quantitative form, physical of monetary units or both. 3. It relates to the income and expenditure for individual functions of the business. 4. It is prepared for a definite period of time, usually for one year. 5. It relates to the future period for which the objectives or goals have already been laid down. 6. It is prepared in advance and is derived from the long-term strategy of the organization. OBJECTIVES OF A BUDGET: Budgets serve as a Blue Print of the desired plan of action.

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Budgets help in reduction of wastage and losses by revealing them in time for corrective action. Budgets serve as means of communication. The organization communicates the policies and targets to the managers in the organization who are responsible to carry out the plan.

Budgets serve as the benchmark for controlling ongoing operations. Budgets help to coordinate, integrate and balance various operations to achieve set objectives of the organization. Budgets are a way of communicating to the departmental, sectional, and divisional heads their responsibilities and making them accountable to the same if any deviations from the actuals arise.

Budgets facilitate centralized control with delegated authority and responsibility. A system of control can be exercised by having a plan against which the actual results can be progressively compared and corrective actions are taken when ever necessary.

Budgets compel advance planning. By having a formal budgeting procedure, management is forced to look to the future instead of living hand to mouth without any clear idea or purpose.

Budgetary control: Budgetary control is a system of controlling costs that includes the preparation of budgets, coordinating with the departments and establishing responsibilities, comparing actual performance with that of the budget and acting upon results to achieve maximum profitability. Its a very important activity to ensure that the actuals confirm to the plans set through the

15

budgets. The meaning and purpose of setting of budgets will not be achieved without effective budgetary control system.

No system of planning can be successful without having an effective and efficient system of control. Budgeting is closely connected with control. The exercise of control in the organization with the help of budgets is known as budgetary control. The process of budgetary control includes Preparation of various budgets Continuous comparison of actual performance with the

standard or the budgetary performance. Revision of budgets in the light of changed circumstances. A system of budgetary system should not become rigid; there should be enough scope for flexibility to provide individual initiative and drive, budgetary control is an important device for making the organization more efficient on all fronts. It is an important tool for controlling and achieving the organizational objectives.

STEPS INVOLVED IN BUDGETARY CONTROL SYSTEM: Establish a plan or target of performance, which coordinates all the activities of the business. Record the actual performance. Compare the actual performance with the standards set. Calculate the variances and analyze the reasons for the difference.

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 Take the necessary corrective action to set the actual performance right.

OBJECTIVES OF BUDGETARY CONTROL: To act as a guide for the management decision making when unforeseen conditions affect the business. To coordinate all the activities of the business To plan and control income and expenditure so that maximum profitability is achieved. To combine all the levels of management in preparation of the budget so that there is individual initiative. To direct capital expenditure in the most profitable direction. To provide a benchmark against which actual results can be compared. To guide the management to remedy a given situation. To ensure that sufficient funds and working capital is available for the efficient functioning of the organization. To clearly lay down responsibility and authority of each employee so that valuable time is not wasted. ADVANTAGES OF BUDGETARY CONTROL: 1. Budgeting helps to coordinate, integrate, and balance the efforts of various departments in the light of the overall objectives of the enterprise. 2. Budgets compel management to plan for the future and become more effective and efficient in administrating the business operations, it also instills into the manager the habit of evaluating carefully their problems before making a decision.

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3. Budgeting increases the participation of the employees in the policy formulation and implementation, thus increasing their morale and motivating them to work in harmony with the organizational goals. 4. Budgeting helps in proper utilization of existing resources, both human and capital and also helps in minimizing wastage. 5. Budgeting improves the quality of communication as all the procedures and rules are written and communicated to all the employees in the organization, which results in better understanding and harmonious relations among managers and subordinates. 6. Budgeting helps the management to focus on significant issues affecting the business, thus facilitating management by exception and also helps in saving the precious time of the top management by not involving in day-to-day affairs. 7. Budgeting measures efficiency and thereby enables selfevaluation by the management. It also indicates the progress made in attaining the enterprise objectives. 8. Budgeting facilitates control as all the relevant details are clearly laid down. It also helps in making the management more cost conscious. CHARECTERISTICS OF A GOOD BUDGETING: A good budgeting system should involve persons at different levels while preparing the budgets. The subordinates should not feel any imposition on them. There should be a proper fixation of authority and

responsibility. The delegation of authority should be done in a proper way.

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 The targets of the budgets should be realistic, if the targets are difficult to be achieved then they will not enthuse the persons concerned. A good system of accounting is also essential to make the budgeting successful. The budgeting system should have a whole-hearted support of the top management. The employees should be imparted budgeting education. There should be meetings and discussions and the targets should be explained to the employees concerned. A proper reporting system should be introduced; their actual results should be promptly reported so that their performance appraisal is undertaken.

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BUDGETING FACTORS AT TECUMSEH PRIVATE LIMITED

PROCUREMENT:
Modes of procurement: There are two main modes of procurement of raw material. 1) DIRECT PROCUREMENT: - Direct procurement means that the raw materials are directly identifiable as part of the final product and are directly used on machine. 2) CONVERSION: - In this process the base material is being converted into final products through various processes applied on to shape them and give them the need satisfaction power. Conversion process not only converts the material into final products but also gives an ultimate solution.

SOURCE OF PROCUREMENT:
It has mainly two sources of procurement of raw material.

1) DOMESTIC: - In this system mainly the procurement of raw materials can be made from with in the country.

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2) IMPORTED: - In this system the procurement of raw materials can be made from outside the country.

STRATEGIES OF MATERIALS MANAGEMENT: - The following

are the strategies followed by materials management in Tecumseh Product India Ltd.

Two sources for all materials: Even though there is shortage of supply from one supplier, it could be accommodated by the other source.

Price: The price can be fixed based on the competitors price. Quality: Quality of materials differs from one supplier to the other. Decision making: The activity of making a decision to buy the material directly from supplier or to import the same.

PLANNING: - Budget planning determined how much of which

material, components, goods, labour, and other requirements are needed and when. This activity is the responsibility of the planner or controller. Planning process initiates coordination and classification of sub goals to achieve major corporate goals.

TYPES OF BUDGETS: - The budgets are usually classified

according to their nature. The following are the types of budgets which are commonly used:

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(A) CLASSIFICATION ACCORDING TO TIME:

(1) Long term budgets (2) Short term budgets (3) Current budgets

(B) CLASSIFICATION ACCORDING TO FUNCTIONS:

(1) Operating budgets (2) Financial budgets (3) Master budgets

(C) CLASSIFICATION ACCORDING TO FLEXIBILITY:

(1) Fixed budgets (2) Flexible budgets

(A) ACCORDING TO TIME:

1) Long term Budgets: The budgets are prepared to depict long term planning of the business. The period of long term budgets varies between five to ten years. The long term planning is done by the top management; it is not generally known to lower levels of management. Long time budgets are prepared for some sectors of the concern such as capital expenditure, research and development,

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long term finances, etc. These budgets are useful for those industries where gestation period is long i.e., machinery electricity, engineering etc.

2) Short Term Budgets: - These budgets are generally for one of two years and are in the form of monetary terms. The consumers foods industries like sugar, cotton, textile, etc. use shorter, budgets.

3) Current Budgets: - The period of current budgets is generally of months and weeks. These budgets relate to the current activities of the business, according to ICWA London. A current budget is a budget which is established for use over a short period of time and is related to current conditions.

(B)CLASSIFICATION ON THE BASIS OF FUNCTION: 1. Operating budgets: - These budgets relate to the different
activities or operation of a firm. The number of such budgets depends upon the size and nature of business. The commonly used operating budgets are: a) Sales budget b) Production budget c) Production Cost budget d) Purchases budget e) Raw Materials budget f) Labour budget g) Plant Utilization budget h) Administrative and selling expenses budget, etc.

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The operating budget for a firm may be constructed in terms of programmers or responsibility areas, and hence may consist of: (i) (ii) Programmed Budget Responsibility Budget

(i) Programmed Budget: It consists of expected revenues and costs of various products or projects that are termed as the major programmers of the firm. Such a budget can be prepared for each product line or project showing revenues, costs and the relative profitability of the various programmers. Programmed budgets are thus, useful in locating areas where efforts may be required to reduce costs and increase revenues. They are also useful in determining Imbalances and inadequacies in programs so that corrective action may be taken in future. (ii) Responsibility Budgets: - When the operating budget of a firm is constructed responsibility in term of responsibility areas it is areas called may the be budgets. However responsibility

classified under three broad categories. (a) Cost/expense center (b) Profit center (c) Investment center

2. Financial Budgets: - Financial budgets are concerned with cash

receipts, disbursements, working capital, capital expenditure, financial position and results of business operations. The commonly used financial budgets are; (a) Cash budget (b) Working capital budget

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(c) Capital expenditure budget (d) Income statement budget (e) Statement of retained earnings budget (f) Budget balance sheet or position statement budget

3. Master budget:

- Various functional budgets are integrated into

master budget. This budget is prepared by the ultimate integration of separate functional budgets. According to ICWA London The master budget is the summary budget in corporations functional budget. Master budget is prepared by the budget officer and it remains with the top level management. This budget is used to coordinate the activities of various functional departments and also to help as a control device.

(C) CLASSIFICATION ON THE BASIS OF FLEXIBILITY:

1) Fixed budget: - According to ICWA London, fixed budget is a budget which is designed to remind unchanged irrespective of the level of activity actual attained. Fixed budgets are suitable under static conditions. If sales, expenses and costs can be forecasted with greater accuracy than this budget can be advantageously used.

2) Flexible budget: - A flexible budget consists of a series of budgets for different levels of activity. It therefore, varies with the level of activity attained. A flexible budget is prepared after taking into consideration unforeseen changes in

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the condition of the business. A flexible budget is defined as a budget which is by recognizing the difference between fixed, semi-fixed and variable cost is designed to change in relation to the level of activity.

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REQUISITES FOR A SUCCESSFUL BUDGETARY CONTROL SYSTEM: - For making a budgetary control system successful,
following requisites are required: -

Clarifying objectives: The budgets are used to realize

objectives of the business. The objectives must be clearly spelt out so that budgets are properly prepared. In the absence of clear goals, the budgets will also be unrealistic.

Proper delegation of Authority and Responsibility: Budget

preparation and control is done at every level of management. Even though budgets are finalized at top level but involvement of persons from lower levels of management is essential for their success. This necessitates proper delegation of authority and responsibility.

Proper communication system: An effective system of

communication is required for a successful budgetary control. The flow of information regarding budgets should be quick so that these are implemented.

Budget Education: The employees should be properly

educated about the benefits of budgeting system. They should be educated about their role in the success of this system.

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Participation of all Employees: The success of budgetary

control system depends upon the participation of all employees of the organization.

Flexibility: Flexibility in budgets is required to make them

suitable under changed circumstances.

Motivation: Budgets are to be implemented by human beings. Their successful implementation will depend upon the interest shown by the employees.

BUDGETARY CONTROL

ADVANTAGES Maximization of profit Proper coordination Provides specific aims Tools for measuring performance Economy Corrective action Creates budget consciousness Reduced cost Determines weaknesses
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LIMITATIONS Uncertain future Revision required Discourages efficient persons Problem of coordination Conflict among different departments Depends upon support of top management

COST VARIANCE ANALYSIS.

In Tecumseh Products India Pvt. Ltd. Cost variance analysis is prepared based upon the actual cost of the period by comparing actual cost with the budgeted or estimated cost. The cost variance analysis is the process of analyzing the difference between budgeted cost allowed for manufacturing a product and actual cost incurred. It is the process of analyzing flexible budget variances. A variance is the variation between the standard or estimated cost and the actual element. A variance or cost variance is the difference between standard cost and the comparable actual cost for a particular period.
Types of Variances:

The following three classes of variances are: Cost variance:- Direct materials, direct labour overheads. Sales variance. Profit or Loss variance.
1. Cost Variance:

Managers make two major types of decisions in the planning and controlling of costs. A) Price Decisions.

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B)

Quantity Decisions and the basis of these two

types of decisions. There are two major sets of cost variances:

(i).

Price or rate variance and Quality usage or Efficiency variance.

(ii)

The sum of above two variances is the total variance. 2. Sales Variance: A sales variance shows either the effect on business changes in quantities of sales or prices obtained for sales i.e., profit. 3. Profit or Loss Variance: Profit or loss variance is the difference between the total cost variance and the sales variance. MATERIAL COST VARIANCE: Material cost variance is the difference between the total standard materials cost (SC) for the actual productions and the actual cost (AC). It is the difference between the standard cost and the actual cost of materials. The formula for material cost variance would be: MCR = (Standard cost of materials Actual cost of materials) ((SP * SQ) (AP * AQ)) Where SP stands for Standard Price SQ stands for Standard quantity 30

AP stands for Actual Price AQ stands for Actual quantity MATERIAL USAGE VARIANCE: The material usage variance is equal to difference between the standard quantity (SQ) required for actual production and the actual quantity (AQ) used multiplied by the standard material price (SP).

The formula for material usage variance would be: MUV = (Standard Qty for actual production Actual Qty) x Standard Price. (SQ AQ)*SP The material usage variance is divided into: (i) Variance (ii) MATERIAL MIX VARIANCE: When a product requires two or more raw materials in its make-up then that is material mix variance. It is the difference between the total quantity in standard production, priced at the standard production, priced at the standard price and actual quantity of material used priced at the standard price. Material Yield Variance. Material Mix or Mixture

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The formula for material mix variance would be: MMV = (Standard Qty Actual Qty) x Standard Price per unit. MATERIAL YEILD VARIANCE: In industries, it is possible to lie down that output will be a particular percentage of total input of materials. In particular situation, it may be given that normal less in production will be 20% of input of materials. In a case like this, 80% of the total input of material will be expected output. It actual yield obtained happens to be different from the standard yield specified, there will be yield variance is that portion of material usage variance which is due to difference specified. between actual yield obtained and standard yield

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CHAPTER-3 COMPANY PROFILE

33

2.1.COMPANY PROFILE
The company was originally established and registered in 1963 under the name of USHA REFRRIGERATION INDUSTRIES LIMITED (URIL). Usha Refrigeration Industries Limited (URIL) started in 1963. URIL manufactured compressors for water cooler, air-conditioners and air-coolers. Lala Charath Ramji who was from a renowned industrial family of DCM and Coromendal Group of Companies started URIL. In 1970 the URIL was changed to Shriram Refrigeration Limited and the business was also diversified towards manufacturing of diesel engines and water coolers. Shriram Industries played a great role in the field and captured more than 50% of the market share in India. Shriram Industries also kept its hands in international trade and were successful in exporting their products to the neighboring countries, Nepal and Bangladesh. In 1980 Lala Charath Ramjis son, Siddharth C. Shriram, became the chairman cum Managing Director of the company. The period saw sea change in industrial policy, which resulted in a great change in the industrial sector. In the process for survival, Shriram went into Tech collaboration with Westing House, US and was named as Siel Compressors. Siel Compressors were the first Indian Company to manufacture compressors. Later Westing House stopped manufacturing compressors and Siel went into Technological Collaboration with Tecumseh Products Company (TPC), USA in 1988.

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Tecumseh means Crouching Panther derived from chief of the Shawnee Tribe (1768-1813), it started its operations to offer new state of art AW Series to Indian customers. Subsequently TPC took over Siel Group in1997 and Siel Group became 100% subsidiary of TPC. As soon as Tecumseh took over the company it stopped manufacturing water coolers and restricted its production to

CFC/hermetically sealed compressors.

TECUMSEH PRODUCTS INDIA LIMITED (TPIL) was incorporated in New Delhi, India with limited liability on January 30, 1997. TPIL is principally promoted on behalf of Tecumseh Products Company (TPC), USA and its nominees hold its shares. Tecumseh India is a 100% subsidiary to Tecumseh Products Company (TPC) USA, Which is the worlds only full line, independent manufacturer of compressors. TPC has 29 manufacturing locations in 4 continents. In India the company has 20 sales offices and extensive networks of over 200 dealers and more than 600 registered small-scale manufacturers. TPC invested $80 million in Indian operation known as Tecumseh Products India Pvt. Ltd (TPIPL). TPIPL has two states of art manufacturing facilities at Hyderabad (Andhra Pradesh) and Ballabgarh (Haryana) with CADEM Center at Hyderabad plant to meet Global Engineering needs. TPIPL has gained core expertise in Research & Development, AW Assembly and AW Machine Shops such that it acquired a Lions share of the Indian Compressor market by gaining 50% share.

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TPIPL is an ISO 14001 and 9001 certified; American based MultiNational Company, Which has core expertise in manufacturing compressors (mostly hermetic) in the air conditioning and refrigeration industry in India. Tecumseh Products Companys (TPC) entered India through a dual acquisition of Siel Compressors Limited Hyderabad and the compressor division of Whirlpool India Limited at Ballabgarh in July 1997. Tecumseh Products India Pvt. Ltd (TPIPL) is the largest independent manufacturer of both air-conditioning and refrigerator compressors in India. It has two state-of-the-art manufacturing facilities at Hyderabad (Andhra Pradesh) and Ballabgarh (Haryana). Tecumseh India is the preferred supplier to those who deal in the AC&R Industry in India and in the Middle East, SAARC countries.

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HYDERABAD PLANT

The plant at Hyderabad manufactures compressors only for the Air-conditioners and compressors for deep freezers, bottle coolers, and water coolers which are considered to be the Worlds No. 1 in the 150 million compressor market a year. At Hyderabad both reciprocating (AW series) and Rotary (RN series) compressors are manufactured, with an installed capacity of 0.75 and 0.60 million units per annum respectively. It is spread across 55-acres of land at Balanagar Industrial belt, 15 km away from the Hyderabad City on the highway line going towards HMT Ltd, Narsapur Road, and has been accredited with ISO 9001 and ISO 14001 certification for best operational and environmental practices. The in house application engineering testing facility is well equipped to constantly improve the performance of compressors. The CADEM center started in 2001 as a center for Tecumsehs global design needs. Today CADEM center undertakes not only the in sourced work from its different manufacturing plants but also outsourced

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CAD/CAE work from the companies in automobile, aeronautical and other verticals. Even this engineering facility is ISO 9001 certified. The Hyderabad plant has six regional offices among which four offices are at the metro cities: Delhi, Mumbai, Kolkata, and Chennai and the remaining two are at Ahmedabad and Secunderabad. Besides these there are branch offices and depots located in prime cities across the country. The Hyderabad plant also has a network of about 177 dealers across the nation and are preferred supplies to key original equipment manufactures (OEMs) like LG, Voltas, Blue Star, Godrej, Videocon, Fedders, Amtrex, Hitachi, etc., TPIPL Hyderabad plant was successfully in getting the ISO 9001 certification for maintaining quality of the compressors in 1994 and for the eco friendly environment maintenance the company has got ISO 14001 certification.

The management has started development activities in the following areas: Effluent treatment plant Tree Plantation. Rainwater harvesting is to increase the ground water level and TPIPL

has the distinction of being the first organization in this regard. Vermiculture is the process of utilizing canteen food wastage for

converting into natural meaner.

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DEPARTMENTS OF TPIPL (HYDERABAD): Human Resource Department Accounts Department Attendance and Pay Office (A&PO) Export Oriented Unit (EOU) Research and Development (R&D) Maintenance and Engineering Department Quality Development of AW assembly AW Press Shop AW Machine Shop Service Center Dispensary Chemical and Technological Laboratories

TPIPL Hyderabad has a total of 766 permanent employees as on which includes: 172 officers 232 Staff 362 Workers

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BALLABGARH PLANT

At Ballabgarh, Haryana TPIPL has invested Rs.200 crores for manufacturing of Non-CFC compressors for refrigeration appliances. The Ballabgarh plant is one of the best compressors manufacturing unit in Asia. The plant is extended on 21-acre land on the Delhi Mathura, National highway and is an ozone-friendly zone. This manufacturing facility has a production capacity of 1.5 million units per annum. It is also an ISO 9001 certified facility. The company strives to provide prompt, accessible after sales services, and technological assistance. And in such a case it is critical and essential to have a free flow of manufacturing information between its manufacturing plants and the other offices like four regional sales offices, two branch sales offices, 9 depots, 194 registered dealers, and 600 registered assemblers nationwide.

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Tecumseh India deployed a gigabit LAN solution using updated hardware and passive components. The solution design was based on layer 3 switching technology, supported by a fiber backbone, on a gigabit interface for interdepartmental connectivity. The company now enjoys the benefits of a backbone, which offers high throughput and bandwidth, and is capable of handling increased load in future. The links are reliable and has very little downtime. And all this has helped the company to carry out online ERP transaction with various other nationwide locations. Tecumseh has notched up significant increase in business volume and expanded customer base in the last few years, including overseas customers.

II. MARKETS Competitors: The Indian compressor industry has been in low gear for the past few years, recording sluggish top line and moderate bottom line growth. Most companies faced a tough time maintaining profitability levels. However, this was due to the overall economic conditions rather than company specific factors. In fact, companies have taken some tough decisions, in preparation for an economic up turn. In the recent years, the compressor and drilling equipment industry has undergone a massive restructuring and consolidation exercise. The several strategic moves made by the companies helped them emerge leaner and stronger organizations, better equipped to face challenges.

41

Competition has been constantly intensifying in this industry with more compressor manufactures going for strategic partnerships and the old players revamping their operations. Atlas Copco Ltd, ELGI equipments, Kirloskar-Copeland, BPL, Danfoss Industries, and Ingersoll-Rand Air solutions division are just some of the major competitors to Tecumseh. Apart from these big names there are many mass merchandisers which are becoming competitive in the local markets day-by-day.

One major development in the industry that has significantly altered the markets dynamics has been the merger of Chicago Pneumatic (India) with Atlas Copco (India) subsequent to the merger of their parents at the global level. This has implications not only for Atlas Copco, but also for leading players like Tecumseh and others. Atlas Copco discontinued manufacturing of compressor elements and decided to assemble the product. According to the company, India lacks comparative advantage in the manufacturing of compressor elements. Only the financial performance would reveal the actual benefits of these initiatives.

Ingersoll-Rand hived off its gas compressors and pumps business in line with its parents decision. Instead, it has decided to focus more on the growth of its residual businesses. It has also forayed into new areas such as equipment rental and refrigerator storage systems. These are relatively new businesses and the impact of these businesses on the future cash flows and its contribution to the top line is yet to be seen.

42

ELGI has hived off unfavorable businesses in which it did not have a competitive advantage and decided to concentrate more on core compressor business. Its Pneumatic break business has already been hived off and its has tapered down the production of multi-utility vehicles and plans to gradually close the multi-utility vehicle business in which he does not have enough competitive advantage. It has rearranged its entire operations by creating separate business units to concentrate on core products. Apart from these initiatives, ELGI also undertakes turnkey projects for setting up exclusive service stations for all major manufacturers and offers annual maintenance contracts for all service station equipments. It has consistently been increasing its presence in the compressor market to command 11.08% share as of 2009. Even after such reign exercises taken up by the main competitors of Tecumseh India, it continues to lead the pack of compressor manufacturers in India with a whopping Rs. 300.8 crores sales (2004). Even though the market share of Tecumseh India has come down to 14% (2003-04) from 18% (2002-03), it continues to be the leader.

Customers: Tecumseh India is the preferred supplier of compressors for many a best brands in India, middle East and SAARC countries. Most of its customers are original equipment manufactures (OEMs), distributors form a minor portion. Tecumseh is a silent partner powering many big OEMs; few of them are discussed below:

43

Fujitsu General is the fourth Japanese air-conditioner company to enter India after Hitachi, Matsushita and the $4.5 billion Daikin Industries. Fujitsu General tied up with Chennai based ETA engineering private Ltd to make the famed O General brand window and split air-conditioners in Pondicherry sourcing completely knocked down kits and technology from Fujitsu General. Mr. Yagi, President, Fujitsu General, inaugurated ETA generals Rs. 30 crore, 60000 units per annum plant in Pondicherry and formally launched the air-conditioners India. The ETA group plans to invest similar amount in the second phase and gradually scale up the capacity to 2.5 lakh per annum, by 2006.

Voltas-Fedders JV was a result of Fedders corporation, NJ, USA and Voltas Limited, a TATA company, coming together to form a joint venture for the manufacture of a range of room air-conditioners in India. The joint venture company, universal comfort products Pvt Ltd is based in Dadra, India. Fedders and Voltas each have a 50% interest in the joint venture, which will produce room and ductless split system air conditioners. This way the very first time that such a manufacturing only alliance has been formed in the air-conditioner industry in India. Voltass operations are organized into four independent business specific clusters: air-conditioning and refrigeration business group, international operations business group, unitary products business group, and engineering products business group. As in 2004, Voltas has sales amounting to Rs. 143 crores and Rs. 271 crores enjoys a market share of 7.8% and 7.1% in air-conditioning and refrigerator markets respectively.

44

Whirlpool India was formed when Whirlpool Corporation entered into a joint venture agreement with the TVS group to produce automatic washers at a plant setup in Pondicherry. A modest beginning was made to establish the whirlpool brand in India. In 1995 the whirlpool corporation acquired Kelvinator India ltd and entered into the refrigerator market. Later in 1995, majority ownership was gained in the TVS joint venture and the two entities were merged to form whirlpool India Ltd. The whirlpool plant went from having no awareness to claim an awareness of up to 85% and a market share of 25%. It has achieved a sale of Rs. 54.92 crores in 2004 in air conditioning equipment with a market share of 2.14%. In contrast to air conditioning equipment whirlpool is a behemoth in the refrigerators market with Rs. 803 crores sales and a dominant market share of 29.88% in 2004. Zamil Air Conditioners (ZAC) was founded in 1974 as one of the first air conditioning business to be established in Saudi Arabia and today is a leading international manufacturer of air-conditioning systems and is No. 1 in the Middle East. ZAC manufactures both consumer and commercial range of air conditioners and has sales operations in over 55 countries in the Middle East, America, Africa, Australia and the Far East. The company operations are structured into six Strategic Business Units (SBUs) supporting six in-house products and service brands as well as a number of international brands under the OEM sales. The six in-house brands are Classic, Cooline, Coolcare, Clima Tech, Geoclima, and Kessler Clima Tech. Besides the several business distinct business units, ZAC is also partners with GE appliances Europe, since 1997, in the form of joint venture called Middle East Air Conditioners (MEAC), for manufacturing and marketing of GE brand air conditioners.

45

Haier Electrical Appliance is a china based $9.2 billion consumer durables and electronics major, Haier Group, has recently taken control of 100% stake in Haier appliances (India) Pvt. Ltd by buying out the initial Indian promoters. Haier appliances (India) forayed into the Indian market when the Koreans, LG and Samsung, had swamped the countrys consumer durable and electronics market. The company had sought the Governments permission to carry out manufacturing directly through original equipment manufactures (OEMs) as well as through contract manufacturers in India. At present, the company is outsourcing its products from domestic appliances manufacturers such as BPL and Voltas. The company plans to make India as a production base for exports to neighboring countries in the near future.

III. OPERATIONS: Tecumsehs operations can be organized into three business clusters. Each of these commands into own well defined infrastructure for market coverage and service to original equipment manufacturers (OEMs). Compressors for air-conditioning: Residential Air-conditioners. Commercial Air-conditioning systems (both room and central) and

contract manufacturing. Compressors for refrigeration: Household refrigerators and freezers. Commercial refrigeration applications including the freezers,

dehumidifiers and vending machines.

46

CADEM center for global design needs and services: CAD (computer aided-design) for product design, design automation,

re-engineering and cost reduction. CAE (computer aided engineering) for structural and CFD analysis. CAM (computer aided manufacturing) for designing tools and moulds. Software and web development.

TPIPLS Vision: To provide comprehensive solutions to customers in the field of cooling while providing autonomous working environment for employees, to tap their creative potential, bring out the best in them and optimize stake holders returns.

Vision Statement It is our goal to be the global leader in all of the Markets in which we choose to participate. We will pursue disruptive technologies to redefine our products.

TPILS Mission:

47

To be recognized as the world leader in the supply of refrigerator and

air conditioning compressors. To provide our customers superior products and services. To create an environment in which our employees can grow to their

full potential and make difference. To provide superior value to our stake holders. To be driven to reach the highest possible standards of excellence in all

our endeavors. Nothing will be done to compromise our integrity. Mission Statement We will leverage our global expertise in mechanical, electrical, fluid handling, related components and services to provide comprehensive solution for our customers needs Compressors, Engines, Electric Motors, Pumps, Electronics and Controls. We will be best in class and most cost effective producer by utilizing the principals of TQM, 6 sigma and lean. Our organization will modify itself in response to changes in environment at a pace and amount of change that can be made without eliminating or impeding our ongoing effectiveness. Incisive, continuous strategic thinking will be well communicated and shared by the organization. 5-S. Philosophies: Tecumseh encourages its employees to follow these philosophies, which is the Japanese way of working: 1. SEIRI (Sorting Out): 48

a. Look around your work area and ask yourself is it really necessary for all items to be there? b. c. Separate items OK re-workable and rejected items. Re- works the re-workable items and disposes off the rejected items.

2. SEITION (Systematic arrangement): a. Items must be placed in pre fixed locations so that they are accessible and can be easily used. b. Items should be clearly identified by labeling them properly.

3. SEISO (Spic and Span): a. b. Clean the workplace your self. Clean all the equipment including tables etc., yourself.

4. SEIKETSU (Serene Atmosphere): a. A clean workplace properly selected and with proper arrangement will soon become dirty if SEIRI, SEITON and SEISO are not practiced regularly. b. To achieve a Serene Atmosphere the three steps of SEIRI, SEITON and SEISO should be continuously repeated. c. We should keep our area of work neat and clean including your own attire.

5. SHITSHUKE (Stick to Self Discipline):

a. b.

Follow rules and regulations strictly. Adhere to timings and respect time.

49

c. d.

Conform to standards while working. Follow the prescribed operational standards.

TPIPLs Quality Policy: Committed to total customer satisfaction by meeting their evolving needs, expectations and aspirations stated, implied or latent. Striving to provide products and service of global quality standards and to reach a position of leadership in the field of operations, setting new values. Continuous improvement across the organization and upgradation of product, technology and process supportive environment, at least const to society shall be the means to achieve the goals. The approach will be through proper systems and procedures and total involvement of employees, vendors and other business associates.

TPIPLs Environmental Policy: The vision of Tecumseh India is to be a serene green and eco-friendly co-operation carrying our all its operations contributing to preservation of environment and natural resources for the benefit at large. Among others this can be achieved through: Allocation of company wide priority for sustainable development with total involvement and commitment. Evaluation and up gradation of current technologies, products and raw materials for minimization, handling and disposal of solid, liquid and gaseous wastes. Realization of tangible objectives and targets set for continual improvement to control and prevent pollution and conserve resources. Legal compliance and going beyond setting new standards. Meeting international expectations such as Montreal protocol, 1987 in phasing our CFCs as refrigerants in our compressors. Training and propagation of Knowledge on environment.

50

TPIPLs Key Business Objective: Set the world industry standard of excellence for customer satisfaction. Achieve total quality. To attain and surpass global quality and reliability standards for our products. Maintain clear technology leadership. Market share leadership with focus on customer needs. Meet business and financial commitments.

TPIPLs Seven Deadly Sins:

1. 2. 3. 4. 5. 6. 7.

Inconsistent product Quality Slow response to market place Lack of innovative and competitive product Uncompetitive cost structure inadequate employee involvement Unresponsive customer service Ineffective resource allocation

Advantages of 5-S:

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Operations can be performed without error. Proceeding in a well regulated fashion resulting in fewer defective items thereby increasing the overall quality of products.

Operations can be performed safely and comfortably, reducing the chances of accidents. Machinery and equipment can be carefully maintained, reducing the number of break downs.

Operations can be performed efficiently, eliminating waste thereby increasing the efficiency and productivity.

Strategies and processes at TPIPL:

Workplace improvements (5 S Philosophies) Creativity club KRAs (improvements/suggestions) Variable earnings sharing of value addition Agreement process organization needs Non conformance reporting /audits Open house/communication meetings Team assessment and feedback Changing life styles.

52

IMPORTANT EVENTS

In the year 2000: TECUMSEH fully acquired Sri Ram, Hyderabad Whirlpool compressor, facility at Faridabad/Ballabgarh.

In the year 2001: Development of Plant in Ballabgarh

In the year 2002: Amalgamation with TIPL

In the year 2003: Voluntary Retirement Scheme Industrial Unrest and lockout in the first half of the year. Export obligations not met during the year. High foreign outgo. Obligations met towards customers by importing

finished goods and selling at a loss.

In the year 2004: Setting up of the CADEM Center

53

In the year 2005: Setting up of a 100% EOU for export of compressors and its parts. Expansion in installed capacity at the Hyderabad plant. Total foreign outgo reduced drastically. Improvement in the market for compressors as a result of an improvement in the market for air-conditioners and refrigerators.

In the year 2006: This year export showed a growth of 3 times over previous years involvement. AW capacity expansion program Company has launched two new commercial models of MLA series compressors. Has won the Green Tech Environment Excellence Silver Award in the countrywide competition among the engineering industries.

In the year 2007: Tecumseh compressors for china. Tecumseh posts 84% rise in export earnings. Tecumseh India to setup rotary compressors unit. 54

BOARD OF DIRECTORS

Mr. Todd W Herrick Mr. RKP Shankerdass Mr. MG Ramachandran Mr. Vipin Sondhi Mr. John H Ferguson Mr. James F Curley Mr. Kent B Herrick Mr. James S Nicholson Mr. Eric L. Stolzenberg Mr. R.K. Sachdeva

: : : : : : : : : :

Chairman & CEO Director Director Managing Director (till Jan 7th, 2007) Director Director (till Nov 7th, 2006) Director Director Director (from Jan 19th. 2007) Director & CFO (from Nov 7th, 2006) Company Secretary T. Venkat Registered Office

Balanagar Township, Hyderabad-500 037 Andhra Pradesh Auditors M/s Price Waterhouse, Chartered Accountants Bankers Allahabad Bank State Bank of Hyderabad Standard Chartered Bank ICICI Bank HDFC Bank

55

3.2. INDUSTRY PROFILE

Indian electronics and IT plays a major role in both the production and exports. During the year (1992-97), the electronics industry has achieved an annual growth of 20% in production and over 40% in exports.

The production in the year (1997-2002) is targeted at about Rs.380 billion with a growth rate of 37% and exports at about Rs.490 billion with a growth rate of 52%. Overall production is based on Indian Electronics industry which is widely distributed and there are more than 3500 units engaged in the electronic production. Which include in 13 central public sector units with 29 manufacturing establishments, 65 units in state public sectors, 600 units in organized private sector and more than 2800 units in small scale sectors.

Electronics has made life simple. All of us in some form or other, directly or indirectly are using electronics goods. Demand for electronics goods has led to the establishment of many manufactures and development is on day-to-day basis. The thermal, hydro, nuclear plants and power transmission industries play a vital role for the establishment of heavy electronics industry.

The industry having a wide scope because of rapid improving technologies because of such wide applications of electronics, there are several producers in different fields of electronics, with the announcement of new industrial policy (NIP) in 1991 all the Indian firms were exposed to global competition and foreign currency transactions in a big way.

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ABOUT AIR COMPRESSORS:

Air compressors provide air at pressures higher than atmospheric. Refrigeration compressors and air conditioning compressors are designed specifically for air conditioning, heat pumping, and refrigeration enclosure air conditioners remove the heat generated by electronic devices from the inside of cabinets or enclosures.

Industrial air filters reduce the number of particles in the air that passes through them. Breathing and ventilation air systems provide reliable and safe air supply sources to workers in hazardous industrial environments.

Compressed air-purgers and vortex coolers are used for spot heating or cooling applications.

Industrial air filters reduce the number of particles in the air that passes through them. Air filtration supplies the means to reduce the level of particulates in the air to a cleanliness standard required by any definition of air conditioning. It extends from the simple task of preventing lint and other debris from plugging heating/ cooling coils to removing particles as small as 0.1 micron which could cause a short circuit on microchips.

Refrigerant compressors are designed specifically for air conditioning, heat pumping, and refrigeration. Small, stand-alone compressors are not included within this grouping. Refrigerant compressors are large-scale units specifically designed to be the heart of an industrial cooling or air-conditioning system (HVAC). They are integral components of the refrigeration cycle, in which refrigerant gases are cyclically evaporated and condensed, absorbing heat from the load to be cooled, and moving to an open environment where it is dissipated. The compressor serves two main functions: to compress low pressure, low volume gases into high pressure and temperature gases, and to remove vapor from the evaporator to maintain a low boiling point. There are three main types of refrigerant compressors: scroll, screw, and piston. Other compressor styles are available, but they are less common.

57

CHAPTER-4 DATA ANALYSIS

58

ANNUAL BUDGETS
TABLE 1: PRODUCTION BUDGET

AW all Models Particulars Sale of units Add: Closing Stock (as on 31st December) Less: Opening Stock (As on 1st January) Total Production in Units 2007 750000 110500 860500 110500 750000 Year 2008 625000 30000 655000 110500 544500

In Units 2009 600000 50000 650000 30000 620000

GRAPH 1: PRODUCTION BUDGET

Production Budget 850000 750000 650000 550000 Units 450000 350000 250000 150000 50000 -50000 2007 2008 Years 2009 544500 750000 620000

INTERPRETATION

Here production budgets for three years i.e., from the year 2007 to 2009 are compared. The production, by observation, to the chart above is self explanatory that the estimations or the budgeted figures of production in units has constantly decreased and increased in the year 2009. The slight change in the production of units is acceptable as it shows a favorable change. The product cost figures are available in the following chart for the reference purpose only.

59

While calculating percentage changes year 2007 is taken as base year: The percentage change in the year 2009 decreased to 72.6%. The percentage change in the year 2009 decreased to 82.67%, but slightly increased from the year 2008 . TABLE 2: PRODUCTION COST PER UNIT

AW (Domestic and Exports) all models Particulars Year 2007 2008 2009 AW 1500 Q Actual Material Cost 2387 2417 2782 Add: Consumables 181 186 175 Rejection Cost 27 25 20 Power Cost 100 85 65 Wage Cost (Labour) 290 250 278 New Lines (Stomat, Talent, and Lamination) 30 Freight Inwards (1.14%) 29 29 22 Warranty 40 44 38 PRODUCTION COST PER UNIT 3084 3036 3380

TABLE3: ACTUAL PRODUCTION

AW all Models Particulars Total Production in Units Total Production in Units 2007 411013 411013

In Units Year 2008 591323 591323 2009 213476 213476

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TABLE 4: CALCULATION OF PRODUCTION VARIANCE CALCULATION OF PRODUCTION VARIANCE (BUDGETED VS ACTUALS)

Year 2007 2008 2009 Budgeted 750000 544500 155000 1449500 Actual 411013 591323 213476 1215812 Variance -338987 46823 58476 -233688 In Units Result Adverse Favorable Favorable

GRAPH 2:PRODUCTION VARIANCE Production Variance 1000000 800000 600000 400000 200000 0 -200000 -400000 2007 2008 Years 2009 Variance

INTERPRETATION

The variance in the year 2007 comparing to budget vs. actual is very unsatisfactory and the result is expressed as adverse. The reason behind is, the overestimation of the budgeted figures over actual. In the year 2008 & 2009, the variance is positive and it is expressed to be favorable performance. The overall variance of the three years i.e., from 2007 to 2009 is negative. Hence, there is a curious requirement to review the budgets. Concentration of performance appraisal in production is at most desired. Note: In the year 2009, the actual direct labour costs are available only till March '08 i.e., for three months. Hence budgeted figures for variance purpose are adjusted for three months. TABLE 1: DIRECT LABOUR BUDGET 61

Units

Budgeted Actual

Particulars Production in Units Labour hours per unit (in hrs) Total Hours (in Hrs) Rate per hour (in Rs.) Total Direct Labour Amount 2007 750000 3.93 190600 78.17 119193770

Year 2008 544500 1.93 280825 56.32 126531000

2009 600000 2.24 267300 43.56 93169261

GRAPH 1: DIRECT LABOUR BUDGET

Direct Labour Budget 140000000 120000000 100000000 80000000 60000000 40000000 20000000 0 119193770 126531000 93169261

Direct Labour Cost

2007

2008 Years

2009

INTERPRETATION From the above data direct labour budget for three years right from 2007 to 2009 are compared. The direct labour cost has increased in tune with decreased production. This shows there is a lot of expenditure incurred in the year 2008. A gradual decrease has been found in the year 2009 comparing to the base year 2007. The level of expenditure is controlled up to a maximum level by thorough revisions. While calculating percentage changes, 2007 is taken as base year. The percentage change in the year 2008 increased to 106.16%, which is beyond the limit. This shows over expenditure. The percentage change in the year 2009 decreased to 78.17%, showing that the strict management control on this issue in this year.

TABLE 2: ACTUAL LABOUR COST

62

Particulars Production in Units Labour hours per unit (in hrs) Total Hours (in Hrs) Rate per hour (in Rs.) Total Direct Labour Amount 2007 411013 2.45 167480 68.35 91581564

Year 2008 591323 2.72 217087 55.99 97243000

2009 213476 3.74 56967.5 59.18 26974347

TABLE 3: CALCULATION OF DIRECT LABOUR VARIANCE

CALCULATION OF DIRECT LABOUR VARIANCE (BUDGETED VS ACTUALS)

Year 2007 2008 2009 Budgeted 119193770 126531000 23292315 269017085 Actual 91581564 97243000 26974347 215798911 Variance 27612206 29288000 3682031.8 53218174 Result Favorable Favorable Adverse

GRAPH 2: DIRECT LABOUR VARIANCE Direct Labour Variance 150000000 100000000 50000000 0 -50000000 2008 Years Budgeted Actual 2007 2009 Variance Direct Labour Cost INTERPRETATION In The year 2007 and 2008, all the budgeted actual and variance figures are showing positive expenditures hence the variance is

63

favorable, but whereas in the year 2009 the variance is showing adverse as the actual expenditure is exceeding the budgeted figure. It is suggested that strict supervision may yield favorable results. Note: In the year 2009, the actual direct labour costs are available only till March '08 i.e., for three months. Hence budgeted figures for variance purpose are adjusted for three months. TABLE 1: SALES BUDGET

Particulars Domestic Sales: Rate Quantity Value (Rs. In Lakhs) Exports: Rate Quantity Value (Rs. In Lakhs) Combined Sales Value (Domestic and Exports): Value (Rs. In Lakhs)

Year 2007 3765 17500 0 6589 3600 57500 0 20700

(Rs. In Lakhs) 2008 2009 4492 10000 0 4492 3918 52500 0 20570 4205 10000 0 4205 4145 50000 0 20725

27289

25062

24930

GRAPH1:SALES BUDGET

64

Sales Budget
27500

Sales (Rs. in Lakhs)

27000 26500 26000 25500 25000 24500 24000 23500

27289

25062

24930 2009

2007

2008

Years

INTERPRETATION The year 2007 is clearly indicating high sales while comparing to the successive years. It is the combination of total sales including domestic and exports. The increase in sales in the year 2008 is due to excess production. In the year 2008, the total sales value has drastically decreased due to less production. Quite improvements are required for further recovery. In the year 2009, though the production has increased, sales did not improve. Variation is very huge. Hence, quick redressal to the problem of sales is desired. The percentage decreased to 92 and 91 for the years 2008 and 2009 respectively compared to base year 2007. TABLE 2: ACTUAL SALES Particulars 2007 Combined Sales Value (Domestic and Exports): Value (Rs. In Lakhs) Year 2008

2009

2115514759 211551475 9

2313188784 231318878 4

727495314 72749531 4

TABLE 3: CALCULATION OF SALES VARIANCE

65

Year Budgeted Actual Variance Result 2007 27289 21155 -6134 Adverse 2008 25062 23132 -1930 Adverse 2009 6233 7275 1042 Favorable

GRAPH 2:SALES VARIANCE Sales Variance 30000 20000 Sales (in Lakhs) 10000 0 -10000 2007 Budgeted 2008 Years Actual Variance 2009 INTERPRETATION The budgeted sales value is overestimated to the actual sales through which the result of sales budget in the year 2007 and 2008 is showing adverse. In the year 2009, excellent improvement is evident from the above graph and as such it indicates favorable result. The performance in sales budget in the year 2009 is expressed to be excellent. Keeping the same spirit, may yield fruitful results and leads to further growth opportunities. Domestic sales are to be increased as a remedy. Note: In the year 2009, the actual sales value is available only till March '08 i.e., for three months. Hence budgeted figures for variance purpose are adjusted for three months. 66

TABLE 1: BUDGETED INCOME STATEMENT

(RECIP, ROTARY AND CADEM) Year Particulars Net Sales Less: Cost of Sales (total) or COGS Gross Profit Less: Total Overheads Profit Before Tax Add: Other Income/DEPB CADEM Profitability Profit (including other income) Before Tax Less: Tax Provisions Net Profit/Net Income/(Loss) 2007 41159 36218 4941 4698 243 1829 2072 30 2042 (Rs. In Lakhs) 2008 2009 37632 30707 32503 26522 5129 4185 4639 5106 490 -921 1298 1245 270 1788 594 1788 594

GRAPH 1: BUDGETED INCOME STATEMENT

Budgeted Income Statement 2500 2000 1500 1000 500 0 2007 2008 Years 2009 594 2042 1788

INTERPRETATION From the year 2007-2009 there is a gradual decrease in the budgeted figures of profit or income statement, which is evident from the above chart. This is due to unexpected increase in the value of raw materials (copper per kilogram increased thrice to the normal value).

Profit/Income (in Lakhs)

67

The variation between 2007 and 2008 is negligible as we see only a normal difference, but there is a drastic decline in the year 2009almost predicting losses. The percentage change has been showing a drastic decrease to 87.56% in the year 2008and to 29% in the year 2009 comparing to the base year 2007.

TABLE 2: ACTUAL INCOME STATEMENT Particulars 2007 Net Profit/Net Income/(Loss) 6192051 Year 2008

2009

76331610 93310955

TABLE 3: CALCULATION OF INCOME VARIANCE

S (BUDGETED VS ACTUALS) Year Budgeted Actual Variance Result 2007 2042 62 -1980 Adverse 2008 1788 -763 -2551 Adverse 2009 149 933 785 Favorable

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GRAPH 2 : INCOME VARIANCE 3000 2000 1000 Profit or Income (Rs. In Lakhs) 0 Income Variance

-1000 -2000 -3000 2007 Budgeted INTERPRETATION There is an over estimation with regards to profits in the year 2007by looking into the chart , as the actual income is very less comparing to the budgeted income/profit which has resulted in adverse result. Lack of proper planning is visualized. Though the budgeted income/profit statement in the year 2008 is declined, even then the actual profit went into losses. i.e., the actual loss is above 7 crores. Hence, the result is adverse. In the year 2009, due to proper revisions and effective budgetary controlling techniques they recouped their profit back. This is evident by seeing only three months statement, which is above 9 crores. This is indicated to be excellent progress. 2008 Years Actual 2009 Variance

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TABLE 1: MATERIAL PURCHASE BUDGET

Particulars Annual Production Add: Closing Inventory Quantity Less: Opening Inventory Materials to be Purchased

Year (In Units) 2007 2008 2009 750000 544500 620000 131400 23140 32806 881400 567640 652806 36000 107438 32903 845400 460202 619903

GRAPH 1: MATERIAL PURCHASE BUDGET

Material Purchase Budget 900000 800000 700000 600000 500000 400000 300000 200000 100000 0 845400 619903 460202

Units

2007

2008 Years

2009

INTERPRETATION A zigzag curve is framed if a graph is plotted, by observing the above chart. In the year 2007, material purchase is very high. This may be due to high production volume. In the year 2008, a sudden steep decline is visualized showing very less material volume. The reason behind is the decrease in production volume. The performance in this year is very poor, which can be affidavit by seeing income statements for the year 2008. In the year 2009, a good estimation, a proper revise, strict supervisory control enabled the management to have an effective control over materials purchased.

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QUARTERLY BUDGETS TABLE 1: SALES VOLUME BUDGET

MODEL SEP AW RN AK AK- Kits AWJ - Kits Total 67541 1000 750 20833 8333

UNITS OCT NOV 70805 2500 750 20833 8333 57060 2500 1800 20833 8333

DEC 81169 7500 1800 20833 8333

98457 103221 90526 119635

GRAPH 1: SALES VOLUME BUDGET

Sales Volum e Budget 120000 Sales (in Units) 100000 80000 60000 40000 20000 0 SEP OCT Months NOV DEC 98457 103221 90526 119635

INTERPRETATION The above mentioned configured figures are the extracts from sales volume budget prepared in the year 2009, which is the latest data. The models included in the sales volume budget are AW, RN, AK, AK Kits, and AWJ Kits. Keen concentration required on sales volume in the month of NOV in the successive years. Seasonal fluctuations should be considered as very severe factors for sales variances. As the booms and depressions (business cycles) changes at a fast phase during odd months or off seasons TABLE 1: BUDGETED INCOME STATEMENT - 2009 71

(RECIP, ROTARY AND CADEM) Particulars AMOUNT (Rs. In Lakhs) SEP OCT NOV DEC Net Total Sales 3102 3302 2804 3961 Less: Cost of Sales (total) or COGS: Materials Consumed 2110 2252 1888 2716 Copper Hedging savings (50:50) -5 -4 -2 -1 Consumables 150 157 134 183 Power 50 53 45 64 Rejection 16 17 15 21 Warranty 10 13 16 19 Repairs and Maintenance 15 15 15 15 Direct Labour - Variable 79 79 79 79 Fixed Salary - Direct (Unionized) 101 101 101 101 Fixed Salary - Indirect (White collar) 97 97 97 97 Depreciation - US GAAP - Prod. 100 100 100 100 Depreciation - US GAAP - Prod. Bldg 3 3 3 3 Depreciation - US GAAP - Admin 4 4 4 4 Depreciation - US GAAP - Admin computers 9 9 9 9 Travel 10 10 10 10 Administration 81 81 81 81 OHSAS implementation 0 0 0 0 E&Y Audit fee 9 9 9 9 Freight Outwards 50 55 50 68 Publicity 4 4 4 4 Sea Freight 20 20 13 21 Commission 10 10 7 11 C&F agents commissions 1 1 1 1 Interest 113 113 113 106 TDC expenses - Gen & Elec 8 8 8 8 Contingency 6 6 6 6 Total Cost 3051 3213 2806 3735 Profit Before Tax DEPB AW DEPB RN DEPB AK Profit (including other income) Before Tax CADEM Profitability Total Profitability 51 146 0 0 197 -19 178 89 146 1 0 236 -20 216 -2 97 1 0 96 -7 89 226 158 4 0 388 7 395

GRAPH 1: BUDGETED INCOME STATEMENT

72

Budgeted Income Statement

Value (in Lakhs) 0
SEP OCT NOV DEC Months 5000 4000 3000 2000 1000

Net Total Sales Total Cost

Total Profitability

INTERPRETATION The quarterly budgeted income statement mentioned above is the pictorial connotation of the year 2009. The months are taken from SEP to DEC. The net total sales are expressed to be satisfactory in the month of SEP, OCT, and DEC. whereas in the month of NOV, a slight decrease is notified. Basically, the total cost of sales is to be controlled as it is an outcome of the expenditure incurred on material consumed, consumables, power, rejection, lab our, a major difference in freight outwards and so on. The risk hedging factors by preparing quarterly budgets is indicated as one of the effective budgeting control tool. The profit before tax in the month of NOV is Negative, whereas in DEC an unexpected hike is visualized. The DEPB rate is running at 7% in the current year. The profits including other income like DEPB benefit is leading the profits towards satisfactory paths. The CADEM Profitability is already in negative figures in the month of SEP, OCT, and NOV. Hence the total profit ability is the outcome. Expertise guidance, strict supervision, in controlling costs is almost required for keeping the same growth pace in total profitability.

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TABLE 1: TOTAL MATERIAL COST BUDGET TOTAL MATERIAL COST BUDGET MODEL AMOUNT (Rs. In Lakhs) SEP OCT NOV DEC AW RN AK AK- Kits AWJ Kits Total 1761 54 18 124 49 2007 1696 92 18 124 49 1979 1838 160 44 124 49 2215 1772 121 44 124 49 2110

GRAPH 1: TOTAL MATERIAL COST BUDGET

Total Material Cost Budget 2250 2200 Value (in Lakhs) 2150 2100 2050 2000 1950 1900 1850 SEP OCT Months NOV DEC 2006 1979 2215 2110

INTERPRETATION The quarterly total material cost budget witnessed above is the clear indication for the months of September to December, 2009. The values are expressed in Rupees in Lakhs for the models combined, naming AW, RN, AK, AK Kits, and AWJ Kits. The material cost is moderately high in the month of sep, nov, and dec. The costs incurred for AK, AK Kits, and AWJ Kits are expressed to be absolutely normal. The costs incurred on AW and RN models had drastic changes. The total material cost control is absolutely satisfied. The performance in handling material cost is very high in the current year.

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TABLE 1: TOTAL LABOUR ABSORBTION BUDGET MODEL AMOUNT (Rs. In Lakhs) SEP OCT NOV DEC 174 5 2 12 5 198 167 9 2 12 5 195 181 16 4 12 5 218 174 12 4 12 5 207

AW RN AK AK- Kits AWJ Kits Total

GRAPH 1: TOTAL LABOUR ABSORBTION BUDGET

Labour Absorbtion Budget 220 Labour Cost (in Lakhs) 215 210 205 200 195 190 185 180 SEP OCT Months NOV DEC 198 195 218 207

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INTERPRETATION Total labour absorption budget in the above chart is the imitation for the months of SEP to DEC 2009. The allocation of budget on permanent workers is constant, whereas on temporary and contract basis workers are fluctuating. Expenditure on blue collars and technicians is always desired, whereas opting for badlis who are called to be surplus workers is to be reduced. For fruitful results and getting excellent profitability labour budget controlling is always suggested. Utilization of skilled labour progressively gives desired results and it is also possible to curtail down unnecessary expenditure on untrained workers.

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CHAPTER-5 CONCLUSION & SUGGESTIONS

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CONCLUSIONS
The study at Tecumseh Products India Pvt. Ltd. at

Hyderabad Plant is defined to be the most technical and analytical study. The professionalism that encapsulates the various degrees of performances at every step of financial study is like a new game. The actual subject matter, naming the project work on and BUDGETARY CONTROL in a

BUDGETING

manufacturing concern is the practical exposure drawn out from the efforts of management of Tecumseh, Hyderabad. The various budgets called financial budgets, operating

budgets, and their performances are studied and interpreted according to the actual performance evidenced from past three years. The budgets are prepared on the basis of ANNUAL

BUDGETS AND QUARTERLY BUDGETS. By studying annual budgets, it is well understood that the estimations, their revisions, are factualized according to the past performances, which are overestimated in the initial stages and got adjusted in their successive stages. Preparation of master budgets, fixed budgets, flexible

budgets are desired to be prepared to have easy and fast access to the data required by the staff and line management. As the company incurred huge unexpected losses in the

previous two years there is a lot of requirement to review its standards, estimations and follow accordingly.

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SUGGESTIONS

Financial interpretations for each and every budget are

required to be clearly analyzed and frequent revisions for setting dynamic goals according to the changing market conditions may lead to the chasing of the actual target i.e., becoming the global leader in the markets which ever they choose to participate. Good review of mission, not from the point of theory,

but required exact practical implementations. Preparation of complicated data always leads to many conflicts, requires lot of time and labour and this may delay decision making as well as the information costs. Collection of latest market information regarding the alternative suppliers, growth opportunities, the

cost of raw materials, quality of raw materials, competitor prices, diversifying marketing expansion, upgradation of technology, observation of business cycles, SMART production methods, SWOT analysis, concentration of skilled labour are some of the important pre-requisites. As the business of Tecumseh depends basically on

exports up to a larger extent, increasing global standards is a vital element that has to be practiced. Taking timely appropriate steps may reduce the strain

of incurring further losses is assured. The effective six-sigma will be beneficial for the

organization.

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BIBLIOGRAPHY

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BIBLIOGRAPHY

PERIODICALS AND BOOKS: M.Y. KHAN & JAIN Financial Management PRASANNA CHANDRA . Financial Management BRIGHAM & VAN HORNE ... Financial Management I. M. PANDEY . . Financial Management

TECUMSEH REPORTS: Business Plan Statements the years 2007 to 2009. Annual Reports. Articles published by Tecumseh.

WEBSITES: www.netmba/finance/capitalbudgeting.com www.tecumsehindia.com www.google.com www.yahoosearch.com

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