INTRODUCTION

Finance is a specialized, functional field found under the general classification of

business administration. The term “Finance” can be defined as the management of the flows of
money through as organization whether it is a corporation, bank, Govt., agency; etc., Finance
concerns itself with the actual flows of money, as well as any claims against money. As a business
discipline, finance can be differentiated from accounting and economics. Accounting is concerned
with the recording, reporting and measuring of business transaction, whereas finance uses the
information provided by the accounting system to make decision to help organizations to achieve
their objectives. Economies are concerned with analyzing the allocation of resources in a society.
It studies transactions, among people involving in a society. It studies transaction, among people
involving goods and services with or without the exchanges of money.

Individual business is face problems dealing with the acquisition of funds to carry on their
activities and with the determination of optimum methods of employing funds. In competitive
market place, businessman must actively manage their funds to achieve their goals. The financial
tools help the manage.

Determine which sources offer the lowest cost of funds and which activities will provide the
greatest return on invested capital. A successful business manager for enterprise uses a goal
oriented financial structure. The financial manager performs certain tasks that help to achieve its
operating objective. The important goals of financial management are:

1 Wealth maximization of shareholders.

2 Liquidity.
3 Profitability of the firm.

FUNCTIONS OF FINANCIAL MANAGEMENT

The functions of raising funds, investing in assets and distributing returns earned from assets,
shareholders respectively known as financing, investment and dividend decision. While
performing these functions, a firm attempts to balance cash inflows and cash outflows. This is
called liquidity decision and we add it to the list of important finance decisions or
functions.Investment or long term asset mix decision.

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 a. Financing or capital mix decision
b. Dividend or profit allocation decision.
c. Liquidity or short term asset mix decision.
A firm performs finance functions simultaneously and continuously in the normal course
of the business. They do not necessarily occur in a sequence. Finance function call for skillful
planning, control and exception of a firm’s activities.

Let us note that outset that shareholders are made better off by a finance decision, which
increase value of their shares. Thus while performing the finance functions, the financial manager
should strive to maximize the market value of shares.

INVESTMENT DECISION:

Investment decision or capital budgeting involves the decision of allocation of capital or

commitment of funds to long-term assets, which would yield, benefits in future. Its one very
significant aspect is the task of measuring the prospective profitability of new investments. Future
benefits are difficult future; capital budgeting decision involves risk. Investment proposals should,
therefore be evaluated in terms of both expected return and risk, besides the decision to commit
funds in new investment proposal; capital budgeting also involves decision of recommitting funds
when an asset becomes less productive or non profitable.

FINANCING DECISION:

Financing decision is the second important function to be performed by the financial manager.
Broadly, he must decide when, where and how to acquire funds to meet the firm’s investment
needs, the central issue before him is to determine the proportion of equity and debt. The mix of
debt and equity is known as the firm’s capital structure. The financial manager must strive to
obtain the best financing mix or the optimum capital structure for his firm.

DIVIDEND DECISION:

Dividend decision is the third major financial decision. The financial manager must decide
whether the firm should distribute of all profits, or retain them, or distribute a portionand retain the
balance. Like the debt policy, the dividend policy should be determined in terms of its impact on
the shareholders value. The optimum dividend policy is one, which maximizes the market value of

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the firm’s shares. Thus, if shareholders are not in different to the firm’s dividend policy, the
financial manager must determine the optimum dividend-pay out ratio.

LIQUIDITY DECISION:

Current assets management, which affects a firm’s liquidity, is yet another important finances
function, in addition to the management of long-term assets. Current assets should be managed
efficiently for safeguarding the firm. Against the dangers of insolvency. Investment in current
asset affects firm’s profitability, liquidity and risk. A conflict exists between profitability and
liquidity while managing current assets. If the firm does not invest sufficient funds in current
assets, it may become illiquid. But it would lose profitability, as idle current assets would not earn
anything. Thus, a proper trade-off must be achieved between profitability and liquidity.

.INVENTORY MANAGEMENT

Inventory is the most important asset in any company. The term inventory refers to
the stockpile of the products a firm is offering for sale and the components that make up the
product. The word inventory was first recorded in 1601. The French term inventaire, or “detailed
of goods,” dates back to 1415. In other words, inventory is composed of assets that will be sold in
future in the normal course of business operations. The assets which firms store as inventory in
anticipation of need are (i) raw materials, (ii) work-in-progress (semi-finished goods) and (iii)
finished goods. The raw material inventory contains items that are purchased by the firm from
others and are converted into finished goods through the manufacturing (production) process.
They are an important input of the final product. The work-in-process inventory consists of items
currently being used in the production process. They are normally semi-finished goods that are at
various stages of production in a multi-stage production process. Finished goods represent final or
completed products, which are available for sale. The inventory of such goods consists of items
that have been produced but are yet to be sold.

Meaning & Definition of Inventory Management: -

Every enterprise needs inventory for smooth running of its activities. It serves as a link
between production and distribution processes .The greater the time lag, the higher the
requirement for inventory, it also provides a caution for future price fluctuations. Inventory
management is required at different locations within a facility or within multiple locations of a

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supply network to protect the regular and planned course of production of production against the
random disturbance of running out of materials or goods.

• Involves a retailer seeking to acquire and maintain a proper merchandise assortment while
ordering, shipping, handling, and related costs are kept in check.

• Systems and processes that identify inventory requirements, set targets, provide
replenishment techniques and report actual and projected inventory status.

• Handles all functions related to the tracking and management of material. This would
include the monitoring of material moved into and out of stockroom locations and the
reconciling of the inventory balances. Also may include ABC analysis, lot tracking, cycle
counting support etc.

• Management of the inventories, with the primary objective of determining. controlling

stock levels within the physical distribution function to balance the need for product
availability against the need for minimizing stock holding and handling costs.

“In business management, inventory consists of a list of goods and materials held available in
stock

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 NEED FOR THE STUDY:

Every company, on average spends 70% on raw materials (inventory). Therefore, there is a need
to know the raw material cost and also there is a great importance to understand the inventory
management system of this company.

The need of controlling inventory is expressed as below:

 To improve customer services,

 Permits purchase and transaction economies,
 Production economies
 Hedge against price fluctuations
 Protects against demand lead time uncertainties.

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 SCOPE OF THE STUDY:

The study focus on inventory management at various levels of the INCAP LTD is to evaluating
the inventory levels as well as storage levels of the organization

Inventory management deserves separate mention beyond other phases of accounting due
to its importance to operation levels at Incap company ltd.

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 SIGNIFICANCE OF THE STUDY:

Inventory management is use full to all the functional areas, marketing,production and
purchasing

 The importance of the inventory management as fallows

 To procure a quality of raw material
 To improve the stock levels
 Through inventory management methods to reduce the cost risk levels

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 OBJCTIVES OF THE STUDY:

 To examine the organization structure of inventory management in thestores of the

INCAP LTD
 To know the optimal inventory level of the INCAP LTD
 To understand the various inventory control techniques followed by stores in INCAP
LTD
 To access the performance of inventory management of the INCAP LTD by selected
accounting ratios
 TO analyze the efficiency of inventory management

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 RESEARCH METHODOLOGY:

The methodology in this content involves the process of collection of data from primary and
secondary sources and interpreting the same by using the analytical tools and techniques utilizing
the consequent finding to put forward liable and insightful suggestions to the company.

Primary Data

A large part of primary data was collected in the course of my interaction with the
personnel concerned departments and also developed in consultation with costing manager, material
manager and officers. The data collected was regarding various aspects of inventory management
like lead-time, ordering cost, carrying cost and working of online computerized stores system.

Secondary Sources

This data is from the number of books and records of the company, the annual reports
published by the company and other magazines. The secondary data is obtained from the following.

 Stores Ledger
 Stores Accounts Records
 Other books and Journals and

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 LIMITATION OF THE STUDY:

 Thestudy is limited only for a period of 2013 to 2018.

 The study is purely based on secondary data
 The limitations of turnovers can be applicable to the study.
 The study was carried in Incap Limited Company Limited, for a period a of period of 35
days,
 TO study the inventory control management of the company

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 REVIEW OF LITERATURE

A tangible property held finished goods. Work in process, raw material including
maintenances, and consumables.

Meaning of Inventory

Every enterprise needs inventory for smooth running of its activities: it serves as a link
between the recognition of a need and its fulfillment the greater the time leg. The higher the
requirements of inventory, the unforeseen fluctuations in demand and supply of goods also
necessitate the need for inventory. It also serves as a cushion for future prices fluctuations. The
simple meaning of inventory is "stock of goods" or "list of goods" the word inventory is understood
differently by various authors. In accounting language it means stock of finished goods only, for a
manufacturing concern it includes raw-materials, work-in-progress, finished goods etc.

Inventory constitutes the most important part of current assets. It is approximately 60 to 65%
of current assets in public ltd companies in India. So that it is very essential to name a proper control
and management on Inventories, for the every organization must maintain the availability of
required materials insufficient quantity as and when required and also to Minimize inventory
investments.

Inventory management is the active control program which allows the management of sales and
purchases of payment Inventory management processes to help increase operational efficiency
across your business, improve customer service, and reduce inventory and distribution costs with
Inventory Management. Increased automation and item tracking capabilities help you improve
inventory accuracy and better match the goods you have on hand with customer demand.

In business, any item of property held in stock by a firm, including finished goods held for sale,
goods in the process of production, raw materials, and items that will be consumed in the process
of producing salable goods. Inventories appear on a company balance sheet as assets. Inventory
turnover, which indicates the rate at which goods are converted into cash, is a key factor in
appraising a firm's financial condition.

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ELEMENTS OF COST

Elements of cost refer to the essential components or parts of the total cost of a cost unit.
Total cost can be classified on the basis of traceability into Direct Costs and Indirect costs. Costs
can also classify based on their physical characteristics of Material,Labor and Overheads. The
various components of Total cost can be stated as Elements of Cost. Let us understand each of the
elements of cost in detail:

DIRECT MATERIAL:
Direct material is the material that can be measured and charge directly to the cost of product.
If forms part of the finished product and is easily identifiable with the product. Material
specifically purchased for a specific job, contract, process or order is also direct material. Examples
such material includes wood in case of Furniture, cotton in case of Cloth sugarcane in case of sugar
etc. Primary packing material such as cartons is also part of Direct Material. Expenses incurred
towards purchases such as carriage inwards, import duty, etc are also added to the cost of Direct
Material. Examples of distribution overheads are cost of warehousing, packing and loading
charges, freight outwards, damages in transit, etc.

INDIRECT MATERIAL

Indirect Material is that material which cannot to easily identify to a specific job,
contract, process or order. They are required to be distributed among multiple cost units. Such
materials normally do not form part of finished products. They are used as consumables. Examples
of such indirect material include Lubricants, Cotton waste, materials used by service departments
etc. Some materials, although forming part of the product, may not be treated as direct material if
they are used in comparatively small quantities and it may not be worthwhile in measuring the
same. For example the thread used in stitching of dress material will be treated as Indirect Material.

DIRECT LABOR

Direct Labor is that labor which is used for the manufacture of specific article, process, job
etc. It can be easily attributed to a specific job contract process or order. Any wages paid to

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supervisors and other staff overseeing operations is not direct Labor. However, even such expenses
can be considered as Direct Labor if they are exclusively engaged for a particular product process or
order.

Indirect labor is that labor that cannot be conveniently identified with and allocated to a
specific product, process, job or order. It is not directly engaged in productive operations. Indirect
Labor includes labor engaged in stock keeping, material handling, maintenance, clerical activities etc.
Indirect labor includes labor that is directly identifiable with the finished product, but the cost is too
small to merit separate measurement. For example, wages paid to trainees is taken as Indirect Labor.

DIRECT EXPENDITURE

Direct Expenditure also known as 'chargeable expenses' includes all such expenditure other
than expenses on direct material and labor that can be directly identified with a cost unit. Examples
of direct expenses are Architect or Surveyor's Fees, Cost of drawing and patterns, Royalty, Repairs
and maintenance of plant obtained on hire, etc.

INDIRECT EXPENDITURE

Indirect expenses are also called overhead. They are also referred to as "On Costs". They
include indirect material, indirect labor and other expenses, which cannot be directly charged to
specific cost unit. The overheads can be divided into three groups namely (i) Factory overhead (ii)
Administrative overhead and (iii) Selling and Distribution overheads

FACTORY EXPENSES

Factory overhead or factory expenses include all indirect expenses, which are connected with
the manufacture of a product. When they are allocated to different cost units they are referred as a
Factory 'On Cost' or Works 'On Cost'.

INVENTORY INCLUDES THE FOLLOWING THINGS:

A) Raw Material:Raw Material form a major input into the organization. They are required
to carry out production activities uninterruptedly the quantity of raw materials required will be
determined by the rate of consumption and the time required for replenishing the supplies, the

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factors like the availability of raw materials and government regulations etc, too affect the stock
of raw materials.

B) Work in Progress: The work in progress is that stage of stocks, which are in between
raw materials and finished goods. The quantum of work in progress depends upon the time taken
in the manufacturing process. The greater the time taken in manufacturing the more will be the
amount of work in progress.

C) Consumables: These are the materials, which are needed to smoother the process of
production. These materials do not directly enter production but they act as catalysts.
Consumables may be classified according to their consumption and criticality. Generally
consumable stores do not create any supply problem and the firm a small part of production cost.
There can be instances where these materials may account for much value then the raw materials.
The fuel oil may form a substantial part of cost.

D) Finished goods: These are the goods, which are ready for the consumers the stock of
finished goods provides a buffer between production and market. The purpose of maintaining
inventory is to ensure proper supply of goods to customers.

E) Spares: The stocking policies of spares differ from industry to industry some industries
like transport will require more spares then the other concerns. The costly spare parts like engine,
maintenance spares etc are not discarded after use, rather they kept in ready position for further
use.

All decisions about spares are based on the financial cost of inventory on such spares and
the costs mat rise due to their non-availability.

Benefits of Holding Inventories:

Although holding inventories involves blocking of a firms funds and the cost of storage
and handling, every business enterprise has to be maintain certain level of inventories of facilitate
un-interrupted production and smooth running of business. In the absence of inventories a firm
will have to make purchases as soon as it receives orders, it will mean loss of time and delays in
execution of orders which sometimes may causes loss of customers and business.

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A firm also needs to maintain inventories to reduce ordering cost and avail quantity discounts etc.,

There are their main purposes of holding inventories.

i) The Transaction Motive: Which necessitates the holding of inventories for the
unpredictable changes in demand and supplies of materials?.

ii) The Precautionary Motive:Which necessitates the holding of inventories for

meeting the unpredictable changes in demand and supplies of materials.

iii) The Speculative Motive:Which includes keeping inventories for taking advantage
of price fluctuations, saving in re-ordering costs and quantity discounts.
Risk and Costs of Holding Inventories:

The holding of inventories involves blocking of firms funds and incurrence of a capital and
other costs.

The various costs and risks involve in holding inventories are:

1) Capital Costs:Maintaining of inventories results in blocking of the firms financial

resources.
2) The firm has therefore to arrange for additional funds to meet the cost of inventories.
The funds may be arranged from own resources of form outsiders. But in both the case, the firm
insures the cost. In the former case, there is an opportunity cost of investment while in the later
case. The firm has to pay interest to the outsiders.

2) Storage and Handling: Holding of inventories also involves cost on storage as well as
handling of materials. The storage of cost include the rental of the godown, insurance charges
etc.,

3) Risk of Price Decline: There is always a risk of reduction in the prices of inventories by the
suppliers in holding inventories. This may be due to increase market supply, competition or
general depreciation in the market.

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4) Risk of Obsolescence: The inventories may become obsolete due to improved technology,
changes in requirements, change in customer tastes etc.,

5) Risk Determination in Quality: The quality of materials also deteriorates while the
inventories are kept.

Objects of Inventory Management:

Inventory management is concern with the determination of optimum level of investment for each
components of inventory and the efficient use of components and the operation of components and
the operation of an effective control and review of mechanism.

The main objectives of inventory management are operational and financial.

The operational objective mean the materials and the spares should be available in
sufficient quantity so that work is not disrupted for want of inventory.

The financial objectives mean that the materials and spares should be available in
sufficient quantity so that work is not disrupted for want of inventory.

The following are the objective means that investments in inventory should not remain idle and
minimum working capital be locked in it.

The following are the objectives of inventory management:

1. To ensure continuous supply of materials, spares and finished goods so that production

should not suffer at any tie and the customers demand also be met.

2. To avoid both over-stocking and under – stocking.

3. To maintain investment ion inventories at the optimum level as required by the

operational and sales activities in reducing the cost of production and overall costs.

5. To eliminate duplication in ordering or replenishing stocks. This is possible with the help
of centralizing purchases.

6. To minimize losses through deterioration pilferage wastages and damages.

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 7. To ensure perpetual inventory control so that materials show in stock ledgers should be
actually lying in the stores.

8. To ensure right quality goods at the reasonable prices. Suitable quality standards will
ensure proper quality of stocks the price analysis, the cost analysis and value analysis will
ensure payment of proper prices.

9. To facilitate furnishing of date for short-term and long-term planning and control of
inventory.

INVENTORY CONTROL TECHNIQUES:

ABC ANALYSIS

VED CLASIFICATION

HML ANALYSIS

SDE ANALYSIS

SOS CLASIFICATION

FSN CLASIFICATION

XYZ ANALYSIS

ABC ANALYSIS:

ABC Analysis or classification which is said be" Always better control".

In this, the higher value items are classified as

"A items" and would be under the tightest control.

"C items" represents relatively least value and would be under simple control

"B items" fall in between tense two categories and require reasonable attention of
management.This is classification which is said to be "Always better control".

VED ANALYSIS:

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 The items are classified on the basis of their criticality of the production process or other
service. In the VED classification of materials, V stands for Vital items without which the
production process would come to a standstill. E in the system denotes Essential items whose
stock out would adversely affect the efficiency of the production system.

Although the system would not altogether stop for want of these items, yet their non-
availability might cause temporary losses in, or dislocation of production. The D items are the
Desirable items which are requires but do not immediately cause a loss to production. The VED
analysis is done mainly in respect of spare parts.

HML ANALYSIS:

This is similar to the ABC analysis except that, in this analysis, the items are classified on
the basis of unit value rather than usage value. The items are classified accordingly as their cost per
unit is H-High, M- medium and L-Low. This type of analysis is useful for keeping control over
materials consumption at their department levels.

SDE ANALYSIS:

This uses the criterion of the availability of the items. In this analysis S- Stands for scarce
items which are short in supply, D- Refers to the difficult items meaning the items that might
available in indigenous market but cannot procured easily, While E-represents easily available
items even from local market.

S-OS ANALYSIS

S-OS analysis is based on the nature of supplies, where in S represents the seasonal items
and OS represents the off seasonal items. This classification of items is done with the aim of
determining proper procurement of strategies.

FSN ANALYSIS

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 Based on the consumption pattern of the items, the FSN classification calls for classification
of items, as F-fast moving, S- slow moving and N- non moving goods. This 'speed' classification
helps in the arrangement of stocks in the stores and in determining the distributions and handling
patterns.

XYZ ANALYSIS

XYZ analysis is based on the closing inventory value of different items, Items, whose
inventory values are high, are classed as X-items while those with low investment in them are
termed as Z- items. Other items are the Y- items whose inventory value is neither too high nor too
low.

It can be easily visualized that the several types of analysis discussed are not mutually
exclusive. They can be, and often are, used jointly to ensure better control over materials- For
example ABC and XYZ analysis may be combined to classify and control depending on whether the
items are AX,BY,CZ,AY and so on. Similarly XYZ - FSN combine classification exercise will help
in timely prevention of obsolescence.

CRITERIA FOR JUDGING THE INVENTORY SYSTEM

While the overall object of the inventory system is to minimize the cost of the firm at the risk level
acceptable of management, the more proximate criteria for judging the inventory system are:

Comprehensibility

Adaptability

Timeliness

Areas of Improvement;

Inventory management in India can be improved in various ways. Improvements could be

effected through:

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Effective computerization: Computers should not be used merely for accounting purposes but
also for improving decision – making.

Review of classification, ABC and FSN classification must be periodically reviewed.

Improved co-ordination:Better co-ordination among purchase, production marketing, and

finance departments will help in achieving greater efficiency in inventory management.

DEVELOPMENT OF LONG TERM RELATIONSHIP:

Companies should develop long term relationships with vendors. This would help in
improving quality and delivery.

Disposal of obsolete / surplus inventories:

Procedures for disposing obsolete / surplus inventories must be simplifies.

Adoption of challenging norms:

Companies should set benchmarks with global competitors and use ideals like JIT to
improve inventory management

Inventory cost-an overall view

Introduction:

In financial parlance, inventory is defined as the sum of the value of the raw materials, fuels, and
lubricants spares parts maintenance consumable, semi-processed materials and finished goods
stock at any giving appoint of time. The operational definition of inventory would be: amount of
raw materials, fuel and lubricants, spare parts and semi – processed materials to be stocked for the
smooth running of the plant/industry.

Need of Inventory:

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 About 10% of the total cost of production of INCAP LTD represents inventory cost.
Inventories are maintained basically for the operational smoothness which they can be affected by
uncoupling successive stages of production, whereas the monetary value of the inventory serves as
a guide to indicate the size of the investment made to achieve this operational convenience. The
materials management department’s primary function is to provide this operational convenience
with a minimum possible investment in inventories. Materials department is accused of both
stock outs as well as large investments in inventories. The solution lies in exercising a selective
inventory control and application of inventory control techniques. Inventories built to act as a
cushion between supply and demand. It is sufficient to take care of the requirements of demand
till the next supply arrives it is sufficient to take care of probable delays in supply as well as
probably variations in demand.

The size of the inventory depends upon the factors such as size of industry internal lead
time for purchase, suppliers lead time, vendor relations, availability of the materials, and annual
consumption of the materials. Inventory cost can be controlled by applying Modern Techniques
Viz., ABC analysis, SDE, GSN, HMC, VED etc. These techniques can be used effectively with
the help of computerization.

Who determines inventory:

Norm per inventory could be set by the area top management. In the INCAP LTD
corporate planning department will allocate this investment with the various item taking into
consideration the requisitions given by the smooth operation of the company. Purchase
department will process the procurement action:

What is meant by inventory cost?

Inventory cost represents:

A. The total value of stores and spares and capital spares.

B. Stores in transits and under inspection and

C. Stock of finished products.

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 Normally there are certain problems in marinating optimum level of inventory. Problem of
inventory can be resolved by the implications. Costs which are relevant for consideration are
discussed in the following lines:

1. The cost of placing a replenishment order.

2. The cost of carrying inventory.

3. The cost of under stocking and

4. The cost of overstocking

The cost of ordering and inventory carrying cost are viewed as: the supply side costs and help
in the determination of the quantity to be ordered for each replenishment.

The under stocking and over stocking costs are viewed as the demand side fasts and help in
the determination of among of variations in demand and the delay in supplied which is the
inventory should withstand.

Whenever an order placed for stock replenishment, certain costs are involved, and for most
practical purposes it can be assumed that the cost per order is constant. The ordering cost may
vary depending upon the type of items, for example raw material like steel against production a

component like castings in steel plants, support materials in the case of coal industry.

The cost of ordering included:

1. Paper work costs, typing dispatching an order.

2. Follow up cost the follow up required to ensure timely supplied includes the travel cost for
purchase follow-up, the telephones, telex and postal bills etc.,

3. Costs involved in receiving of the order, inspection, checking and haling in the stores.

4. Any set up cost of machines, charged by the supplier, either directly indicated in
quotations or assessed through quotations for various quantities.

5. The salaries and wages of the purchase department.

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Cost of Inventory Carrying:

This cost of measured as % of the unit cost of the item. This measure gives basis for
estimating what are actually cost a company to carry stock.

This cost includes:

Interest on capital

Insurance of tax charges

Storage costs, labour costs, provision of storage area and facilities like bins racks etc.

Transport bills and hamali charges

Allowance for deterioration or spoilages

Salaries of stores staff obsolescence

The inventory carrying cost various and a major portion of this is accounted for by the interest on
capital. INCAP LTD is paying 20% interest in bank loans.

Under stocking cost:

This cost is the cost incurred when an item is out of stock. It includes cost of lost
production during the period of stock out and the extra cost per unit which might have to be for an
emergency purchase.

Over stocking cost:

This cost is the inventory carrying cost (which is calculated per year) for a specific period
of time. The time varies in different contexts – it could be the lead time of procurement of entire
life time of machine. In the case of one time purchases, over stocking.

Cost would be +: purchase price – scrap price.

Accounting for materials:

The accounting for direct material begins with the issuance of the purchase requisition and
ends only when the finished product has been shipped to the customer.

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 In the course of this cycle the other two elements of cost, direct labour and factory over
heads become part of materials cost to the extent that they are applied to production and included

in inventory values.

Acquiring raw materials from vendors:

Four basic documents are involved in acquiring materials form vendors. They are:
Purchase requisition, the purchased order, the receiving report and the vendors invoice.

After due consideration of purchase requisition a vendor is selected and a purchase order is
sent to the vendor by the purchasing agent. Ultimately the merchandise and the vendors invoice
are received and the receipt of merchandise is recorded on a receiving report.

If the vendors invoice, the purchase order, and the receiving report are found to be in
agreement, a voucher for payment is approved.

Purchase Requisition:

This is used to request the purchasing agent to order materials. Timing of the requisition
and the amount to be requisitioned depend on the kind of materials and the circumstances. For
control purposes it is import and that the individuals authorized to issue purchase requisitions be
limited to such personnel a foremen, store keepers and departmental heads.

The purchase requisition originates a substantial percentage of the total costs of a

company, and one of the surest ways to control costs is to control them before they are incurred.

Purchase requisitions may be dispensing ditch in those instances where agreements are
made with a supplier to meet specified requirements over a periods of time. Such agreements are
blanket purchase requisitions.

In many companies, a copy of the requisition is sent to the accounting department for
checking of the property of the code. The origination also inserts the quantity to be ordered the
description of the materials, the amount on hand, the monthly consumption and any special
rotation as to the purpose for which the materials is ordered. Vendor selection upon such things as

quality and availability of desired quantities when needed as well as price.

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Purchase Orders:

A purchase order is prepared from the purchase requisition, with sufficient copies to meet
the requirements of the company organization structure. Usually at least four are prepared, the
original for the vendor and copies for the purchasing department files, the accounts payable
department and the receiving department. The copy for the latter department may have the
quantity ordered blocked out so that the count of material at receiving will not be influenced by
the quantities shown on the purchase order.

The purchase order is a vital document in the materials accounting process for when it is
accepted by the vendor, it becomes a contract. As a contract it must be complete and specific.
Therefore, following the listing of items ordered would be stated the required delivery date,
packing and shipping instruction, billing instruction, and terms of payment. It is customary to
include clauses and conditions as to warranty, patent infringement, and contractor’s liability when
services are to be performed etc., such clauses may be interested as required or be printed on the
face or back of the order with a definite and well marked statement that they are a part of the
contract. These clauses are very useful controlled deceives from the point of view of presenting
costly legal entanglements.

Receiving Reports:

When material is received, the quantity is determined by counting, weighting or other

measurement by the receiving department. This is done to assure that payment is made only for
goods actually received. The receiving department prepares receiving reports, either on a special
form or on a receiving copy of copies of the purchase order.

Payment of Invoices:

Vendor’s invoices are sent to the accounts payable department. Approved vendor’s
invoices are filled by vendor according to date of payment. On the date a voucher is prepared on
which are listed the invoices of the vendor covered by the voucher. The cheque is draw for the net
amount by the voucher. A combination cheque and voucher form is frequently used. The
recording in the invoice register may be done when the invoices are received or after they are
attached to the voucher for payment.

25
Internal Control:

The purchasing receiving and payment procedures for goods are services are a vital part of
system of internal control. The matching of purchase orders, receiving records, and vendor’s
invoices assures that payments are not made for goods and services not received and that the items
of the invoice are in agreement with those specified in the purchase order. The entire process
aids in the control of costs, for any payment for goods and services must ultimately bereflected in
the accounts as a cost of the current period or of a future period.

JOURNAL ENTRY:

To record total of requisition summary

Dr.Work in process

Cr.Raw Materials Inventory

The first step is the recognition of the fact that materials are needed for production.
Workers, foreman and production control personnel are usually the people that recognize the need
for material. The store requisitions prepared in order to obtain materials from the store rooms that
material are to be released for production. For control purpose it is best to have the foreman and /
or specified production control personnel requisition the materials.

In some plants the production control department may issue stores requisition at the same
time that production schedules are issued. The foreman in such cases might be restricted only to
the issuance of the requisition for materials required in excess of estimated or standard quantities.
This excess stores requisition is usually a distinct form which might require a supervisor’s
signature as well as foreman’s signature. Waste of material cannot be hidden for long when
excess stores requisitions are used.

RECORDING THE STORES REQUISITION - THE GENERAL LEDGER

The stores requisition is recorded in the general ledger and in various subsidiary ledgers.
Among the usual subsidiary leaders are the perpetual inventory cards, departmental cost records,
and job cost sheets.

26
Table-7

STORES REQUISITION SUMMARY

Date Req.No Dept. I Dept.II Total

Direct Indirect Direct Indirect Direct Indirect

TOTAL

In the General Ledger, Stores requisitions are recorded by a transfer from Raw Materials
inventory ( a credit) to work in process (a debt). Each stores requisition is not the subject of a
General Ledger entry.

The stores requisitions for a month are totaled, and this total is the subject of the above general
ledger entry. Ordinarily each stores requisition is recorded in a requisition summary which is
totaled each month to determine the dollar amount of the general ledger entry.

A requisition summary show above provides departmental distinctions as well as

distinctions between direct and indirect materials.When the general ledger contains only one work
in process account and on e factory overhead account the monthly entry from the requisition
summary would be:

Dr. Work in process (for direct materials)

27
 Dr. Factory overhead (for indirect materials)

Cr. Raw material inventory

When the general ledger contains departmental account t the monthly entry from the requisition
summary would be:

Dr. Work in progress – I

Dr. Factory Overhead – I

Dr.Work in Progress – II

Dr.Factory Overhead – II

Cr.Raw Materials inventory

Recording the stores requisition – a subsidiary ledger:

The three basic subsidiary ledgers in which stores requisitions might be recorded are the
perpetual inventory cards, departmental cost records, and job cost sheets. Perpetual inventory are
very useful for inventory control purposes, whereas departmental cost records are valuable aidsin
accounting for each area of responsibility. In addition, departmental cost records are
indispensable aids in calculating unit costs when production is of a continuous process nature for
example a canning factory.

Stores requisitions can be recorded individually in subsidiary ledgers, or if summarizations

are possible requisitions can be requisitions can be recorded in summary form. The perpetual
inventory cards are to be useful aids in controlling inventories, the stores, requisitions must be
recorded there in at least once each week or ever daily for critical major materials.

Departmental cost records can take many different forms. However, if they are to be
complete, direct materials, direct labour, and factory overhead must be a part of such records.

The job cost sheet contains complete information on the costs pertaining to a job. Direct labour
direct material, other direct changes, and factory overhead are all included on a job cost sheet.
Other direct charges include such items as special tools and dies which can be are worthwhile

28
tracing to individual jobs. Factory overhead per jobs usually estimated in terms of direct labour
costs or direct labour hours. This estimate is called applied factory overhead “per the job”.

PHYSICAL COUNTS – TESTING THE PERPETUAL INVENTORY RECORDS:

Perpetual inventory records must be verified by periodic physical counts. These counts are a
necessary part of testing the accuracy of records used in inventory control and of testing the extent
to which established inventory procedures are followed. The counting may be done on a rotating
basis with some items counted each day or week or a complete count be made at the end of a year

INVENTORY VALUATION AND COST FLOWS:

What is the cost of inventory?

One can readily visualize the determination of inventory quantities by physical count or by
use of perpetual inventory records. When the quantity is determined, it must be multiplied by a
unit cost in order to determine the inventory value that is used on financial statements.

Trade and quantity discounts are to be excluded from unit cost since these discounts exist
for the purpose of defining the true invoice cost of merchandise. Cash discounts, on the other
hand, have been considered as a reward for early payment and as a penalty for late payment. The
reward has often been interpreted as a loss of income, whereas the penalty has often been
interpreted as a loss rather than as a part of unit cost. Thus it would not be difficult to find
difference of opinion as to whether invoice cost includes or excludes cash discount.

When the ‘current replacement cost’ of material on hand on the close of a year is less than
the actual cost, the inventory value is reduced to replacement cost (current market price). Thus the
acceptable basis inventory valuation is the ‘Lower of cost market’ or more properly the ‘lower of
actual cost of replacement cost’.

The determination of inventory values is very important from the point of view of the
balance sheet and the income statement since costs not included4d in the inventory (the balance

sheet) are considered to be expensive and are thus included into enhancement statement.

Valuation of inventories – Methods of Determination:

29
 Although the prime consideration in the valuation of inventories is cost, there are a number
of generally accepted methods of determining the cost of inventories at the close of an accounting
period. The most commonly used methods are first – in first – out (FIFO) average, and last in first
out (LIFO). The selection of the method of determining cost for inventory valuation is important
for it has a direct bearing on the cost of goods sold and consequently on profit. When a method is
selected, it must be used consistently and cannot be changed from year to year in order to secure
the most favorable profit for each year.

THE FIFO METHOD (FIRST .IN. FIRST.OUT METHOD)

Under this method it is assumed that the materials or goods first received are the first to be
issued or sold. Thus according to this method, the inventory on a particular date is presumed to be
composed of the items which were acquired most recently.

Advantages: the FIFO method has the following advantages:

1.It values stock nearer to current market price since stock is presumed to be consisting or

2. The most recent purchases

3. It is based on cost and therefore, on unrealized profit enters into the financial accounts of the
company.

4. The method is realistic since it takes into account the normal procedure of utilizing or selling
those materials or goods which have been longest in stock.

Disadvantages:The methods suffer from the following disadvantages:

1. It involves complicated calculations and hence increase the possibility of clerical errors.

2. Comparison between different jobs using the same type of materials become sometimes
difficult. A job commenced a few minutes after another job may have to been an entirely
different charge for material because the first job any have to been entirely different charge
for materials because the first job completely exhausted the supply of materials of the
particular lot.

30
 The FIFO method of valuation of inventories is particularly suitable in the following
circumstances:

i. The materials or goods are of a perishable nature.

ii. The frequency of purchases is not large

iii. There are only moderate fluctuation in the prices of materials or goods purchased.

iv. Materials are easily identifiable as belonging to a particular purchase lot.

THE LIFO METHOD (LAST IN FIRST – OUT METHOD)

This method is based on the assumption that last item of materials or goods purchased are
the first to be issued or sold. Thus, according to this method, inventory consists of items

purchased at the earliest cost.

Advantages:This method has the following advantages

1. It takes into account the current market conditions while valuing materials issued to
different jobs or calculating the cost of goods sold.

2. The method is based on cost and, therefore, no unrealized profit or loss is made on account
of use of this method.

The method is most suitable for materials which are of a bulky and non perishable type.

BASE STOCK METHOD:

The method is based on the contention that each enterprise maintains at all times a minimum
quantity of materials or finished good in its stock. This quantity is termed as base stock. The base
stock is deemed to have been created out of the first lost purchased; therefore, it is always valued
at this price and is carried forward as a fixed asset. Any quantity over and above the base stock is
value in accordance with any other appropriate method. As this method aims at matching current
costs to current sales, the LIFO method will be most suitable for valuing stock of materials or
finished good other than base stock.. The base stock method has the advantage of charging out

31
materials/goods at actual cost. Its other merits or demerits will depend on the method which is
used for valuing materials other than the base stock.

WEIGHTED AVERAGE PRICE METHOD:

This method is based on the presumption that once the materials are put into a common bin, they
lose identity. Hence, the inventory consists of no specific batch goods. The inventory is thus
priced on the basis of average prices paid for the goods weighted according to the quantity
purchased at each price.

Weighted average price method is very popular on account of its begin based on the total quantity
and value of materials purchased besides reducing number of calculations. As a matter of fact the
new average price is to be calculated only when a fresh purchases of materials is made in place of
calculating it every now and then as is the case with LIFO, FIFO methods. However, in case of
this method different prices of materials are charged from production particularly when the
frequency of purchases and issues, sales is quite large and the concern is following perpetual
inventory system.

VALUATION OF INVENTORIES IMPACT ON THE FLOW COSTS:

As should be quite evident, the different methods of calculating inventory values will all have
their impact on the flow of costs through the balance sheet into the income statement. The dollars
that are paid to acquire inventory are always divided between the balance sheet inventories, and
the income statement (Cost of goods sold), there is no other place output them. Thus if the
different methods of calculating inventory produce differing inventory values, they will also
produce differing cost of goods sold figures, and the differing cost of goods sols figures will
naturally produce differing profit figures.

In order to show the impact of inventory valuation on cost flows, the preceding exhibits are
summarized. Each method produces a different figure for the transfer of raw materials to work in
process. These differences appear small, but the only reason for this is that the dollar amounts
have been kept small to make the illustration workable.

With the transfer of materials to work in process, the cost of flow or transfer will have its impact
on the work in process inventory and the transfer of completed merchandise to finished goods.

32
Ultimately when goods are sold, the varying methods of valuing inventories will have their impact
on cost of goods sold and this profit. The effects of the cost flows on cost of goods sold and
profits can be accentuated further if the different methods of valuing inventories are applied to
work in process and finished goods.

Evaluation of Methods – Can we justify the difference?

The best method of inventory valuation might be ‘specific identification’ that is the units in
inventory should be identified with the specific invoices and thus specific unit costs to which they
apply.

Fortunately, the FIFO method constitutes a very useful approximation to the specific
identification method if one can reasonably assume that the actual flow of materials is first in first
out. This assumption is not unreasonable and thus we have stated the main argument for the FIFO
inventory scheme that is physical flow of materials would match the flow of costs under the first
in first out method.

Inventories Valued at Standard cost:

A very useful method of valuing inventories is at a standard cost. With a standard cost
system there is no need for spending a great deal to time and money tracing unit costs through
perpetual inventory records.

Table-8

PERPETUAL INVENTORY CARD UNDER A STANDARD COST SYSTEM

Peripheral Inventory
Plant:
Standard Cost
…………………………….
Order Quantity
…………………………….
Order

33
Point………………………
Location

Date Descripti On order Received Issued Available

on
On On
order hand

As shown above there is need only for physical quantities since the inventory value is the
inventory value is the physical quantity multiplied by the standard cost. With the cost and value
columns disposed off, a perpetual inventory card can include additional data such as quantities on
order, quantities available. These additional data are very useful for inventory and production
control purposes. On the basis of a few calculations concerning actual units costs, inventories at a
standard costs could easily be converted into inventories on a FIFO, a LIFO or an average cost

basis.

Inventory of Obsolescence:

Obsolete inventories cannot be used or disposed off at values carried on the books.
Frequent reviews should be made of all inventories, and when obsolescence is indicated a request
for revaluation should be prepared for approval by management. The difference between original
and obsolete value should be recorded by a charge to an operating account. Inventory
obsolescence and a credit to inventory. If the material is scrapped, this will be for the full
inventory value of the material. If it is anticipated that the material can be sold at reduced value or
used in areas where it will be worth less than its original value, the entry would be only for the
amount of write down. Some companies carry a solvate inventory and transfer to its materials
which may be sold or used at reduced values.

Dr. Solvate Inventory

Dr. Inventory Obsolescence

Cr. Raw Material inventory or supplies inventory

34
TURNOVER RATIO’S

INVENTORY% OF CURRENT ASSETS:

Total inventory

---------------- X 100

Current assets

Generally inventory constitutes the major position of current assets. It can be classified as raw
materials, work –in –progress and finished goods inventory, a study on inventory as a% of current
assets reveals the stock turning capacity of the company

Finished goods as % of total inventory

Finished goods

-------------------- X100

Total inventory

Finished goods means the goods, which are ready to sale after production,A more finished
goods % in relation to total inventory means there is a poor finished goods and vise –versa

A study on raw material as% of inventory reveals that how fast investment in raw material
is turned into sales. A bigger % means raw material turnover and vise versa

Inventory turnover ratio:

Cost of goods sold

-------------------------------

Average inventory

The cost of goods sold means, sales minus gross profit. The average stock the ratio indicates how
fast inventory is sold; a high ratio is food from the view point of liquidity and voce-versa. Allow
ratio would dignify that does not sell and stays on the shelf or in the ware-house for a long

Inventory holding period;

365 days

----------------------------

35
 Inventory turnover ratio

This ratio measures the inventory application efficiently of the concern in the production
on process, a high inventory turnover ratio means high production and sales vice –versa, generally
firms require higher stock turnover ratio data relating to the inventory holding period is depicted in
inventory turn over ratio

An overall inventory holding period consist of raw material holding

period work-in- progress holding period and finished goods period being a manufacturing concern
the company should keep its efforts to minimize inventory holding period.

PROFILE OF THE COMPANY

Lokesh Machines Limited was incorporated as a public limited Company on December 17, 1983
and commercial production started from 1986.

The Company was promoted by Mr. M Lokeswara Rao, who started this company after gaining
significant insights into the nuances of machine and machine tool manufacturing during his stint
of over 16 years as a shop-floor executive of HMT Ltd.

Initially commencing business with a modest capital, and doing some job works for HMT
Ltd, the company was nurtured carefully by Promoter to the present stage, achieving a Gross
turnover of Rs. 112.91 corers in the year ended 31st March 2007.

Over a period, the Company developed a wide range of SPMs, and built up reputations for
the quality of its products and after sales service. The Company has on date built over 600 Special
Purpose Machines for Companies like Ashok Leyland, Bajaj Auto, Force Motors, TATA
MOTORS, Escorts, Mahindra & Mahindra, John Deere, Kinetic Engineering, Hindustan Motors,
Honda Motor Cycles and Scooters, Bharat Forge, Rane Engine valves etc.

LML achieved a significant breakthrough by winning a prestigious turnkey order from M/s
John Deere, Pone for their green field tractor project for supply of total manufacturing line for
cylinder blocks, against stiff competition.

LML has also bagged a prestigious export order from M/s FPT Industry Spa of Italy, for supply of
Milling and Boring machines and successfully supplied over 35 machines and made its presence

36
in the European markets. This order was a stepping-stone for the company in fulfilling its strategic
initiative of becoming an exporter of machine tool products from India Recently LML has also
supplied about 8 Machines to Honda Motor cycles and scooters, Japan for their Indian
requirement. LML had developed machines and supplying to HOWA, Japan under a long term
contract and to Italy and the turnover from exports during the year 2006-07 was Rs. 438.16 lakes.

The company also entered the Auto Component Segment by setting up dedicated lines of
Machines for manufacture and supply of Cylinder Blocks for Mahindra & Mahindra Limited
(M&M) for their Tractor, Jeep and Scorpio divisions.

After successfully delivering more than 300 Special Purpose Machines to Ashok Leyland, the
company was awarded a long term contract for supply of machined cylinder blocks and cylinder
heads. Certification for its machine divisions and TS 16949 the Company obtained ISO 9001-2000
Certification for its component division.

Mr. M Lokeshwara Rao, who had a steady job as a shop-floor executive in HMT Ltd. Started his
proprietary concern to carry out job works for the same company. Soon afterwards,-as a first
generation technocrat entrepreneur, he promoted Lokesh Machines Ltd., which had a modest
beginning carrying out some machining and conversion operations for the components and
machine tools of HMT Ltd.

In spite of the prevailing atmosphere, the company persisted with its efforts at innovation and
product development. The recognition of the technical capabilities of the company received a
major boost in the year 1995-96, when the company was able to conclude an agreement with
Mahindra & Mahindra Limited for machining of their cylinder Blocks. The Company was also
able to bag orders for special purpose. Machines from other Auto Majors like Escorts, Ashok
Leyland, and Bajaj Auto etc.

2.2.1 Manufacturing Process-Machines

The manufacturing process for the machines is briefly described below:

Production Plan &Design:

This is the primary stage of manufacturing process. Depending upon the specifications of the
machine to be manufactured, the design of the machine is prepared in case of Special Purpose
Machines. This design is verified and confirmed in consultation with the user (customer). As per

37
the designs, the entire machine may also be divided into various components. A Bill of Materials
is then prepared, listing out the various materials required for manufacture of the components and
the machine. A schedule of processes which the materials have to undergo is prepared. At this
stage, a decision is also taken as to the component, if any, which are to be sub-contracted, based
on techno-economic evaluation.

Procurement of Materials:

The materials required for manufacture of machinery is procured from among the approved
suppliers of the company. Materials received are then subjected to rigorous inspection to verify
whether they conform to specifications as per the Bill of Materials. The approved, material is then
issued to the shop-floor.

In Process Inspection:

During the various stages of manufacture described above, the materials are subjected to In-
process Inspection on various parameters to identify deviations from the specifications, if any,
during the process and to take corrective action wherever needed.

Calibration of Test Instruments:

The gauges and measuring instruments are calibrated periodically to ensure they are as per pre-set
standards.

Final Inspection:

The components are then subjected to final inspection before passing them for assembly.

Assembly

The components produced in house, along with the components bought out or sub-contracted are
then assembled to produce the machinery.

Testing and Trials:

38
The machines are then subject to Testing and Trials to ensure that they satisfy the specified
parameters of performance. The trials are conducted internally as well as in the presence of the
customer to fully satisfy the user’s expectations.

Dispatch:

On successful completion of test run and trials, the machines are then dispatched to the customer’s
works.

Commissioning of Machine:

On receipt of the machine at customer works, necessary supervision of its erection and
commissioning is carried out by the company’s service personnel. Further, necessary orientation
/training of customer’s operators are impacted by the company’s service personnel

Manufacturing Process – Auto Components:

The manufacture of auto components consists mainly of machining of the raw Cylinder
Blocks/Cylinder Heads supplied by the customers. This raw Cylinder Blocks and Cylinder Heads
are received at the factory of the Company, and are inspected for any manifest defects before
processing.

This raw Cylinder Blocks are then subjected to several operations of machining such as
milling, drilling, lapping, on the Special Purpose and General Purpose machines of the company.
In course of the machining, the materials are subjected to rigorous inspection during the process to
ensure that the quality of the machining conforms to the pre-set quality standards. Whenever
deviations are detected, necessary corrective action is taken.On the completion of the machining
process, the component is dispatched to the customer after a final round of inspection and quality
check.

Production Volume and Key Operational Efficiency Indicators:

Full capacity utilization has been the specialty of lokesh machines limited. The Company has
always been expanding consistently and guardedly after establishing the capacity requirement.

39
 Machine tools capacity utilization is in excess of 100%. The company is outsourcing
significantly to meet the demand. Having established the demand, the company is now expanding
further on a few mother machines an buildings to house assembly and warehouse.

COMPETITORS
BirlaMachining&ToolingsLtd. DAGTOO
BirlaPrecisionTechnologiesLtd. BIRPRE
ConsortexKarlDoelitzsch (India) Ltd. CONKAR
DrillcoMetalCarbidesLtd. DRIMET
EMAIndiaLtd. EMAIND
ITLIndustriesLtd. ITLIND
JainexAamcolLtd. JAIAAM
JeetMachineToolsLtd. JEEMAC
KennametalIndiaLtd. KENIND
KulkarniPowerToolsLtd. KULPOW
MivenMachineToolsLtd. MIVMAC
RapicutCarbidesLtd. RAPCAR
RishiLaserLtd. RISLAS
SolitaireMachineToolsLtd. SOLMAC
TridentToolsLtd. MAGTOO
TuliveDevelopersLtd. KERJOS

40
PLANT LOCATION ADVANTAGES:

The project is setup at village Nidamanuru, Krishna District, Andhra Pradesh on national
high way No.5 and is about 12 Kms. From the city of Vijayawada and it is well connected by road
and rail and has the necessary infrastructure. INCAP has the following favorable location factors.

1. It is connected to national high way No.5 with a railway link and airways.
2. Availability of cheep manpower.
3. Availability of fuel and power.
4. Availability of water.
5. Climatic conditions.
6. Financial aids (A.P.government given a subsidy of 1.5 lakhs on total cost of the project.)
7. Good community attitudes.
8. Presence of other allied industries around it.
9. Good facilities for expansion.

MATERIAL HANDLING:

The material handling system in INCAP is conventional type of handling system. They
use plastic tubes to transfer the material from one machine to another machine.

PERSONAL MANAGEMENT:

Requirement of personnel as per the requirement given by the respective department &
monitoring the punctuality for conducting the training classes to all the personnel as per the annual
training plan.

UNIONS AND INDUSTRIALRELATIONS:

The company does not have any unions. The industrial relations and the employer
relations are fine till now.

41
RECRUITMENT POLICY:

The required man power will be assessed by the top level management and on behalf of
managing director, the manpower requirement will be announced through new papers.The
company is also recruiting the friends and relatives of the already working employee to have an
organizational belongingness feeling.The company is also recruiting purple by keeping man
powder inventory i.e, the people who want to seek the employment in the organization they will
submit their resumes to the personnel officer, when the organization is in need of the man power
they call those people for interviewing.In the selection committee the top-level management
screens the candidates and recruit, if they are suitable.

TRAINING:

The recruited manpower will be trained for one year. After completion of the training the
man power will e planned a regular pay scale cadre.

PROMOTION:

The promotion is based in INCAP LIMITEDis experienced based from top to bottom. If
nay person of the level management shown any exceptional taken he will be immediately
promoted as supervisor.

PERSONAL DEPARTMENT:

The INCAP LIMITED has the personal officer, one personal assistant, receptionist and
security.

WAGE STRUCTURE:

The INCAP LIMTIED has skilled, semi skilled and un-skilled man power ‘8’ scale
according to the scale they fix the wages to that particular employee. INCAP, salaries increased
by 10% annually.

MANPOWER:

42
 The project requires about 200 personnel 100 unskilled, 50 skilled, 30 semi-skilled, 20
administrative and managerial personnel. Necessary training will be imparted to the key
personnel collaborators. Present the company has 100 office staff and factory workers on its rolls
and proposes to at an additional 100 members in various categories.

INCAP commercial production started in 1993, Round the clock the company works for 3 shift.

1st Shift 6.30 am to 3 pm

2nd Shift 2.30 pm to 11 pm

3rd Shift 10.30 pm to 6.30 pm.

For managerial persons & staff 9.00 am to 5.30 am.

ACCOUNTS AND ADMINISTRATION:

All the matters, related to accounts and administration are looked after by accounts &
administration department in order to smooth running of all the plant activities.

MARKETING DEPARTMENT:

 Receiving the enquiry from customers and replying then with quotation, and other related
technical information.
 Preparation of monthly rating requirement in the form of matrix and handling over the
same to product planning & control department for necessary action.
 Preparation of order acceptance for all the purchase received from different customers
and sending the copies of the same to all concerned persons.
 Following the execution of dispatches as per the order received from the customer as per
the order acceptance.
PURCHASE DEPARTMENT:

Procuring all the raw material and the consumables as per requirement raised by different
departments from the approved vendors or sub contractors.

PRODUCTION PLAN NING AND CONTROL:

43
Receives the monthly matrix from marketing department and plans are production accordingly by
raising capacitor production sheer.

Material requirement plan is made by the ppc department according to the matrix given by
the marketing department by considering the required stock in pipe line. For the short fail of
material “indent” will be raised from ppc department to purchase department after being checked
and approved by technical director and managing director.

RAW MATERIAL STORES:

Receives the quality assurances (QA) cleared material is stored item wise as per INCAP’s
standards and the material is issued to production in “first in first out” order (FIFO) upon receipt
of the requisition from production department. The raw materials required in the process are
aluminum (AL) oils of 99.99% purity, tissues paper also of 99.99% purity, electrolytic alcans,
rubber bungs and PVC sleeves.

The anode and cathode foils though made of AL differ from each other in the following
way. The anode AL foils will have an anode in the electrolytic process.

RAW MATERIAL REQUIRED:

 Two type of foils :

a) Anode foil
b) Cathode foil
 Lead tabs
 Tissue paper
 Electrolyte
 Aluminum can for covering
 PVC sleeves for monitoring the parameters
 Rubber bung for curling.
 Anode lead tab (long & positive)
 Cathode lead tab (short & negative)

44
QUALITY ASSURANCE:

Quality policy, inward inspection, in process inspection, final inspection is the procedure
followed by IN Cap’s Head OA.

QUALITY POLICY:

IN Cap provides products and services of quality at competitive pieces that meet the
requirement of the customers though continuous improvement in all our activities.

INWARD INSPECTION:

Checking the quality of incoming raw material as per INCAPs standards and gives the
feedback to all the concerned personnel

45
46
HISTORY

Lokesh Machines Limited was incorporated as a public limited Company on December 17, 1983
and commercial production started from 1986. The Company was promoted by Mr. M Lokeswara
Rao, whostarted this company after gaining significant insights into the nuances of machine and
machine tool manufacturing during his stint of over 16 years as a shop-floor executive of HMT
Ltd.
Initially commencing business with a modest capital, and doing some job works for HMT Ltd, the
company was nurtured carefully by the Promote r to the present stage, achieving a turnover of Rs.
75.32 crores in the year ended 31st March 2005.

Incorporated in 1983, we operate in the Machine Tool Industry. We have strong backing of
Promoters with over three decades of experience in the Machine Tool Industry. Our professional
team is richly experienced in Design, Development, Production, Supply of Machine Tools, Jigs,
Fixtures and Accessories needed for Precision Engineering. This highly charged team’s
commitment has won us various clients. Their satisfaction with our service is very obvious, what
with over 60 percent of business coming from repeat customers. Our well knit service setup has
trained Engineers and Craftsmen, who give best of the results with the help of state-of-the-art
manufacturing facilities. Our strong equity partners make our efforts possible. And that makes us
financially stable.
SYMBOL

47
LOCATIONS

Hyderabad is the most HAPPENING CITY today. It is also the fastest growing city in India. Our
Registered Office and Company are based in Hyderabad. Our CNC Machine Division, SPMs

48
Division and Components Division are also based here. Hyderabad is renowned for skillful and
precise craftsmanship in Pearl Processing. We employ the same degree of precision in all our
products.
BOARD OF DIRECTORS

The company is currently managed by Board of Directors comprising of 10 directors. The day-to-
day affairs of the company are being managed by Mr. M Lokeswara Rao, Managing Director.

Name Designation STATUS

MrMullapudiLokeswara Rao Managing Director Executive Director
Mr K Krishna Swamy Director (Technical) Executive Director
Mr B Kishore Babu Executive Director Executive Director
Mr M Srinivas Director (Auto Components) Executive Director
Mr M Srikrishna Director (CNC Machines Executive Director
Division)
Mr B R Mahesh Director Independent Non-Executive
Director
Mr V Shankar Nominee Director of IDBI Independent Non-Executive
Director
Dr. Y. Satyanarayana Director Independent Non-Executive
Director
Mr. R Mohan Reddy Director Independent Non-Executive
Director
Mr. Y Venkata Rao Director Independent Non-Executive
Director

RECRUITMEMT PROCEDURE

49
Recruitment
The Company’s aim is to attract the best available talent and effectively deploy the
resources to meet the business requirements.
The recruitment sources targeted by the Company include a mix of campus recruitments,
referenced applications and recruitment through advertisements and placement agencies
RecruitementProcess
● knowledge Job Description:
● Developing Software using Dot Net process.
● Desired Profile:
● Good Communication skills.
● Hardworking,
● Dedication to work.
● Salary: Negotiable

RequirementsJob Responsibilities:-
● The Sourcing Specialist executes the recommended sourcing strategy using priority
sourcing channels, conducts initial phone screens, maintains candidate data in RMS and
provides recruiters with highly

PRODUCTS

50
51
 FINANCIAL PERFORMANCE REVIEW
BALENCESHEET
Particulars As at As at As at As at As at As at
31.03.13 31.03.14 31.03.15 31.03.16 31.03.17 31.03.18
Source of funds
Shareholder’s
funds 877.74 877.74 1177.74 1177.74 1177.74 1177.74
a)Share capital 1340.74 1873.92 6186.70 7047.75 7085.29 7352.14
b)Reserve and
surplus 3745.65 4065.01 3923.26 5511.15 7301.54 7551.86
Loan funds 144.76 122.46 259.71 639.18 25.17 125.00
Secured loans 495.53 540.93 513.24 648.94 650.45 647.99
Unsecured loans
Deferred tax liability
Total 6604.42 7480.05 12060.65 15024.76 16240.19 16854.73
Application of funds
Fixed assets
Gross block 5290.38 5883.49 6906.14 9225.84 10066.47 10947.26
Less: Depreciation 1803.31 2087.39 2459.50 3017.04 3663.91 4343.99
Net Block 3487.07 3796.10 4446.64 6208.80 6402.56 6603.27
Capital Work in 315.88 600.31 2156.48 795.89 1241.09 1010.07
Progress
3487.07 3796.10 4446.64 6208.80 6402.56 7613.34
INVESTMENTS - - 110.00 800.00 800.00 800.00

Current assets,
Loans & Advances
a. Inventories 2378.91 2536.46 3556.96 4412.55 4660.22 5005.03
b. Sundry debtors 1480.44 2506.70 2506.70 3880.65 3328.01 3964.11
c. Cash and bank 136.3 170.84 682.88 208.64 128.80 189.18
balances 497.09 385.82 1328.77 2362.20 2671.47 2517.00
d. Loans and
advances
4492.74 5599.82 8448.43 10864.04 10755.50 11675.32
Less : Current
liabilities & 1709.57 2523.84 3100.90 3643.97 2991.96 3233.93
Provisions
Net Current assets 2783.17 3075.98 5347.53 7220.07 7796.54 8441.39
Miscellaneous 18.3 7.66 - - - -
expenditure
(To the extent not
written off
Or adjusted)
Total 6604.42 7408.05 12060.65 15024.76 16240.19 16854.73

52
53
 PROFILE OF THE INDUSTRY
Industrial Profile;
Machine tools a strategic industry, forms the backbone of many if not most of the major sectors of
industrial activity in a country in the traditional manufacturing context. Therefore, a country such
as India which is on the threshold of becoming a major global industrial and economic power must
have a strong, well-developed, robust and modern machine tool industry to support and assist its
manufacturing sector.

The machine tool industry in India has played and will continue to play a key role in
enhancing competitiveness and enabling development of quality and excellence in the output of
the manufacturing industry and of the Indian economy as a whole. In India, the machine tool
industry supports the strategic development and growth of the automotive, the white and brown
goods, the capital goods industries as well as strategic sectors such as defense, railways,
aerospace, etc. Machine tools also contribute to the vibrancy of small and medium scale
manufacturing industries, in particular, the millions of job shops in the country.

In India, the Rs. 17 billion machine tool industry supports more than Rs. 2,000 billion
manufacturing sector in the country. The Indian machine tool industry predominantly comprises s
manufactures from the small and medium-sized enterprises. There are about 150 major
manufacturers in the organized sector. About three-quarters of total machine tool production in the
country comes out of ISO certified companies that are involved in manufacturing of metalworking
machine tools, manufacturing solutions, accessories, and cutting tools & tooling’s systems. India-
wide, the sector employs some 65,000 skilled and unskilled persons.

Based on current trends and emerging demands, the computer numerically controlled (CNC)
segment is emerging as key driver of growth for the machine tool industry in India. Indian made
machine tools are currently exported to over 55 countries-major ones being UnitesStates, Italy,
Brazil, Germany, and the Middle East. Lathes and automats, presses, electro-discharge machines
and machining centre’s from the bulk of export orders for Indian manufactures.

Historical data
Industry Strengths
The machine tool industry in India is recognized for:

54
 ● Capability to manufacture low-cost, highly productive manufacturing solutions, especially
customized products, for Indian and overseas users- in the range of turning centre’s,
machining centre’s and grinding machines.
● Consistent attempt to transform the industry to become more productive, more efficient,
and, above all, much more cost competitive. Products offered by the Indian machine tool
industry today are priced much lower than earlier.
● Strong emphasize towards improvement of quality. Over 75 per cent of the total
production of the industry comes from ISO certified and CE accredited manufactures.
● Engineering expertise on design, CAD, documentation, testing and evaluation. Most
machine tools manufactured in India are indigenously designed.
● Pool of skilled workforce specializing in assembly, design, and software development, as
well as in efforts to further strengthen their design and innovative skills.
● Forging backward integration with sub-suppliers and vendors for greater standardization of
components and assemblies.
● Initiatives to form clusters and enter into consortia, with even competing manufacturers,
for developing world-class manufacturing solutions.
● Proactive efforts to reach out to customers through process of interactive dialogues at the
industry and at the individual company levels.
● Special focus on increasing reach of the industry to other potential overseas markets. The
machine tool industry is making special forays to establish presence in key machine tools
markets through joint participation in overseas fairs, as well as establishment of exclusive
machine tool show centre’s. As a result, Indian machine tools are today well accepted in
China, Germany, Italy, and France and in North America.
Core Competency
The Indian machine tool industry manufactures almost the complete range of metal-cutting and
metal-forming machine tools. Customized in nature, the products from India comprise
conventional machine tools as well as computer numerically controlled (CNC) machines. There
are other variants offered by Indian manufacturers too, including special purpose machines,
robotics, handling systems, and TPM-friendly machines.

55
Industrial Machine Group

Industrial machine group combines a seasoned group of expert in the Plastics Processing Industry
with progressive business leadership. The group has extensive contacts and broad expertise in all
facets of the Plastics industry. This gives us unique access or insight into a large customer base
that currently use the Machinery and Parts we source internationally. The company has an
extensive physical infrastructure and currently conducts business in India, China, US, Canada, and
Mexico. This platform allows your company quickly take advantage of new products / market and
will facilitate the development of a long term partnership with Industrial Machine Group.

56
 RESULTS AND DISCUSSIONS

1. INVENTORY TURNOVER RATIO

TABLE: 01

AVERAGE
YEAR COST OF GOODS SOLD RATIO
INVENTORY

2013-14 26275948 5343965.5 4.9

2014-15 14937776.44 7781443.5 1.919
2015-16 606204558 20800657 2.914
2016-17 82489696 412762465.8 0.199
2017-18 187085727 53869681.5 3.742

INVENTORY TURNOVER RATIO=cost of goods sold/average inventor

Graphical Representation:

RATIO
6

0
2013-14 2014-15 2015-16 2016-17 2017-18

Interpretation
From the table it is observed that the inventory turnover ratio has increased land2 year. It has
increased from 4.9 to 1.919 and decreasing from 2013-14 to 2014-2015 in the 1.919, 2.914, 0.199
from the year 2016-17 to 2017-18. It is a test of efficient inventory management. If the company
has higher the ratio, the better is the performance of the company. If the inventory turnover ratio is
higher the operating cycle becomes faster and finally it will lead to higher Profits for the company.

57
2.RAW MATERIAL TURNOVER RATIO
TABLE: 02
MATERIAL
YEAR CONSUMED INVENTORY RATIO

22830279.07 4873451 4.68

2013-14

9990241.43 10689496 9.345

2014-15

35290991.45 30911818 1.1416

2015-16

54152908.51 51640675 1.048

2016-17

1465569.74 56098688 2.612

2017-18

RAW MATERIALS TURNOVER RATIO= Material consumed/Inventory.

RATIO
6

0
2013-14 2014-15 2015-16 2016-17 2017-18

Interpretation
From the above table 2 it is observed that the raw material turnover has fluctuations are made in last
5 years. When we compared the 2017 raw material with 2018 ratio is increased from 1.048 to
2.612.

58
SUNDRY DEBTORS TURNOVER RATIO
TABLE: 03

YEAR NET SALES AVERAGE DEBTORS RATIO

26275948 5468185.53 4.8

2013-14
14937776.44 9363709.06 1.594
2014-15
60620458 21800781.89 2.78
2015-16
82489696 25696444.61 3.21
2016-17
187085727 45553983.15 4.106
2017-18

SUNDRY DEBTORS TURNOVER RATIO= Net sales/Average debtors.

RATIO
6

0
2013-14 2014-15 2015-16 2016-17 2017-18

Interpretation
From the above table 3 it is observed that the age of feed sundry debtor's turnover is fluctuated
from last 5 years when we compared the 2014 with 2018 it remains consistent.

59
INVENTORY TO CURRENT ASSETS RATIO
TABLE: 04

YEAR INVENTORY CURRENT ASSETS RATIO

4873451 11748012.79 0.41

2013-14
10689496 19676009.04 0.543
2014-15
30911818 65559974.28 0.471
2015-16
51640675 75167187.99 0.068
2016-17
56098688 97939506.11 0.572
2017-18

INVENTORY TO CURRENT ASSETS RATIO= Inventory/Current assets.

RATIO
6

0
2013-14 2014-15 2015-16 2016-17 2017-18

Interpretation
From the above table 4 it is observed that the age of inventory current assets is gradually
increased from the period 2013-14 is 0.41 and 2014-18 is 0.543, 2012-12 0.572 high ratio

60
CURRENT RATIO
TABLE: 05

YEAR CURRENT ASSETS CURRENT LIABILITIES RATIO

11748012.79 3709044.27 3.167

2013-14
19676009.04 15047878.64 1.3
2014-15
65559974.2 48762416.99 1.344
2015-16
75167817.99 62704628.00 1.198
2016-17
97939506.11 65977413.70 1.484
2017-18

CURRENT RATIO= Current assets / Current liabilities.

RATIO
6

0
2013-14 2014-15 2015-16 2016-17 2017-18

Interpretation
From the above table 5 it is observed that the age of current assets and current liabilities is
gradually decreased from the period 2013-14 3.167 and 2014-2015 it is decreased to 1.3, 2015-
2016 and 2016-2017 decreased ratios

61
INVENTORY TO SALES RATIO

TABLE: 06

YEAR INVENTORY SALES RATIO

4873451 26275948.00 0.185

2013-14
10689496 14937776.44 0.751
2014-15
30911818 60620458.00 0.509
2015-16
51640675 82489696.00 0.626
2016-17
560989688 187085727.00 0.299
2017-18

INVENTORY TO SALES RATIO=Inventory/Sales.

RATIO
6

0
2013-14 2014-15 2015-16 2016-17 2017-18

Interpretation
The above table 6 shows the inventory table shows that within year to year the raw materials and
sales are going to process. Observing the 2014-2015 on the year ratio increase 0.715, 2013-14,
2015-16, 2017-18 ratios decrease ratios 0.185, 0.509, 0.626, 0.299.

62
 FINDINGS

 During the period of study i.e., 2013-14 to 2016-17, I found that there was mixed trend in
inventory as a % of current assets in the year 2013 – 14 the ratio was 40% and gradually
declined to 24% and slowly increasing till year 2017-18 that is 24 to 28.49. Finally the
performance of inventory over current assets is satisfactory.

 From the study of the inventory management I noted that there was mixed trend in raw
material as a % of total assets. The lowest inventory over total assets ratio was recorded at
7.35% during the year 2013-14 and the highest inventory ratio at 10.36% during the year
2016-17. In the year 2017-18 ratio is 9.62%.

 From the analysis of the study that is 2013– 14 to 2016-17, I identified that mixed trend in
inventory turnover ratio the lowest turnover ratio is recorded in the year 2017-18 that is
65% and the highest inventory turnover ratio recorded 191.9% in the year 2013-14, finally
inventory turnover ratio is being satisfied.

 The period of study I found that there was up & down of inventory holding period in the
year 2014-15. It is maintained lowest holding period in the year 2017-18 that is 6days.

 From the analysis of study I found that there was a drastic increase in a current assets ratio
during the year 2013-14 the ratio was 0.842 and has been increased to 1.211 in the year
2017-18 it is good for organization

 During the period of study, identified that there was mixed trend in quick ratio it
maintained average quick ratio is 0.62 during the period 2013-14 to 2017-2018.

63
 SUGGESIONS

 Linking up alternate part numbers and elimination of duplicate code numbers so that
effective utilization if the available items could be done and unnecessary purchase could
be avoided.

 It is also noted that most of the vendors supplying material to INCAP LTD are the same,
INCAP LTD management explore to possibility to arrive supply chain management
concept with regular vendors to reduce lead time for requisition possibility and placement
of final purchase orders.

 Orders are being placed annually for the total require. For one year period .instead of this
orders may be placed periodically especially for A class items periodically.

 The overall, the inventory management in Sccl is up to mark where by adequate supplies
of materials and stores, minimization of stocks outs and Avoided costly interruption in
operations.

 It has kept down the investment in inventories carrying cost an obsolescence losses to the
minimum through purchasing economies by the measurement of requirements on the
basis of recorded experience

 It also enables the management to make cost and control

64
 CONCLUSION

From my analysis I found that the company is viable and can be revised if the existing
debts, which are heavy in compared to the equity, are restructured. It calls for reduction of the debts
through written off, conversion into equity and liquidate through sale of Assets like land.

As a immediate measure the company should approach the to contribute necessary funds
for working capital and some additional amount as one item grant for the statutory dues to enable
the company to restart operations

The company's growth was mainly on account of substantial increase in the export of
general purpose a/c however the company started incurring losses due to unfavorable marketing
conditions and unfavorable sales.

65
 REFERENCES

1.FINANCIAL MANAGEMENT - I.M.PANDAY 9TH EDITION

2.FINANCIAL MANAGEMENT- KHAN AND JAIN

3.PRINCIPLES OF INVENTORY MANAGEMENT- BSGOEL

4.FINANCIAL MANAGEMENT- PRASANNA CHANDRA

66