Factory Accounting

[1] Production Planning [2] Central Demand (Inter Factory Demand) [3]
Supplementary Work Order Demands [4] Civil Trade [5] Standard Estimate [6] Labour Estimate [7]
Material Estimate [8] Spot Estimate [9] Non-Recurring Rate (NRR) & Non-Recurring Revision of
Materials (NRM) [10] Pricing of Estimate [11] Work Order [12] Syllabus of Work Order Pt. I & II
[13] Blank [14] Warrant & it’s progression [15] Production Ledger Card [16] Drawl of
Material/Labour booking against Warrants [17] Blank [18] Cost Card [19] Variance Analysis
Warrants [20] Rejection [21] Semi Statements [22] Work-in-Progress [23] Except System Accounting
[24] Accounting of Tools [25] Process Costing [26] Foundry Costing [27] Timber Costing [28]
Accounting of Overhead Expenditure [29] Step Ladder Allocation of Service Section Expenditure [30]
Shop Budget Committee [31] Blank [32] Blank [33] Accounting of R & D [34] Annual Accounts Pt. I
& II [35] Quasi-Commercial Accounting [36] Productivity Linked Bonus (PLB) [37] Price List,
Profit/Loss on issue of stores [38] Single Point Performance Index [39] Miscellaneous

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[1] Production Planning

1.1Extracts: Extract is the authority for undertaking work in Ordnance Factory . It is issued by Ordnance
Factory Board (OFB), Kolkata to enable the Factory to undertake manufacture in respect of all out turn
Work Orders and certain Indirect Service Work Orders. One Extract is placed for one Work Order. Copies
of all Extracts as well as amendments relating thereto will be received in the Accounts Office direct from
OFB or through the Finance Division, OFB, if they relate to Army, Navy, AirForce, MES or Stock Orders.

1.2 Extracts are based on the indents placed by the indenters like Army, Navy, Air Force on OFB. There are
five classes of extracts. Example: –

Extract
Class Extract subject (issued)

For issue to Army & and miscellaneous services like repairs for Navy and Air
Class I Force.

Class II Payment Service (Including orders for MES or Non-Military Departments).

Class III Inter Factory Requirements (Demand)

Class IV Manufacture for Stock (Internal to Factory other than capital)

Class V Capital Works

1.3 Register for Extracts: A register of extracts will be maintained in the Accounts Office to watch the
receipt of all extracts issued, the progress of completion of extracts with special reference to the P.D.C., if
any, mentioned in the extracts as well as to ensure that the quantity ordered on the extract is not exceeded –
in actual manufacture.

1.4 When extract is completed, the remark “Completed” will be written against it in the register. The
information will be obtained from the production cards.

Note-(1) Whenever an Extract is received, it should be entered in the costing package maintained in
computer.

1.5 Procedure of placing Extracts:- Class I and Class II extracts are issued to factories by the OFB on the
basis of demands placed it from time to time on behalf of the Army or other Government departments etc. as
the case may be. If such an order is received by factory direct, the G.M. applies to the OFB for a class I
extract when the order is on behalf of the Army and for a Class II extract in the case of a Payment Order the
value of which exceeds financial power of the GM.

1.6 All applications for extracts in respect of orders placed on Factories by Local Military Authorities should
be carried out under Class-I extract. Supplies of Stores and equipment to Air Force, M.E.S., Navy and
Defence Production Research and Development organisation will be treated as Class-II Orders. However,
miscellaneous services like repairs for Navy, Air force will be treated as Class-I order.

1.7 Class-IV and Class V extracts are issued to factories by the OFB from time to time on the basis of
application from the GMs of factories. The procedure for placing Class III open extracts has been detailed in
para 1.10

1.8 Extracts are not required for minor repairs or conversion, repacking or breaking up of stores carried out
by factories on the direct requisitions of army formations (i.e. arsenals and ordnance depots) if the cost of
any such transaction does not exceed ? 10,000. For all such orders (work orders 05/00003/00 and
05/00005/00) exceeding this amount, the G.M. should apply to the OFB for a Class I extract.

1.9 Open Extracts : Before the commencement of each financial year, open extracts for various services
pertaining to all classes of extracts are issued to the factories by the OFB. An open extract is a general
authority for factories to carry out miscellaneous and petty services falling under Classes I, IV and V for
which specific sanction of the OFB is not required in each individual case. Under open extracts allotted for
Class II, the G.M. can carry out work of payment services in each case upto the limit of his financial power
without asking for separate extracts to the OFB. Similarly, a class III open extract is sufficient authority for a
factory to undertake manufacture, repair or other work for another Ordnance Factory on receipt of an inter-
factory demand (I.F.D.) from the later, without further reference to the OFB.

Note:- For manufacture or reconditioning of components of rifles, machine guns etc. open extracts will be
issued and marked Class IV. A suitable register will be maintained in the Accounts Office for watching that,
the monetary limits in this respect are not exceeded without proper sanction.

1.10 List of outstanding Extracts: At the end of the year, a list of all out-standing extracts (including those
outstanding from previous years) will be prepared for each class of extracts showing the extract numbers and
the quantities outstanding as per production cards and the list will be sent to the factory for check and return.
In factories where these lists are prepared by the Management, the Accounts Office will check the
outstanding shown therein. Any discrepancies should be settled at once. When an extract from the
outstanding list is completed, the remark “completed” should be entered in the outstanding list.

1.11When an extract is altered or cancelled, necessary note will be made on the extract as well as in the
register or the outstanding list as the case may be.

1.12 For budget purposes, the outstanding values of all extracts under each class should be worked out. This
will be the amount which is required to be spent in the next year i.e. any expenditure already incurred should
be excluded. This can be done by pricing the outstanding quantities at full standard rates and deducting there
from the value of unfinished semi manufacture, making an allowance for any undue fluctuation that might
have occurred on account of excess cost of tools or change in the material values or on cost charges.

1.13 Cancellations of Extracts: When a Class I extract is cancelled, as much of the expenditure as has
already been incurred on it will be transferred to some other warrants, if possible, and any scraps or
components returned to store.

1.14 In the case of all other extracts, such expenditure should be adjusted to general indirect charges under
orders of the P.C. of A (Fys), but, where a Class III extract was issued in satisfaction of some arsenal
demand, the expenditure should be transferred to work order. In the case of Class II extracts, a loss
statement will be necessary to write off the net loss under the sanction of the Competent Financial Authority.
1.15 Whenever, a demand or extract is cancelled, credit will be taken for it in the year in which it is
cancelled irrespective of whether the cancellation is effected in the year in which it was placed or in a later
year. On receipt of intimation that a demand or extract has been cancelled, a report will be sent to the OFB
by the factory through the Accounts Officer regarding the actual loss sustained on account of commitments
etc. entered into before receipt of the cancellation order, in order that the factories budget may be
reimbursed to the extent necessary.

1.16 The term “actual loss” referred to in Para 1.15, will cover the- cost of labour employed and material
used in the manufacture of stores of which further use cannot be made. It does not include material
purchased and taken into stock for eventual use in complying with demands that may be placed later for the
same store or for a store in the manufacture of which similar material is used.

1.17 Excess manufacture: There are three categories of excess manufacture, each of which is described
below separately:

(i) Excess manufacture covered by original extract.

(ii) Excess manufacture not covered by original extract but exempted from covering sanction.

(iii) Excess manufacture not covered by original extract and requiring covering sanction.

1.18 There are certain stores, e.g. complete rounds of OF ammunition which are required to be manufactured
in complete units. A list of such stores is maintained by the O.F.B. If demands of D.O.S. for any of them are
less than a whole number, of units, the OFB will issue extracts for the next greater whole number of units
and authorize the factory to place the balance not required by the D.O.S. into stock under a special head.

1.19 In respect of manufacture of steel excess manufacture and issue upto 5 per cent of the total quantity
ordered on an extract placed on behalf of the Ordnance Factories will not require further covering sanction.

1.20 In all other cases when a warrant is completed and if it is found that the quantity actually manufactured
exceeds that authorized on the corresponding extract, the excess should be placed under objection and the
G.M. of the factory be requested to obtain a covering extract from the OFB.

[2] Central Demand (Inter Factory Demand)

2.1Inter Factory Demands (IFD): Extract is issued to the Factory which supplies the finish product. With
the receipt of Extract, The consignor Factory places Inter Factory Demand (IFD) on feeder Factories for
supply of components, castings, forgings etc. These IFDs constitute authority for the feeder Factories to
make provisions of material for planning production of components.

2.2 The manufacturing programme in each Factory is determined by (a) the extracts placed by the DGOF on
the Factory and (b) Inter Factory Demands from other Factories.

2.3 The Planning Department of the Factory releases Warrants (Production Orders) in batches to the Shop
(Sections) to undertake the manufacture according to yearly production plan. The labour authorisation is
made through Manufacturing Warrant and the material authortsation is made through Material Warrant.

2.4 IFD has every information as contained in an Extract for the same. Information which are mentioned in
IFD are – (a) Extract No. & Type of Extract (b) Product detail which is/are to be manufactured (c) Drawing
of the product (d) quantity of product (e) material detail etc.

2.5 IFD transactions: There are various sources of receipt of material in the Factory which are – (i) Trade
sources (ii) Receipt from other Factories, (iii) Receipt from non-military Department or from other Defence
establishments etc. So IFD transaction is one of the sources of procurement of material in Ordnance
Factories.

2.6 On planning of yearly Production of a Factory, the Factory prepares requirement of material for the
planned production activities. Then factory tries to ascertain the source from where the material to be
procured.

2.7As per the existing rule, factory should first try to get the material from sister Factories and then from
trade source to maintain the quality of Production. So, on ascertainment of material, which can be procured
from sister Factory, factory will float demand to other Factories.

2.8 The document prepared for placing demand is IFD. Two copies of the IFD will be received in Accounts
Office of the Intending Factory. Who after post audit will pass on one copy to, Indentee Factory Accounts
Office for record & watch the supply. So, IFD is a type of extract or may be called as authority for
undertaking production in the supplying factory.

2.9 Types of IFD transactions: There are two types of IFD supply – (1) supply from Production, (2) Supply
from stock. Hence, Issue Voucher serial will accordingly vary with series of “P” or “S” as the case may be.

2.10 Placing of IFD Receipt Vouchers: Receipt vouchers related to trade supply are priced with reference
to supply orders. But in case of IFD transactions, the only source of evaluated document are Issue Vouchers
received from Accounts Office of supplying factory. So receipt vouchers are priced with reference to price
Issue vouchers of the supplying Factory. Factory management of recipient is quoting issue voucher No., date
& supplying factory concerned to link the issue value and price the Receipt vouchers correctly.

2.11Linking of IFD transaction: On receipt of Issue vouchers from supplying factory, the same are noted
in a Register Factory wise with Issue Voucher No., Date, Quantities, & Value. So according the quoting of
factory & issue Vouchers No. on Receipt Vouchers the receipt transaction can be linked easily and clear the
out-standings at Receipt sources. The issuing factory is also sends an ID list monthly & then yearly from
which the correctness of posting can easily be ascertained & corrected. The unlinked items will be
considered as SIT- (Stores in Transit).

2.12 Stores in Transit (SIT): A yearly statement of IFD transaction is prepared by the Accounts office of
recipient Factory in a prescribed format.

2.13Various types of errors and increase of SIT: As per instruction or rule, Receipt Vouchers on IFD
transactions are required to be prepared, but following types of problems are normally experienced –

(i) Non receipt of Issue voucher at management end.

(ii) Back loaded material returned on regular voucher.

(iii) Discrepancies in quantities and delay in settlement.

(iv) Delayed action for keeping stock holding at lower side.

(v) Wrong documentation by supplying factory & delay in settlement.

2.14 Asset/Liabilities on IFD transaction: As per system outlined in linking inter factory transactions there
much not be unlinked items but in actual the picture is quite different. The major reasons for arising of such
situation are stated in previous Para. So the unlinked items are supposed to be asset at the end of a year, i.e.
material issued but not yet Accounted for and no liabilities should arise. In exceptional cases liabilities also
arises when Issue vouchers are not received at Accounts Offices but on the basis of copy of issue voucher
with the Railway Receipt the factory management prepares Receipt vouchers In SIT however only net asset
is being shown.
[3] Supplementary Work Order Demands (SWOD)

3.1 An order issued by the General Manager for the execution of petty casual work or for internal factory
services which do not require the sanction of the DGOF.

3.2 In regard to petty casual work or minor internal Factory services or repairs and maintenance or for
departmental store orders, the Planning Departments releases Supplementary Work Order Drafts (SWOD).
The SWOD serves the combined purpose of an Estimate and the Manufacture/Material Warrant. Materials
are drawn by the Shops on the authority of these SWODs.

3.3 A Register of SWOD and Non-recurring rate-Form-showing all details commencing from the
preparation of supplementary work order draft/Non-recurring rate Forms upto the point of completion will
also be maintained in the Costing Section. The register should be reviewed by the A.O. every month.

[4] Civil Trade

4.1The policy of the Government is to utilize the spares capacity available, after meeting service demands
for the manufacture of stores etc. for sale to Civil Trade, other non-military departments (including Central
and State Governments, Public Bodies, Municipalities, Local Board and Other Semi-Government institution
and Foreign Governments). Manufacture is undertaken against 80, 82, 83, 84, 88, 92, 93, 94 and 96 series of
work orders. The CT& Exports division of OFB is authorized to fix the price in consultation with the
Finance Division of OFB. Such price will be notified. The Accounts Office of the respective Ordnance
Factory will provide the priced estimates and the actual expenditure incurred on the particular item
facilitating the pricing exercise.

4.2 The Ordnance Factory Board/General Manager are authorized to fix the quotation price without prior
concurrence Accounts Officer / Principal Controller of Accounts (Factories). The Accounts Officer prices
and checks the arithmetical accuracy of the estimates. The Accounts Officer ensures that orders issued by
Government are not over-looked. Pricing of all materials other than non-ferrous scrap is done with reference
to market or controlled price. Minor difference between ledger and market/controlled price may be ignored
and ledger rates may be adopted where market rates are not available. Price of non ferrous scrap is fixed on
the basis of the value of grade1 scrap as given in “The Eastern Metal Review”. The prices of other scraps are
calculated on the basis of the percentage given in the relevant orders.

4.3 Pricing of OFB products against Civil Trade : OFB alone in consultation with Member (Fin) is
authorized to quote minimum price redefined as DM + 50% of DL + cost of special tools if any + cost of
special packing if any + cost of utilities e.g. power, water fuel etc. wherever such cost exceeds 8% of direct
material. Above dispensation is subject to the following conditions:

1. Notwithstanding the above dispensation OFB will make effort to realize the maximum cost/price
that the market can bear.

OFB to ensure that no element of truly variable incremental cash cost constituting additionally to
the total cost on account of Civil Trade Order is left un-recovered.

2. The proposed formula to quote minimum price will be applicable for exceptional cases only for
utilization of capacities rendered idle due to inadequacies of order from services and Para
military forces.

3. There will be no change in existing power delegated to General Managers for determining price
to be quoted against Civil Trade enquiries.

Accordingly General Managers are authorized to quote minimum price of any civil trade item computed on
the basis of direct labour plus direct material plus 20% total overhead charges. If any case a lower price is
proposed, prior approval of OFB should be obtained for which a case with full justification should be sent.

Authority: MOD letter No. 5(1)/2000/D/(Prod) dt. 14.02.2001 read with OFB letter no. 30/CT/Policy dt.
05/11/1996

[5] Standard Estimate

5.1Standard Estimate is prepared for the articles of repetitive nature are required to be manufactured with
proper ‘time and motion study’ to assess the estimated labour man hour for each operation with trade/grade
wise of Industrial employees for the job and also actual quantity of each kind of raw material required to be
utilized to complete the manufacture.

5.2 Standard Estimates or rate forms of labour and material are maintained for all the important standard
items of manufacture in each factory. These estimates are prepared by the factory after proper time and
motion studies and with due allowance for wastage and rejections affording credit for any standard
recoveries etc.

5.3 Rejection percentages are also provided in the standard estimate. The pricing is done by Accounts Office
on the receipt of the Estimate. The estimates are re-priced half yearly.

5.4 The percentages of rejections are indicated as `minimum’ and ‘maximum‘ percentage.

5.5 On receipt of these estimates in Accounts Office for pricing and post audit, the ‘Labour Section’ will
verify the labour operations and rates with reference to original sheets of piece work rates, viz. data cards,
operations sheets, rate forms etc., as the case may be and levy the D.A. at constant D.A percentage of the
Section. Similarly, the material portion will also be verified by the `Material Section’. Thereafter, this
section will price the materials with the latest monthly average rate or in the absence, with estimates or
approximate rates. Finally, `Costing Section’ will levy variable and `fixed’ overheads at the annual budgeted
rate. A summary of the value under `Labour’ together with appropriate levy of Dearness Allowance
percentage, materials, variable and fixed overheads will be exhibited on the front page showing the
minimum and maximum rate of the estimates with reference to minimum and maximum percentage of
rejection.

5.6 The estimates duly priced and audited are then returned to the factory as required, one copy is retained
for use in the `Accounts Office’.

5.7 When it is necessary to revise the standard Estimates, the alterations are communicated by means of
Revision Forms.

5.8 As per recommendation of the Abhyankar Committee, the provisioning of two types of Labour viz.
Hand & Machine and minor indirect nature of material in the estimates has since been deleted.

5.9 Standard Estimates are not prepared for work of a casual nature for which spot estimate or
supplementary work order drafts are prepared in the same way as estimates.

5.10 Reprising of Estimate: All amendments to standard estimates, revisions etc. should be posted in the
estimates immediately on receipt in the Accounts Office and estimates repriced accordingly.

5.11 All standard estimates should be repriced once in six months. In the case of standard estimates,
pertaining to inter-factory demands, repricing may be necessary more frequently and change whenever there
is any in the cost of materials or percentages of overheads or in the D.A. percentage etc. a repricing of the
relevant estimates should be immediately made so that the issue vouchers may be priced as realistically as
possible. The date on which the last re-pricing of a standard estimate was carried out should be shown in ink
on the estimate supported by the dated initial of the auditor concerned.
5.12 Standard Estimates are not prepared for work of a casual nature for which spot estimate or
supplementary work order drafts are prepared in the same way as estimates.

5.13 Spot estimates instead of detailed estimates are prepared by the management in respect of small order
i.e. where the aggregate of direct labour (indirect labour charge; in respect of jobs done on indirect work
order) does not exceed Rs. 100/-. In the case of a service order or urgent (priority) category the limit of
`small orders’ may be raised so as to include orders covering direct labour (indirect labour value in respect
of the jobs done on indirect orders) to Rs 250.

[6] Labour Estimate

6.1 Discussed in detail in Para 5.

[7] Material Estimate

7.1 Discussed in detail in Para 5.

[8] Spot Estimate

8.1 For simplification in the system of Cost Accounting and Financial control, Spot Estimates instead of
detailed estimates are prepared by the management in respect of small order i.e. where the aggregate of
Direct labour, (indirect labour charge; in respect of jobs done on indirect work order) does not exceed
10,000.

8.2 In the case of a service order or urgent (priority) category the limit of ‘small orders’ may be raised so as
to include orders covering direct labour (indirect labour value in respect of the jobs done on indirect orders).

8.3 Spot estimate or Supplementary Work Order Drafts (SWOD) are prepared in the same way as estimates.

[9] Non-Recurring Rate (NRR) & Non-Recurring Revision of Materials (NRM)

9.1 The standard Estimates provide for various labour operations required for a job as well as quantities and
description of various materials required.

9.2 Cases occur where, due to certain defects in manufacture on account of various causes, due to materials
not being to the correct size or shape it is necessary to carry out additional operations not provided in the
Standard Estimate or draw materials in addition/excess of that provided in the Standard Estimate.

9.3 Authorisation for additional labour operation is provided in Non-Recurring Rate (NRR) Forms and for
materials on Non-Recurring Materials (NRM). The control on issue of NRRs/NRMs is ensured as follows –

(i) Authorizing the Manager, R & E/Works Office/Planning Office to sanction NRRs/ NRMs upto Rs.
5000/-. Beyond this, sanction of the GM is necessary.

(ii)Prescribed forms should be used.

(iii)Reasons necessitating issue of NRRs/NRMs should be recorded on these documents.

(iv)Reasons should be scrutinised by Accounts Office and follow up action taken for ensuring remedial
measures in cases where the recurrence can be avoided.

( v )Separate registers-one for NRRs and another for NRMs will be maintained shop/section-wise by R & E
Works office of the factory.
9.4 All NRRs/NRMs sanctioned willbe posted Warrant-wise in the register. Main Warrant consists of 5
digits. The first four digits are for the main warrant The fifth digit is reserved for control purpose. Thus 1
and 2 in the last digit denotes NRRs NRMs respectively.

9.5 Accounts Office collects the figure monthly from the various abstracts with reference to the control
figures and intimates the same to the factory for check with reference to the entries in the registers
maintained by the factory. Based on this and other details remedial measures are taken.

9.6 When alternative material is proposed, the above form will be used. The financial effect is the difference
between the value of the new material and material provided initially.

[10] Pricing of Estimate

10.1 It is the primary duty of the Accounts Office to ascertain the cost of the materials/items produced in the
Factory. This job is being dealt with in the costing system of the Branch Accounts Offices.

10.2 To ascertain the expected requirement of labour and material operation for a particular item of
production is called Estimation. Therefore, from the central point of view in utilization of material and
labour, Estimates are playing a vital role.

10.3 In Ordnance Factories, for each item of product, an estimate of the item is prepared by the Management
wherein, how much material is to be processed for production of 1 or 100 items is shown with scraps to be
recovered and how much will be loss in process.

10.4 In labour side, they will exhibit labour operation details in each section through which the material will
pass to convert it to a finished good/product. It will show the item required for each operation and total rate
for the operation and total rate for the operation is (total time) x (hourly rate).

10.5 On receipts of the Estimates in Accounts Office, the pricing of the same is done twice in a year.

10.6 The rates of the material provided in the Estimates are supplied by the Material/Labour Section, which
is maintaining item-wise material accounts (folios) and labour rates are checked by the Labour Section with
reference to Schedule of Rates.

10.7 In this connection, it may be noted that for each operation a time study of operation is done by Factory
by employment of the worker on the job and after providing 25% profit element and fatigue allowances of
time for grinding and of machine etc. An hourly rate is arrived at which after vetted by Accounts Office
finds place in the Schedule of Rates.

10.8 On completion of above formalities, the Accounts Office will levy incremental benefit percentage and
then D.A. percentage on each Section and also levy the Overhead Charges both VOH and FOH on it at
predetermined percentage.

10.9 On the top sheet of the Estimate, the summary has to be prepared showing the – (i) Material Cost, (ii)
Labour Cost of each Section & (iii)VOH & FOH Cost of each Section.

10.10 In each Section, a NR percentage is shown, to provide allowances to the Shop up to that limit,
rejection may occur in process of operation. In the Summary Sheet of Estimate therefore NR allowances
also been added to arrive at the total Estimated Cost of the item.

10.11When a new item is proposed to be produced in a Factory Provisional Estimate is prepared. On

standardization of the item, the Estimate also standardized after minor modification as per actual
requirement.
10.12 On standardization of Estimate, the Estimate plays an important role in controlling the expenditure as
on the basis of these Estimates provision of labour and material operation is made in Warrants (Material
Warrant & Manufacturing Warrants respectively) which is the limitation of the labour employment or
drawal of material for the Batch Production.

[11] Work Order

11.1 Work orders are the documents generated for identifying the indenter and the item of expenditure. It is
the numerical code no. assigned to each kind of expenditure incurred or work undertaken in a factory.

11.2 Number Coding of Work Order (W.O.): Work Orders consist of 9-digit code numbers. The code is
divided into 3 parts. The first two digits indicate the Main Work Order showing the indenter or the purpose
for which a work is undertaken. Thus, if work is being performed for the Army, Code 90 is used in the first
two digits. If the work is for another Factory (IFD), Code 70 is used.

11.3 The next five digits indicate the particulars of work. Means to say that these five digits stand for the
description of the item. and the last two digits indicate control codes.

11.4 The Work Orders (01and 02 series) relating to Indirect Expenditure also consists of 9 digits. These
Work Orders which are common to all Factories are shown in the Syllabus of Work Orders. For indirect
Work order ‘0’ in the third digit of the Main Order indicates debit and ‘1’ in the third digit of the Main Work
Orders indicates credit i.e. minus figures.

11.5 The last two figures of the work order indicate the section for which expenditure is incurred. The
complete codification of W.O. are given as:

Work Order Number Codification

Part – I Part – II Part – III

X X 0 0 0 0 0 Y Y

Indenter or Purpose of work Particulars of work Control codes.

11.6 Details of Work Orders common to all factories as well as Process Work Orders are contained in the
Syllabus of Work Order Part I issued by the Principal Controller of Accounts (Fys).

11.7 For items of production peculiar to a factory, details are contained in Syllabus of Work Order Part II.
The allotment of numbers is controlled by the General Manager.

11.8 For proper allocation and ascertainment of the overhead expenses, it is essential that a thorough study
of the different work orders under 01-Fixed charges and 02-Variable charges as detailed in the Syllabus of
Work Order Part I is made by all concerned with production and cost management.

11.9 Excepting the “indirect expenditure” under W.O. serials “01 and 02” in the first part of the syllabus, the
expenditure on all work orders is treated as “direct expenditure”.

11.10 The Work Orders relating to other item of work/series, which are also common to all Factories consist
of 9 digits and have been compiled in the book called “Syllabus of Work Order Part I “.

11.11 Example:
(i) Indirect Expenditure – Fixed Charges – 01

(ii) Indirect Expenditure – Variable Charges – 02

(iii) Process Material – 03 Series of W.O.

(iv) Capital Services – 04 Series of W.O.

(v) Repair & Conversion – 05 Series of W.O.

(vi) Misc. Seris (Cost of Packing etc.) – 06 Series of W.O.

(vii) Drawings and Prints – 07 Series of W.O.

(viii) Conversion of Timber – 08 Series of Work Orders.

(ix) Tools & Gauge – 09

(x) Departmental Material – 10

11.12 Syllabus of Work Order Part II (maintained by the Superintendent) is for expenditure on outturn
orders for the manufacture of various articles for issue to the Army and other Ordnance and Clothing
Factories and for services rendered to non-military departments, Railways and other private firms and
individuals.

[12] Syllabus of Work Order Pt. I & Pt. II

12.1 Syllabus of Work Order Pt. I: A catalogue of W.O. common to all factories consisting of direct
capital, process orders, etc., other than regular Out turn orders which are included in Part-I syllabus.

12.2 Syllabus of Work Order Pt. II: A code or a catalogue of a Factory’s out turn work orders. Each work
order is assigned a serial No. for identification and accounting purposes and the series usually arranged
either in alphabetical or PVS Order. As far as practicable the description of the W.O. should conform to the
official nomenclature of the job at its finished stage.

12.3 The syllabus of work orders, Part I is maintained in PR Section. Any addition, alteration or
amendments as and when required are carried out and the Branch Accounts Offices informed accordingly.
Reprinting of syllabus of work orders, Part I is also arranged, when necessary.

[13] Blank

[14]Warrant & it’s progression

14.1 Warrant: It is an authority for undertaking manufacture of an article by the Productive Shop/Section.

14.2 There are two types of warrant – (i) Material Warrant (ii) Manufacturing Warrant.

14.3 Material Warrant: It is an authority to draw material to undertake production. It is issued on the basis
of work Order. It contains following:

• Nomenclature of the materials required for the product to be manufactured

• Ledger Folio Number of the material

• Unit of the material e.g. Kg, Litre, Meter etc. in codified number

• Quantity of material required

 • Remarks

14.4 Manufacturing Warrant: It is an authority to undertake production. Manufacturing contains

following –

• Original Authority for doing the work i.e. Extract Number

• A Relevant Estimate Number

• Description of the Work

• SWO Number

• Quantity of work to be done

• Operation to be performed

• Trade & Grade of Labourer to be employed

• Time required for operation

• Hourly Rate of the operator

• Total amount of Basic labour required

14.5 Wattant contains Material to be used and operation wise Trade/Grade of labour to be employed to
complete the article to be manufactured. A Warrant Number is of five digits, e.g. 0000/0, where the fifth
digit denotes as under:
0 for Main Warrant Number

1 for Extra Labour demployed as per NRR

2 for Extra Material drawn as per NRM

3 for Replacement Warrant for excess rejection

4 for Additional number of the existing warrant

14.6 Issue of Warrant:It is issued by the General Manager of the Factory. Work Office/Planning Office
(PO) of the Factory issues Warrant to the respective Manufacturing Sections to undertake the job against a
Work Order.

14.7 Separate Warrants are generally issued for each extract. In order that the warrants may be completed
within the period of the normal duration of warrants, large extracts may be divided into convenient
compartments, in which case warrants will be issued for each compartment. On the contrary, extracts on
which similar stores are ordered may be pooled together as in the case of the Rifle Factory and warrants
issued against the pool for mass production, provided the quantity ordered on a warrant is expected to be
completed within the period of normal duration of warrants.

14.8 Warrant life: Normal duration of Warrants for work other than Capital Works (New or Repair) is Six
months only. Approval for further extension may be obtained from DGOF.

14.9 In case, where work passes from one shop to another, separate Warrants will be issued for each shop
and the time limit will apply to the duration of Warrant for each shop.

14.10 The date of commencing production work on a warrant may be some weeks after the date of issue of
the warrant and the period will be counted from the date of commencing work on the warrant i.e. the date of
performance of the first operation on each warrant.

14.11 Warrants for Ordnance and carriage components which take longer than six months for completion,
may be issued’ for one year without reference to the O.F.B: Further extension, where necessary, for a
warrant for important service stores will be subject to the prior approval of the O.F.B.

14.12 In the case of warrant for .303″ MK 7 type cases, bullets and caps, warrants for empty cases and
bullets will be issued for 3 and 4 months, respectively while warrants for empty caps will be issued for 5
months in the first two 5 months period of the financial year and the last warrant being for a period of 2
months only

14.13 For a warrant planned for completion in six months but whose completion is delayed on account of
replacement of rejections or by change of design, approval of the OFB should be obtained for extension of
its life.

Note–Old items of semi-manufacture on which no further expenditure has been incurred should be reviewed
periodically and referred to the factory for action.

14.14 (a) Warrants and preliminary check thereon: A “Manufacture Warrant” (a work order sheet at the
clothing factory) is prepared by the factory for each item of work ordered to be done in a factory, quoting
therein the original authority for doing the work, drawings and estimates prepared therefore, the description
and quantity of work to be done, the work order and warrant numbers allotted to the work, the operations to
be performed (these are not shown in work order sheet) and the rate to be paid for each operation. These
rates are taken from the “standard estimates” or “rate forms” maintained in the factory, copies of which
(where they exist) are also supplied to the Accounts Office.

14.15 Simultaneously, with the issue of the “Manufacture Warrant” detailing labour operations and rates etc.
a “Material Warrant” is also issued authorizing the quantity of each kind of material required and showing
other identification particulars as on the manufacture warrant. On the authority of these warrants the
manufacturing shops can demand the material required and authorized and execute the work specified in the
manufacture warrant.

Bullet: If the manufacture of an article has to be done in two or more Sections separate warrants
(manufacturing and material) showing the same work order and warrant number are issued to all
the Sections concerned.”

14.16 (b) Register of Warrants: This register is maintained to have an effective control on the receipt and
disposal of warrants and also for the opening and closing of cost cards. The register will be maintained in the
following proforma:

Date of

receipt of

Section on which warrant in

warrant
Sl. Work Warrant No. Page No. of ex-tract Accounts
No. Order No. and date issued Register office

(1) (2) (3) (4) (5) (6)

________________________________________________________________________
Date of forwarding duly checked to Labour (L) Section/Accounts Office Material (M) Section/Accounts
Office

_____________________ _________________

14.17 For facility of tracing, the register should be divided into block of work orders (04, 10, 70, 90 series
etc.) and depending on past experience a suitable number of pages should be set aside for each block.

14.18 Postings should be made according to the date of receipt of the warrant. Immediately on receipt of the
warrant from the management, costing section should check the material provisioning and labour rates with
reference to standard estimates, extracts etc. and enface “checked with estimates” on these warrants, They
should forward the ‘Manufacture Warrant’ to Labour Section and `Material Warrant’ to Material Section
through a Top Sheet. in the following proforma, to be stamped on the warrant

DateInitials

_____________________________________________________________

1. Date of receipt in `C’ Section

2. Date of sending to L/M Section

3.Date of receipt of shop copies in L/M Section

4.Date of return to `C’-Section/Costing Section duly paired.

14.19 The progress of movement of warrants from costing to Labour/Material Sections should be watched
through this top sheet.

14.20 The verification of warrants with Standard estimates should be done as expeditiously as possible but
not later than two working days after receipt in `C’ Section.

14.21 As soon as a warrant is posted in the register, it should be cross-linked i.e., the relevant page No.,
Serial No. etc. of the register should be noted on the warrant itself for facility of future posting and easy
reference.

14.22 While forwarding the manufacture and material warrant to ‘Labour’ and ‘Material’ Sections
respectively, the initials of auditors concerned should be obtained in the register in token of
acknowledgement. Care should be taken to see that the initials are neat and recognisable.

14.23 Arrangements should be made with management for sending shop copies of completed manufacture
warrant to `Labour Section’ and Material Warrant to `Material Section’ together with a completed list of
warrants. Additional copy of the list of completed warrants will be received in Costing Section avid column
9 of the register filled in.

14.24 On receipt of the shop copies of completed warrants with the list of completed warrants in `L’ and `M’
Sections the pairing should be completed and objections, if any, raised and the warrant should ordinarily be
passed on to the `C’ Section within 3 working days from the date of receipt of shop copies from
management.

14.25 Full particulars will be recorded in col. 10 in respect of (a) Warrants which are short closed (b)
replacement warrants and (c) items manufactured in excess of sanction and action taken to regularise the
same,
 Bullet: Register of supplementary work orders draft and Non-recurring rate, Form.-showing all
details commencing from the preparation of supplementary work order draft/Non-recurring rate
Forms upto the point of completion will also he maintained in the Costing Section. The register
should be reviewed by the A.O. every month,

14.26 Closure of Warrant:

[15] Production Ledger Card

15.1 Simultaneously with the opening of a Cost Card, the Accounts Office opens a Production Ledger Card
for each Warrant. The Production Ledger Card serves the purpose of a ledger folio.

15.2 The receipts of articles completed and accepted in inspection are posted in the Production Ledger Card
from the Inspection Notes or Departmental Advice Note (IAFO-1937 received from the Factory. ), In the
Ammunition Factory, Kirkee and Leather Factories this is called an ‘O’ voucher.

15.3 As the completed articles are issued to the indenters, the ‘P’ Issue Vouchers, received from the Factory
are posted in the Production Ledger Card of the concerned Warrant on the issue side.

15.4 The balances in the Production Ledger Cards represent articles completed but not issued. The total
value of all such balances as at the close of a financial year is exhibited in the Finished Stock Account in the
Annual Production Accounts of the Factory.

[16] Drawl of Material/Labour booking against Warrants

16.1Discussed in Para 14.

[17] Blank

[18] Cost Card

18.1 Opening of Cost Card: Cost Cards is document which is opened warrant wise and the same is
maintained manually in the Local Accounts office in IAF (Fac) 95.

18.2 For this purpose, Cost Cards are opened immediately a warrant is issued. Particulars regarding Extract
Number, Quantity ordered, Work Order/ Warrant Number, nomenclature of material and estimated cost
under different elements of cost are required to be filled in.

18.3 Opening of the Cost Card is authorised by the Officer. In the case of warrants which are carried
forward from the previous year, opening value of semi under the different elements of cost as well as the
estimated cost of items will be filled in.

18.4 Posting in Cost Cards: The EDP Centres at the office of the Chief C of A (Fys) and OE Fy Kanpur,
Vehicle Factory, Jabalpur, A.F. Kirkee, H.V. Fy. Avadi, furnish to the concerned Accounts offices monthly
abstracts in the Month/2nd month following that of the account to which they relate:

1. Labour and Overhead Abstract

2. Material Abstract

3. Transfer Voucher/Allocation Abstract

18.5 Action Taken by Accounts Office on receipt of Warrant: A warrant is received by Costing Section
of Accounts Office & issued by Works Office of the Ordnance Factory. A warrant contains two parts:
 • Manufacturing Warrant

• Material Warrant
18.6 Costing Section, on receipt the Warrant, will enter in the Warrant Register and open Cost Card as well
as Production Ledger Card of the item to be manufactured.
18.7The manufacturing part of the warrant will be then forwarded to Labour Section for checking and
payment of Piece Work/Day Work Cards & posting of primary documents on it.

18.8 Similarly, Material Warrant will be sent to Material Section (Ledger Group) for checking the
admissibility of the material drawn/return as per given in the Warrant & finally posting of Primary
documents i.e. Demand Notes & Return Notes etc. on it. Costing Section will also watch the completion of
the Warrant through Warrant Register.

18.9 No Cost Card as well as Production Ledger Card will be opened for Indirect Series of Work Orders.

18.10 Closing of Cost Card: On completion of a Warrant, Costing Section will call back Accounts Copy of
the Warrant from Material and Labour Section respectively and pair with the completed Shop copy. These
will be attached with the relevant Cost Card for scrutiny of variances and arrive out the Cost of Production
as well as actual Unit Cost of the Product.

18.11 The list of Warrants completed during a month is to be received by the Costing Section by the 10th of
the following month. As soon as the list of warrants completed during a month is received in `Costing
Section’. Necessary action in the following manner should be taken to close the Cost Cards:-

18.12 (i) The first step is to obtain from the Labour and Material Sections respectively the completed shop
copies of `Manufacture’ and `Material warrants’ duly paired with Accounts copies. These copies will be
annexed with relevant cost cards.

18.13(ii) In the case of warrants running from the previous year, it should be ensured that the cost card has
been debited with opening semi, if any. Replacement Warrants and warrants for tools and gauges
manufactured on the parents order with Sub numbers will similarly be annexed with respective cost cards
and all enclosed to the cost card for the parent Work Order. It should be ensured that the details of all
expenditure recorded against a warrant should be available when a warrant is finally closed, no matter how
long a warrant has been running. The original Cost Card of the past year/years in regard to a warrant closed
in the current year should be available. Accounts Officers are to ensure that Cost Card for all carry forward
warrants for any year are available.

18.14 (iii) The Class of cost-wise expenditure debited to the work during a year by Section and month
separately and the class of cost-wise values of the opening semi, if any, will be cross-totalled and reconciled.
The total figures under each elements of cost appearing in the Cost Cards for replacement and tool and
gauge warrant will be brought forward and debited separately to the Cost Card for the parent Work order.
All the debits viz. the opening semi expenditure during the year, cost of replacement, tools and gauges
charges by class of cost will be cross totalled and reconciled.

18.15 (iv) At the end of the year in the case of running warrants, the value of closing unfinished semi should
be priced as indicated at para 22 and deducted from the total expenditure element-wise to determine the cost
of production of completed articles.

18.16 (v) It should now be determined whether any avoidable rejection has occurred in the warrant. The
amount of avoidable rejection should be calculated and deducted from the expenditure recorded in the cost
card. The amount deducted will be excluded from Production Account.

18.17 (vi) The normal cost of production of the articles completed will be arrived at by excluding the
difference mentioned in Para 18.16 above from the total cost of production inclusive of the cost of
rejections. The unit cost of Production will then be worked out under each element of cost by dividing the
normal total cost by the number of articles completed.

18.18 The Accounts Officer should carry out a diligent perusal and scrutiny of details in respect of cost
cards –

(i) Where the variation between the estimated and actual cost is more than 10% under Labour/ Material
Heads.

(ii) Pertaining to warrants the estimated value of which is Rs. 10,000 and above.

(iii) All Civil Trade Warrants.

(iv) All warrants in which rejections have taken place.

(v) Any other warrant presenting unusual features.

18.19 All cost cards pertaining to items discussed at Para 18.18 (i), (iv) and (v) above with detailed cost
analysis will be passed on to the factory management by the A.O. for information and comments. All
comments should be given in the spirit of healthy co-operation and should be calculated to enable the
management to effectively control the cost.

18.20 Once the Cost Cards are closed, the AAO, Costing Section should thoroughly scrutinize all the Cost
Cards and offer critical remarks on points of an interesting or unusual nature. The Accounts Officer, who is
required to sign all Cost Cards is expected to exercise a diligent overall check on all cost cards and should
thoroughly check all the Cost Cards pertaining to case mentioned above.

18.21 (i) Cost Cards should be closed with the cost data available in the Card itself observations on
discrepancies/deficiencies found during scrutiny may be raised separately and pursued through objection
Register. It is not necessary to open a separate file for each Cost Card. All the objections/observations
should invariably be entered in the `Audit Progress Register’ maintained for each section i.e. Labour,
Material, costing separately and their clearance should be watched through the `Register’ which should be
submitted to the A.O. once in a month.

18.22 (ii) When an alternative material is actually used, estimated cost as exhibited in the cost card should
reprised so that it will embrace the materials actually used in the manufacture. In cases where a alternative
materials used are more expensive the normal ones, it is open to the A.O, to enquire into the same and if the
reasons as given by the management are not satisfactory the extra expenditure should be placed under
objection for regularisation.

18.23 (iii) As NRMs are to be issued in these cases and NRM’s where the financial effect upto Rs. 500 are
sanctioned by Manager in charge ofRates and Estimates Section, the review by A.O. will be selected cases
which call for remedial action. The financial effect is determined on the basis of difference in the value
between the standard material normally used as per estimate and the alternative materials utilised. For
purposes of arriving at the financial effect of NRM and non-recurring alternative material forms, a list of
commonly required materials with current rates should be prepared by the Rates and Estimates Section of
the Factory in consultation with the Accounts Officer. The latter should intimate the changes in the rates of
material at the beginning of every quarter to ‘enable the factory to up-date their rate lists.

(iv) To facilitate ascertainment of the expenditure against NRMs, NRRs and Replacement warrants the fifth
digit of the Warrant (which consists of 5 digits) will indicate the control numbers for NRRs, NMRs etc.

Thus `1′ is for NRRs `2′ is for NRMsand `3′ is for replacement Warrants.

(v) The period of retention of cost cards is two years from t e ate of closing of cost cards. It should be
ensured that the details of all expenditure recorded against a warrant should be available when the warrant is
finally closed no matter how long the warrant is running i.e. the cost card relating to semi warrants of
previous years should be available.

[19] Variance Analysis

19.1 The next step is to compare the actual unit cost under each element as well as the total thereof with the
estimated figures recorded on the cost card. The actual is liable to vary from estimates due to various
reasons of which some are discussed in successive para hereinafter

19.2 (i) For purposes of variance analysis, the actual rejectionshould be compared with the lower percentage
of normal rejection provided in the estimate and not with the maximum limit. Drawl in excess of the
Minimum rejection percentage is made through N.R.Ms.

19.3 (ii) When an alternative material either authorised in the standard estimates or a new one is proposed to
be drawn, the same is also authorised on N.R.Ms. The financial effect in such cases will be determined on
the basis of difference in value between the standard material normally used as per the estimate and the
alternative material used

19.4 (iii) The labour cost which included dearness allowances on percentage basis may vary from the
estimates due to the variation of the actual percentage from the estimated one. It may vary due to rejections,
replacement and performance of more or less operations than provided in the estimates. It may also vary due
to wrong preparation or pricing of piecework cards or employment of day workers instead of piece workers
involving changes in the method of Manufacture. Further, the Labour cost is also liable to vary due to wrong
posting in Cost Card or wrong assessment of the value of semi, etc.

19.5 (iv) The material cost is liable to vary from estimates on account of reasons at 19.2 (i) and 19.3(ii)
above. In addition, due to the time lag involved the monthly average ledger rate prevailing at the time of
pricing the estimate may not be the same as the rate -prevailing at the time of drawal of different materials
provided in the warrant. Again there may be variations due to rejections, replacement wrong reparation of
pricing of Demand Return Notes, Transfer Vouchers, and Wrong assessment of the value of semi use of
differently costly materials over and under drawal of materials etc.

19.6 (v) The overhead charges may also vary due to variations at 19.4 (iii) above. It may also vary due to the
variations of the percentages of overheads from estimated ones. Further, the overheadcharges are also liable
to variation due to wrong posting of cost cards, wrong assessment of the value of semi “etc.

19.7 (vi) A Prima facie scrutiny of the percentage of different periods or checking of the postings in
warrants may sometimes reconcile the variations. Again more detailed scrutiny with reference to original
documents viz. piece work cards, day work cards, Demand/Return notes, N.R.Rs/N.R.Ms. Replacement
warrants etc. may sometimes be essential for tracing the reasons for variations. A thorough re-examination
of all the primary documents involved may at times be the last recourse of reconciliation when the reasons
for variations are deep rooted, specially in the case of compensating errors. It may, however, be said that the
analysis of the reasons for variations in respect of items of considerable labour and material value, processed
through different sections for a considerable length of time and susceptible of wastage and rejection at every
stage of manufacture will normally ” involve a greater extent of scrutiny. The extent one may have to dive
deep into original documents for tracing out the reasons for variations depend entirely on the nature of
variation and the mode of approach for reconciliation.

19.8

[20] Rejection

20.1 In terms of Cost Accounting, rejection is divided into two categories – (i) Normal (unavoidable)
rejection, (ii) Abnormal (avoidable) rejection.
20.2 The Standard Estimates contain provision for normal (unavoidable) rejection inherent in the process of
manufacture. For these purpose two rejection percentages called “maximum” and “minimum” are provided
for in the Standard Estimates.

20.3 (i) Abnormal(avoidable) rejection: Any rejection beyond maximum rejection percentage is treated as
abnormal (avoidable) requiring regularisation as loss.

20.4 (ii) Normal (unavoidable) rejection: Any rejection beyond maximum rejection percentage in the
standard estimate is treated as Normal (unavoidable) rejection.

20.5 Abnormal Rejections in Manufacture: (i) For the purpose of ensuring effective costcontrol andcost
comparison,the cost of any abnormal rejection in manufacture is treated as an item not chargeable to the
normal cost production of an article and is, therefore, shown as a separate item in the Production Account.

20.6 (ii) Except for petty or adhoc orders which are undertaken on SWODs and for which neither standard
estimates are prepared, nor inherent in the manufacture of an article should always be included in the
estimate for the manufacture and all rejections beyond the percentage provided for in the estimate should be
regarded as avoidable and written off on loss statement after necessary investigation. There will be two
rejection percentages one showing the normal rejection and the other, the maximum beyond which the
rejections should be treated as abnormal. For the powers delegated to GM’s and the OFB/DGOF for
regularisation of all such losses.

20.7 (iii) The regularisation of abnormal rejection beyond maximum ceiling by loss statement should be
related to a period, which covers a reasonable volume of production. The period should normally be 3
months for short cycle products and 6 months for long cycled ones.

20.8 (iv) The cost of rejection up to the maximum percentage as authorised in the standard estimate will be
included in the cost of Production and that beyond the maximum percentage provided in the estimates shall
be excluded from production account and regularized as loss cases of avoidable rejections have been broadly
categorized into three types as follows: –

20.9 (a) Where an item involved manufacture of various components and assembly and the estimates
provide different percentage of allowance for rejection for different components and one manufacture
warrant is issued to cover complete production of batch, avoidable losses should be determined component
wise, and the total amount for the warrant regularized on one loss statement.

20.10 (b) Production consists of Casting or forging and r machining thereof and the estimates provide for
rejection allowance at casting/forging stage and the machining stage. In cases where independent warrants
for casting/forging and machining are being issued, the losses will be dealt with independently without
linking the warrants viz. casting/forging losses will be separate and the machining losses will be separate
and will be regularized if they exceed the allowable percentage in such cases. In case only one warrant is
issued, the case for loss will arise only if the overall rejection exceeds the allowance percentages for the
quantity processed in a batch e.g. if the overall allowable rejection percentage is 16 at casting stage and 12 at
machining stage, there will be a case for regularisation only if the rejection exceeds 28% of the quantity
processed in a batch.

20.11(c) Production of a component is planned stage wise, there being a separate warrant for each stage. In
such cases not only the various warrants for a particular stage but all stages for a particular component shall
be combined for practical convenience. Where production is in big quantities, 6 months may be considered
as period for grouping and reckoning the loss, but if the production is small, loss shall be determined for the
year as a whole. The Ordnance Factory Board will decide the period of grouping.

20.12 A review of the cases where actual rejections have been found to be lower than that provided for in
the estimates should be carried out from time to time to re-fix the minimum percentage on a realistic basis,
and as with improvement in production technique rejection become lower, provision in the estimates for
rejection should be suitably reduced where warranted.

20.13 For purposes of regularisation of losses on adhoc orders for which no estimate exist, the normal rule
as provided for in F.R Part –I will be followed. If the loss is categorised as unavoidable, the certificate of
unavoidability of rejection loss in manufacture under Rule 169 FR Part I will however be issued by O.F.B.

20.14 All avoidable resection losses requiring regularisation will be categorized as store losses./The
consolidated figure of such losses formally written off should be reflected in the Appropriation Account for
the year.

20.15 Each case of loss due to rejection beyond unavoidable rejection percentage will be examined on its
merit and categorised as due to theft, fraud or neglect or not due to theft, fraud or neglect in accordance with
the procedure laid down in Rule 162 FR Part 1.

20.16 The delegation of powers for regularisation of abnormal losses as prescribed vide part (ii) above
should be viewed as supplementary to the financial powers of various authorities, as prescribed in Rule 162
FR Pt-I and wherever the value of the avoidable loss to be written off by such competent authority
irrespective of the actual percentage of rejections.

20.17 Cases of avoidable resections need not necessarily be categorised as due to theft, fraud or neglect’.
Each case will have to be examined on its merit and categorized as due to thefts fraud or neglect or not due
to theft, fraud or neglect. In accordance with the procedure laid down in Para 161 FR Part 1. Oncethe
categorization is made in the normal manner, rejection losses may be written off by the competent financial
authority as indicated below:

20.18 Rejection losses not due to theft, fraud or neglect: (i) General Manager upto Rs.10, 000 irrespective
of the percentage of rejection

Or

up to 50% of the unavoidable percentage of rejection irrespective of the amount involved.

(ii) OFB up to Rs. 50,000 irrespective of the percentage of rejection.

Or

Up to an additional 100% of the unavoidable percentage of rejection irrespective of the amount involved.
All other cases will require the sanction of the Govt. of India.

20.19 Rejection Losses due to theft, fraud or neglect: (i) General Manager Rs. 5,000, (ii) OFB Rs. 30,000.
All other cases will require the sanction of the Govt. of India.

Bullet: While the GMs/OFB will be competent to regularise all avoidable rejections within the percentage
limits fixed irrespective of the monetary value, in cases where the percentage exceed these limits but the
amount of loss remains within the financial powers of the GM/OFB for write off of store losses under Rule
161 FR Pt-I, the same will be written off by the authority under whose competency the amount falls.

[21] Semi Statements

21.1 At the end of each year, the actual stock is taken by the respective Ordnance & Ordnance

Equipment Factories of the – (i) unused materials and (ii) part furnished works. Full lists are prepared of all
the articles found, showing the stage of manufacture each has reached, and the Extracts, Work Orders and
Warrant numbers to which they have been charged.
21.2 The physical verification of current items required to be done on 31st March of each financial year.
Verification of Non-moving and Slow moving warrants should be carried out by the end of February and
Semi-Statements forwarded to the Local Accounts Office by early March.

21.3 Verification of the other warrants should be carried out at the end of the Financial year and finished in
consultation with Local Accounts Office by 15th April. Factory orders are to be issued by the respective
General Manager of an Ordnance Factory and Office Order by the Local Accounts Office stipulating
specific dates for each step in the preparation scrutiny and finalization of semi-statements.

21.4 A special cell should be formed in the costing section of the Local Accounts Office for the entire work
of scrutiny and evaluation of work-in-Progress as per annual semi-statements. The semi-statements will be
verified with reference to Manufacture and Material Warrants, Warrant Registers, Cost cards and Production
cards etc. to verify the correctness of the quantities shown therein and the discrepancies if any observed in
the semi statements should be sorted out by formal joints sitting of the Factory and Accounts representative
according to a time line extending from 1st to 15th April.

21.5 The evaluation of Work in Progress should be completed by the end of April. When there are no
finished articles on a work order, the whole expenditure represents semi-manufacture and the items in the
list pertaining to such order need not be valued in detail.

21.6 In cases where rejections have taken place in the course of manufacture and
N.R.Rs./NRMs/Replacement Warrants have been issued, the replacement expenditure that has been booked,
should, in addition to the original cost, be distributed between the finished and unfinished articles in the
same proportion in which the original cost is distributed except, in cases where it is, definitely known or
ascertained that the replacement cost solely relates either to the one or the other. The Semi statements will
then be data entered in the computer and priced by the system. Print out of all semi Cost Cards is taken using
Costing package.

21.7 The value of the semi manufacture under each work order and warrant will be posted in an abstract and
also credited in the relevant Cost Card under each element of cost.

21.8 A Master Summary will be prepared showing the value of the Work in Progress (WIP) under each
element of the cost work order wise. The total represents the value of work in progress as on 31st March by
debiting the Balance Account and thereby exhibiting the balance as ‘Assets’ in the ‘Statement of Assets &
Liabilities’.

21.9 In the following year, this asset representing Work-in- Progress (WIP) as on 1st April will be debited to
the work in progress Account simultaneously charging all the individual carry forward cost cards with the
corresponding amount under each element of Cost.

21.10 A close watch is to be kept on the actual position of physical pipe line by the factory so that it is
generally computable within the usual normal level of work-in-progress vis-à-vis total production. In the
case of elected principal items of production, surprise physical verification of the work in progress should be
carried out by the Factory several times in a year.

21.11 Checks exercised by the Accounts office on semi statements: Checks exercised by the Accounts
office on semi statements are as follows –

(i) Costing Section – Scrutiny with reference to the warrant Register to ensure that all incomplete warrants
have been included.

(ii) Material Section – Verification with reference to the postings in the relevant material warrants that the
quantities of material shown are correct and the pricing of materials was do-neat the rate at which bulk of
the Demand/Return Notes were priced.
(iii) Labour Section – Verification with reference to the postings in the relevant Manufacture Warrants that
the operations shown as performed are correct and pricing of these operations are at correct rates.

(iv) Costing Section – Final Scrutiny with reference to the cost cards and production Ledger Cards levy
Overhead and preparation of an abstract of semi in respect of the each work order and warrant for working
out cost of production.

21.12 A close analysis of the outstanding warrants should be made and value of semi carried forward
prepared year-wise ‘Monthly Progress Report on the Liquidation of Warrants’ is required to be rendered by
the General Managers to the OFs duly vetted by the Accounts Officers. The GM renders the report to the
Hqrs, so as to reach A.O. by the 10th day of the following month and the A.O. forwards the report duly
checked, so as to reach OFB by the 20th of the following month. The details of the year upto which warrants
are to be included as well as the period upto which details of end products and reasons for non-clearance are
required to be indicated periodically by OFB.

21.13 Apart from the accumulation of unfinished work, the carry forward of semi for a number of years
might perpetuate irregularities such as advance payment, wrong booking and payment against wrong
warrants, non clearance of Inspection Notes against completed work resulting in marginal residual payments
remaining uncleared etc. Accordingly, close review of the outstanding warrants at all levels is essential.

21.14 Suitable action must also be ensured for proper care and preservation where required to avoid any
deterioration of the unfinished semi and to ensure their continued physical availability till the warrants are
closed and final issues made.

21.5 Finished Semi: The article which is manufactured and inspected by the QAE and the same is accepted
as complete finished product as per quality of terms and conditions laid down in the Warrant/Work Order
but not issued/dispatched are called Finished Semi.

[22] Work-in-Progress (WIP)

22.1 For the purpose of compiling the Annual Production Accounts, it is necessary to find out the value of
Work-in-Progress (WIP) at the end of the year, so that the total Cost of Production of all articles completed
during the year can be ascertained.

22.2 Each Production Section takes stock of Work-in- Progress as detailed below: –

(i)Verification of Non-moving and Slow-moving Warrants is carried out by the end of February and Semi
statements are forwarded to the Accounts Office by early March.

(ii)Verification of other items is carried out at the end of the year i.e. 31st March.

22.3 The Semi Statements contain Section wise – ( i )Details of Work Order and Warrant Number, (ii)
Description and quantity of each material in hand, (iii) In the case of part-finished work, the stage of
manufacture and quantity.

22.4 These statements are checked by Accounts Office to ensure that all “Uncompleted Warrants have been
included”. In respect of Warrants, where part quantities have been completed, the outstanding quantity as
shown in the Semi Statement is checked with the Production Ledger Cards. The Semi Statements are then
priced and an Abstract is prepared showing the value of Work-in-Progress by each Work Order and Warrant
under each element of cost.

22.5 In the case of selected principal items of Production, surprise physical verification is carried out by the
Factory, several times in a year, so that the actual position of physical Work-in-Progress is comparable with
the total production.
22.5 For the purpose of preparing the Annual Accounts, a Principal Ledger is maintained in each Accounts
Office. The account in this ledger are so devised as to – (i) Provide the information required for compilation
of the final accounts and (ii) Facilitate reconciliation with the expenditure compiled in the financial
accounts. Work-in-Progress account is one of the main accounts which are taken into account for completion
of annual account.

22.6 Work in Progress Account – This Account shows on the debit side –

(i) Opening balance of Work in Progress.

(ii) expenditure incurred on production during the year, separately under direct material, direct labour and
overheads.

(iii) Over absorption of variable and fixed over-head charge (if any)

The credit side of the Account shows –

(i) Cost of Production of articles completed during the year for Army, Payment, other Factories, Stock and
Capital works.

(ii)Unfinished Semi, carried over at the end of the year.

(iii)Under absorption of Variable and Fixed Overhead Charges.

[23] Except System Accounting of components

23.1 Except System of Accounting of components is the system under which components of an article are
manufactured on separate Work Orders provided for them in the syllabus.

23.2 The production of an item may be turned and completed in one section or may be partly done in
different sections and completed in another. In such cases the normal procedure of compilation of costs will
be computation of cost against section/sections concerned with reference to the markings of original
documents viz. Demand Notes, Return Notes, Day/Piece work cards etc. with Section(s) code numbers and
postings accordingly in the warrants.

23.3 The actual expenditure in the relevant Cost Card is posted showing section number as tabulated in
various abstracts showing the expenditure. Items are also manufactured for stock in the case of known
demands and omnibus orders.

23.4 In case of items comprising many components, which are of peculiar in certain factories due to main
items of production therein being so composed, the above procedure is not suitable either for building up the
stock or for meeting demands. Each kind of component is turned out independently and finally assembled.
Instead of taking the finished component to stock as complete and subsequent drawal to assembly work
order, the components are kept on production charge.

23.5 The work orders for components are in 40 series and the components are held on production charge as
finished components till they are drawn for assembly in the main out-turn work order.

23.6 This being an exception to the general procedure of manufacturing the components on stock series
work orders and drawal from stock in the main (assembly) work order or as a stage process of production of
the completed item against the main work order is called ‘except system’.

23.7 The orders for manufacture of components are called ‘Except orders’ and the components are known as
‘Except components.
23.8 At (i) Ammunition Factory Khadki (AFK) Pune, (ii) Ordnance Factory Khamaria (OFK)
Jabalpur, (iii) Rifle Factory Ishapore (RFI), Kolkata, (iv)
Small Arms Factory (SAF), Kanpur, (v) Ordnance Factory Varangaon (OFV)
and (vi) Ordnance Factory Tiruchirapally (OFT), (vi) Heavy Vehiche Factory Avadi, Chennai
manufacture of components required for producing ammunition and weapons is undertaken on a separate
Work Order for each component.

23.9 The components are neither transferred to stock nor accounted for in Store Ledgers. The components
remain on Production Charge and are drawn for assembly on the assembly Work Order, through Red
Demand Notes.

23.10 The Red Demand Note shows – (a) the quantity and description of the component, (b) the Work Order
and Warrant to which the issue is made and (c) the Work Order and Warrant from which the issue is made.

23.11 It is thus virtually a transfer voucher. These Red Demand Notes are priced by the Accounts Officer
and a separate Component Abstract is prepared.

23.12 The value of components is treated as Departmental Material (class of cost 22) on the assembly
Warrant and is posted in the cost card in a separate column. The value of components is shown as a credit
under the component Work Orders in the Component Abstract.

23.13 Detailed procedure: The finished components instead of being utilised directly on the assembly work
orders or being taken on regular stock charge are sent to a component stores where they remain on
production charge. A separate production card is maintained for each of the component. The receipts in the
Production ‘card is posted, as usual, from the Inspection Notes IAFO-1937 (Departmental advice notes) and
thereafter drawal and return of components to and from the assembly work orders are accounted through
Red Demand Notes IAFO-1895 and Red Return Notes IAFO-1895A specially adopted for this purpose.

23.14 The cost of the components that appear in the cost card of the assembly warrants are as departmental
material under class of cost 22 and the cost of assembly only is exhibited there, under each element of cost.

23.15 The unused components in the component store at the end of the year will represent finished but
unissued production, on the component work order concerned. Components not used by the Sections in a
year are shown as semi manufacture at the end of the year against the assembly work order on which they
were drawn.

[24] Accounting of Tools

24.1 `Tools’ and `Gauges’ of standard type as well as tools for general shop use should be manufactured and
repaired under ’02’ series of Work Order 02/00008/00. Cost of this general and standard tool will be levied
on jobs as an item of variable overhead. The last two digits will indicate the Code Number of the user
section to facilitate the charging of the cost of tools to the variable overhead of the user section.

24.2 Tools, Gauges, etc. which are peculiar to a particular out turn will be manufactured against direct Work
Orders. This will be done by allotting sub numbers to the main out-turn Warrant.

24.3 `Tool Room‘ should be treated as both ‘Service’ and ‘Production‘ Section. Overhead expenses incurred
in the Tool Room is allocated between the wings on pro-rata basis.

24.4 Control over expenditure against Work Order 02/00008/00 is exercised by the Budget Committees.

24.5 Capitalisation of Tools: As regards capitalization and amortization of tools following procedure
should be followed with effect from 01/04/07.
24.6 (i) All tool gauges etc. of the value of Rs. 40,000/- and above, whether manufactured in house or
bought out from trade should be capitalized, provided their life is not shorter than 2 years. Normal rate of
5% per annum will be adopted for charging depreciation. No financial compilation needs to be made for the
same.

24.7 (ii) All tools, gauges etc of the value of Rs. 40000/- or more but the life is shorter than 2 years, whether
manufactured in-house or bought out from trade should be treated as revenue and cost thereof charged to
production in the year of incurring the expenditure, as variable overhead through indirect Work Order
02/00008/00.

24.8 (iii) All tools, gauges etc of the value which is less than Rs. 40000/- whether manufactured in-house or
bought out from trade, irrespective of their life, should be treated as revenue and cost thereof charged to
production in the year of incurring the expenditure as variable overhead through indirect Work Order
02/00008/00.

[25] Process Costing: 25.1(i) When different grades of finished products are obtained by processing a
single raw materials, or (ii)When one final product involves processing through successive stages, the
procedure for compiling the cost of finished products differs from Job (or Warrant) Costing.

25.2 Examples of the first type of production are conversion of Timber Logs to Planks at Gun Carriage
Factory, Jabalpur, and production of tanned leather from raw hides, at Ordnance Equipment Factory,
Kanpur.

25.3 Examples of the second type are the production of Cordite at Cordite Factory, Aruvankadu, and TNT at
High Explosives Factory, Khadki. The procedure for ascertaining the costs of finished products is discussed
in successive para.

25.4 (i) Timber Logs to Planks: For conversion of logs to planks, a Work Order is allotted under “08”
series, “08” denoting Process Work Orders. Logs are drawn from stock against this Process Work Order on
Demand Notes and labour charges incurred for conversion are also booked to this Work Order through Piece
Work Cards.At the end of each quarter, the Factory prepares a statement showing.
(a)Opening balance of logs, carried over from the previous quarter.

(b)Logs drawn during the quarter

(c)Logs in hand at the end of the quarter.

(d)Quantities, and grades, of planks produced.

(e)Loss in conversion.

(f)Quantity of firewood and saw dust recovered.

25.5 Planks are graded according to length, width and thickness. Weightage is given to each grade or planks
in terms of the lowest grade, for the purpose of costing the planks. Example: (i) Gr.I = 1 Cft. equal 3 Cft. of
Grade III, (ii) Gr.II1 Cft. equal 2 Cft. of Grade III.

25.6 The fire wood and saw dust recovered are returned to stores on a Return Note to the credit of the
Process Work Order.

25.7 The above statement is priced by the Accounts Office with reference to the expenditure on material,
labour and overheads, as ascertained from the monthly Abstracts.
25.8 The planks are transferred to stock and the Receipt Vouchers are priced at the rates calculated, as
above, for each grade of planks.

25.9 At Ordnance Equipment Factory, Kanpur, raw hides are purchased and processed into tanned leather.
The hides yield different grades of leather and differential rates are worked out of each grade of leather.

25.10 The production of tanned leather involves processing of the hides through several stages. For each
such stage, a Process Work Order is allotted. While the raw hides are drawn against the Work Order for the
first process labour charges and subsidiary materials required for each process are booked against the
concerned Work Order.

25.11 Every quarter, the Factory prepares statements for each process, showing.

(i)hides in process, at the beginning of the quarter.

(ii)hides transferred from the previous process,

(iii)hides transferred to the next process,

(iv)hides in process, at the end of the quarter,

25.12 These statements are priced by the Accounts Office and the cost of the hides, as arrived at each
process, is transferred to the next process. The quantities produced at the final process, are priced at standard
rates fixed by the Management for each grade of leather and transferred to stock. The deference between the
actual total cost of leather produced and total value at which it is transferred to stock is shown as profit or
loss in the Finished Stock Account.

25.13 Cordite: Cleaned cotton waste is soaked in a mixture of Sulphuric and Nitric Acids and becomes
guncotton. The gun cotton is then mixed with Nitroglycerine to make cordite paste.The cordite paste is
treated with Acetone and dried to become cordite. For each process (including the manufacture of Acids,
Nitroglycerine and Acetone) a Process Work Order is opened.

25.14 Every quarter, the Management furnishes statement in respect of each process showing quantities
produced during the quarter, balances at the beginning and at the end of the quarter and quantities
transferred to the next process.

25.15 A Process Cost Statement is prepared by the Accounts Office for each process; and the transfers are
made from process to process; to arrive at the cost of Cordite paste.

25.16 The cordite paste is drawn against a Stock series of Work Order, under which separate warrants are
issued for making the finished cordite. Transfer Vouchers are prepared by the Accounts Office for debiting
the cost of cordite to the concerned Warrants sand crediting the Process Work Order.

[26] Foundry Costing

26.1 Process Costing is also adopted for steel ingots produced in the Foundry Sections, at Metal and Steel
Factory, Ishapore, Ordnance Factory Kanpur, and for brass ingots produced at Ordnance Factory,
Ambarnath, Ordnance Factory, Katni, and Metal and Steel Factory Ishapore.

26.2 A Process Work Order is allotted for the production of ingots. The ingots are classified according to
composition, into different class of steel. A set of Foundry Statements is prepared every month, for working
out the cost of different classes of ingots produced.

26.3 Foundry Form III is prepared by Management showing the details of different materials consumed in
respect of each class of ingots and the quantities of ingots (by weight) produced. This statement is priced by
Accounts Office to arrive at the value of materials consumed.

26.4 Foundry Form II is prepared by the Labour Section of Accounts Office showing the direct labour
charges incurred. Overhead charges are levied thereon under Variable Charges and Fixed Charges at the
rates applicable.

26.5 Foundry Form I is a Production and Issue Statement, prepared by the Management, showing the
distribution of the ingots produced to various Work Orders and Warrants.

26.6 The total cost of production for each class of ingots is compiled in this statement by the Accounts
Officer from Forms II and III, and a rate per Unit (Kg) is worked out.

26.7 The ingots issued to each out turn Work Order are priced at appropriate rates in the Statement, and the
value shown against each Work Order/Warrant. A Transfer Voucher is prepared by the Accounts Officer for
debiting each out turns Work Order / Warrant, by crediting the Process Work Order.

[27] Timber Costing

27.1 Timber costing is carried out at Gun Carriage Factory (GCF), for processing of Timber works.

27.2 Logs of various kinds of timber are accounted for in the Bin Cards /

Stores Ledgers. These are drawn for conversion into planks. A monthly statement is made out by the Saw
Mill Section for conversion of logs/sleeper to planks.

27.3 While accounting of Timber costing through distribution of cost, the debit side consists of opening
balance of logs and drawals during the month. To the value of these, labour expended on conversion of logs
and overheads charges on the above are added. From this, the value of timber fire wood and saw dust
recovered, logs returned to stores and log in hand is deducted to arrive at the cost of planks Produced.

27.4 The planks are graded in 10 groups according to quality and size of planks. Quantities of various
groups of planks are posted against each group.

27.5 There is a mid-weight fixed by the factory for planks of each group. Total of mid-weight for all planks
is worked out and there after the rate per mid-weight is determined. By applying the rate, the total value of
planks of various groups is calculated. Loss in conversion of logs to planks is reviewed with reference to the
scale fixed and regularisation action taken where necessary.

27.6 The planks are required to be seasoned. Kiln seasoning of the plank is and the expenditure on Kiln
season is distributed monthly through Kiln Cost Distribution Sheet. Along with the `Kiln Cost ion Sheet’,
allocation sheet giving the Ticket Numbers, Rate of pay designation of each I.E. employed against Work
Order No. 03/00303/00- Kiln seasoning of Timber is furnished.Kiln Seasoning consists of –

(i)Labour charges including overheads.

(ii)Steam cost as per allocation from steam cost statement, and

(iii)Material, if any, from material abstract.

Seasoning Cost = (Capacity) x (Time) x (Rate)

Rate = (Seasoning Cost/Capacity) x (Time)

[28] Accounting of Overhead Expenditure

28.1Overhead Charges constitute a Class of Cost, which cannot be directly charged to the Product. To arrive
at a true Cost of the Product it is essential that a proper system of accounting of charges incurred by the
Service Sections or by the Production Section itself in the shape of supervision, security, welfare, power,
steam water is collected and distributed to the Products of the Shop.

28.2 Service Charges of the above nature, which are common to all the Production Sections but cannot be
charged directly to the output of that Section/Shop, are called Indirect Charges or Overheads.

28.3 Classification of Overhead Expenses: Under the existing system, Overhead Charges arising in
Ordnance and Ordnance Equipment Factories are classified into – (i) Variable Overhead (VOH) and (ii)
Fixed Overhead (FOH). The former being recovered in full against Production and the latter at
predetermined percentages after deduction of the War Insurance Charges and certain expenditure which are
kept out of Production Cost.

28.4 (i) Variable Overhead (VOH): In Cost Accounting, Overhead expenses, which are in sympathy with
the load of the Factory, are classified as `Variable Overhead (VOH)’. Means to say that, the overhead
charges which increase with the volume of production and decrease accordingly are called VOH. VOH is
booked in ’02’ series of Work Order.

28.5 (ii) Fixed Overhead (FOH): Overhead expenses which remain constant against the sympathy,
magnitude, volume production are called FOH. FOH is booked under ’01’ series of Work Order.

28.6 Item of expenditure classified as Fixed and Variable are detailed in ’01’ & ’02’ Series of the Syllabus
of Work Orders respectively. At present there are 55 Work Orders under ’01’ Series and 26 Work Orders
under `02′ Series.

28.7 Departmentalization of Overhead Expenditures: The first step in the accounting and allocation of
Overheads is their Departmentalization. The Overhead expenses (whether Variable or Fixed) pertaining to
each Manufacturing Centre (Cost Centre) are collected together so that the Overhead Charges for each Shop
may be charged to the output of that particular Shop or Cost Centre.

28.8 The Overhead expenses incurred for a Shop may be incurred either by that Shop or by other Shops on
its behalf as service rendered with a view to collecting together both these types of expenditure, last two
digits of `01′ & `02′ Series of Work Order numbers are used to indicate the Manufacturing Centre/Shop for
which expenditure is incurred.

28.9 The Shop or Section in a Factory may be Productive or Non Productive (Service) or both. The total
Variable Expenditure for the Factory plus such portion of Fixed Overhead Expenditure as is chargeable to
the output has to be charged to the out turn of the Factory.

28.10 With a view to obtaining correct allocation of Costs, the Overhead Expenditure pertaining to any
Production Shop in any cost period is to be charged to the Production of that Shop during that period. The
overhead expenses of Service Shops are allocated to the Production Shops in proportion to the service
rendered by the former to the latter or any other predetermined basis.

28.11 Estimation and Fixation of Overhead Percentages: Before the commencement of each financial
year, estimation of Direct Labour, Fixed and Variable Expenses for Production, Non-Production (Service)
Section is made keeping in view the Production Programme for the ensuing year by the CBS (Central
Budget Committee) with General Manager as Chairman and DGM/WM and Accounts Officer as Member.

28.12 This Committee decides percentage for levy of Fixed and Variable Overheads for the financial year
for different Production and Service Sections. Review of actual expenditure with reference to the Estimates
is also done by the Shop Budget Committee on receipt of the monthly Mechanized Tabulation known as
SVC (Sectional Variable Charges) and SFC (Sectional Fixed Charges) Statements.
28.13 In the case of Fixed Charges, charges not required for current Production are to be assessed and
deducted from the Estimated Fixed Overhead Charges. The charges so deducted represented War Insurance’
Charges.

28.14 War Insurance Charges: The maximum installed capacity of a Factory to meet the requirement of
the Services in times of war is assessed on the basis of working 2 Shifts of 10 hours each per day for 25 days
per month in the case of Batch Operation Plants and 3 Shifts of 8 hours per day for 22 days per month in
case of Continuous Chemical Process Plants. Before the commencement of year, the capacity which will not
be required for the year’s Production Programme, should be identified in terms of man and other facilities
and the cost of such capacity determined. These costs should be treated as `War Insurance Charge’ and
deducted from the intimated Fixed Overhead Charges of the Factory for the year. After segregating the cost
of surplus capacity not actually required for the current Production Programme and also the charges required
to be kept out of production under the extant orders, the balance of Fixed Overhead Charges should be
chargeable to the year’s Production based on the Estimated Direct Labour Charges. This will ordinarily be
operation for the whole year.

28.15 Levy of Overhead Charges: The expenditure under ’01’ and ’02’ Series of Work Order are allocated
to the various jobs by changing predetermined percentages on ‘Direct Labour. These percentages vary from
Shop to Shop.

28.16 The difference between the actual expenditure and those levied at predetermined percentages is called
Unabsorbed Fixed and Variable Charges.

28.17 Under absorption: If the actual expenditure is more than the amount levied, then it is called under
absorption.

28.18 Over absorption: If the levied amount is more than the actual, then it is called over absorption.

28.19 These under/over absorption should not exceed (+) or (-) 5%. If so, the difference should be charged
to the production by relying it overall the work orders in proportion to the value of Direct Labour.

28.20 Variable Charges Distribution:The Variable Charges are to be estimated for each quarter of the year
separately Shop wise and Work Order wise and thereafter aggregated for the year as a whole. As a result,
budget figure for each quarter will be available against which actual should be compared and analysed after
estimating the Variable Charges of each Section, the percentage as decided by the Management and
Accounts Officer are distributed/charged from one Service Section to another Service/Production Section.

28.21 Accounting of Variable Overhead Expenses: Accounting of Variable Overhead Expenses involves
two phases viz. (i) collection of actual variable expenditure for each Shop or Cost Centre monthly for each
Costing Period and (ii) charging to each job executed during the Costing Period. After the collection of
Variable Charges the amount thereof chargeable to Production i.e. the leviable amount is to be determined
(For this purpose, the items of expenditure, such as abnormal losses/profits on sale of surplus stores, losses
relating to surplus stock, etc. are deducted from the actual Variable Charges).

28.22 Budgetary Control of Variable Overhead: With a view to exercising a control over the Variable
Overhead Expenses with reference to the Budget/Standard set in advance, the actual are compared to have
the efficiency of budgeting. For this purpose monthly Statements of Variable Overhead Expenses should be
critically examined against particular quarter’s budgetary provisions and suitable action taken on
controllable items by the Shop Manager. Quarterly analysis of variations and action taken thereon should be
placed before the SBC for review by the General Manager. Normal variations against each item should
range between (+) or (-) 5% of the budgeted provision.

28.23 Accounting and levy of Fixed Overhead Expenses: Accounting of Fixed Overhead Expenses also
involves two phases viz. (i) collection of Fixed Charges and (ii) Charging them to jobs. The total Fixed
Charges Work Order wise for a year in respect of each Shop/Section will first be estimated based on actual
Fixed Charges for the previous year only taking into account known/ foreseeable charges on account of
increase/ decrease in the incidence of Fixed Charges. From this, deduction is made for `War Insurance
Charges’ and certain other items to be kept out of production to arrive at the estimated for each Production
Shop and share of Service and Non-Production Sections will form the basis for the leviable charges.

28.24 The percentage of leviable Fixed Charges is determined with reference to the Direct Labour Charges
Section wise (Production/ Semi Production) for the year as a whole.

28.25 At the end of the year, the difference between the chargeable Fixed Charges and actual levied amount
should be shown as Under/Over absorbed Fixed Charges provided the same does not exceed (+) or (-) 5% of
the Chargeable amount. If it exceeds, the difference will be charged to Production by re-levying the
difference overall the Work Orders in proportion to the value of Direct Labour.

[29] Step Ladder Allocation of Service Section Expenditure

29.1 Step Ladder allocation is a method of allocation of charges of “Service Sections” to “Production
Sections” for the calculation of Overhead Charges debitable to each shop.

29.2 For the purpose to allocate the expenses of Overhead charge on the production sections, Accounts
office prepares separately, ‘variable’ and ‘Fixed’ Charges Statement. In this statement, ‘Service Sections’
are posted on the left side and `Production Sections’ on the right side.

29.3 The expenses pertaining to each Service Section is distributed to the Production Section in a single
distribution in accordance with selected bases of distribution viz.

(a)Actual consumption (e.g. electricity used for power and light)

(b)Total direct labour in each Section.

(c)Percentages fixed by Management.

(d)Number of workers in each department (Hospital, School, Welfare).

29.4 Procedure: The ‘Service Sections’ are arranged on the left hand side and the ‘Production Section’ on
the right hand side. The ‘Service Section’ that should be placed first in the left most side which generally
receives the least service of all rendered to it by other departments. Next sections are placed in similar
descending order one after another and so on to the direct manufacturing department at the extreme right.

29.5 The criterion is that the total benefits rendered by the department should be greater than the sum of the
benefits received from the right. This arrangement and the percentage of distribution of expenses by direct
allocation to ‘Production Section’ as well as by the “Step Ladder Method” require good judgment on the
part of the person who lay out sheet. The percentage of distribution is based partially on facts and partially
on estimates.

29.5 Computation may be simplified and the number of entries reduced by distributing as one amount the
cost of a number of departments of alike general nature, for example, Welfare expenses, and medical
expenses may be distributed direct to sections as one amount.

29.6
 Step Ladder Allocation Method
[30] Shop Budget Committee
30.1 Each section has a Shop Budget Committee for preparing an estimate of Direct labour charges for the
ensuing year, and the variable charges taking into account, the past actuals and the current manufacturing
programme. Shop Budget Committees will be closely associated with the work of the shop.

30.2 Shop Budget Committee comprises of – Divisional Officer DO of the particular Shop/Cost Centre as
Chairman, Head of Section, Representative of the Local Accounts Office as members.

30.3 In respect of service sections, the estimate is prepared showing only the anticipated level of
expenditure. These estimates are scrutinised by the Central Budget Committee and approved.

30.4 After approval of the estimates, the Accounts Office prepares a statement for apportioning the service
section charges to various production sections. The indirect variable charges of Stores Section assessed
under specified work orders for the Factory as a whole is distributed on the basis of direct materials to be
drawn by them.

30.5 Accounts Office then work out the total variable expenditure for the Section based on these figures and
estimates of Direct labour charges appropriate variable charge rates are fixed by the Central Budget
Committee. The rates thus fixed are adopted for the entire year.

30.6 The budget is prepared annually by Central Budget Committee and quarterly review of the budget with
reference to actual expenditure is done by Shop Budget Committee and Central Budget Committee.

30.7 The budget of Variable Overhead (VOH) charges is framed for each shop by the Shop Budget
Committee and finalised by the Central Budget Committee. The success of the budgeting depends on how
realistically the programme of production and variable charges are assessed.

30.8 Accounts Officers visit to the shop helps them to know the trend of production and with reference to
that they can scrutinise how far the programme of production assessed for a quarter in respect of a particular
shop is realistic and can be achieved with available facilities.

30.9 Central Budget Committee: The ‘Central Budget Committee’ comprising of the General Manager as
‘Chairman’, Local Accounts Officer and a selected AWM/WM as Member review the entire data.

30.10 It is necessary that the G.M. should himself preside over the Central Budget Committee so that not
only his knowledge of the entire operation brings to bear the right balance between the various parts of the
budget estimate but also his authority secures adequate commitment at all levels. The representative from
the Accounts Office should be at a level not lower than the Branch-in-charge.

30.11 While assessing of all factors involved in the fixation of variable overhead rate e.g. anticipated direct
labour hours, anticipated direct material, anticipated variable charges, anticipated changes in load is the
responsibility of the factory, the Accounts Office should closely associate themselves with the work and
render all the assistance required.

30.12 The Accounts Office will work out the rate per SMH of variable overheads for different production
sections.