Bharat Forge Ltd., Pune.

Variance Analysis

Executive Summary:-

The objective of any organization is to reduce cost and maximize the returns on
investment by optimum utilization of the available resources.

Variance Analysis has been a major tool for analyzing the various costs involved in
the process of manufacturing. It helps to compare Budgeted and the Actual costs. It helps
in analyzing the reasons for the favorable or unfavorable variances.

This project is focused on Variance analysis in manufacturing unit. In the first part it
explains the meaning of the Variance and types of Variances under standard costing. The
next part explains the variances practiced in the company and calculation of the
Variances considering some vendors and customers. Further it contains the analysis of
those variances for the month of April 2008, May 2008 and June 2008

This project related to a part of costing, helps to know the variance, reasons for its
occurrence and to improve the performance by implementing the variance analysis
technique in the organization.

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1) About The Project:-

A) Background of the Project:-

The project is carried out at Bharat Forge Ltd Mundhwa, Pune & project is focused on
Variance Analysis in Manufacturing Industry.

The Project tries to explain in layman’s language about the history, growth, and types
of Variance Analysis in Manufacturing Industry. In the second part of this project it will
cover how Variance Analysis is calculated and bases on that the analysis, findings and
suggestions are given.

The Project carried in Bharat Forge Ltd, is Variance Analysis as to have complete
control over cost with the help of Variance Analysis. By having complete knowledge of
variance analysis it helps us to purchase raw materials and invest in various invesatments.

B) Project Title: - “VARIANCE ANALYSIS”

C) Company Where The Project Is Undertaken:-

BHARAT FORGE LTD.,
Mundhwa,
Pune-411036

D) Objective: - “Study of the Variance Analysis in Manufacturing unit”

E) Sub-Objectives:-
 To study the steps in the process of variance analysis,
 To study the causes or reasons using variance analysis,

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F) Sample Size:-
Three years Balance Sheet is taken to calculate Variance Analysis.

G) Methodology of the study:-

The study is Descriptive research is study of existing facts to a conclusion. In this

research the attempt has been made to analyze of Variance Analysis associated with the
Sources of Data.

a. Primary data:-

Discussion with company Guide and with other officials. The basic data for the study
has been collected from the interaction with the executives of the BHARAT FORGE
LTD., manufacturing industry, PUNE which formed the primary data for the study.

b. Secondary Data:-

 Company reports.
 Balance Sheet and P & L Account.
 Company projected Statements
 Actual carried out.

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Management Problem:-

The management problem of Bharat Forge Company is “what will be cost of

production, method of production, what will be the cost of procuring raw materials and
others factors of production, methods of reducing variances”.

Research Problem:-

The research problem of Bharat Forge Company is “what will be the impact of
different variances in the manufacturing industry”.

2) Tools:-

The research has been done by using the following types of Variance Analysis.
 Raw Material Cost Variance.
 Domestic Sales Cost Variance.
 Energy Rate Cost Variance.
 Export Sales cost Variance.
 Cut Weight and End Piece Cost Variance.

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3) Findings:-

The findings of the company are as follows:-

 The domestic sales of the company in the year April 2006-07 is increased whereas
in April 2005-06 and April 2004-05 has decreased.
 The export sales of the company in the year April 2005-06 was increased whereas
in April 2006-07 has decreased its export sales.
 The domestic raw material of the company in the year 2005-06 was increased but
in April 2006-07 and 2004-05 was decreased.
 The scrap variance is unfavorable variance in April 2006-07 as compared to April
2005-06 and April 2004-05.
 The energy rate variance is favorable variance in April 2006-07 as compared to
April 2005-06 and April 2004-05. It was due to increase in electricity rate and
furnace rate.

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4) Suggestions:-

The suggestions given to the company are as follows:-

 The Domestic Sales Variances for the year April 2006-07 is more than the
year April 2005-06, In the year April 2005-06 all customers had favorable
variances, which states that Sales were increased. But in April 2004-05 has
decreased its domestic sales but it had favorable variance.
 The Export Sales Variances in the year April 2005-06 has increased its
exports and is favorable, where as in April 2006-07 is decreased and there
was unfavorable variance. But in April 2004-05 the exports was more and it
was having favorable variance.
 The Domestic Raw Material Variances in April 2005-06 is more favorable
than April 2004-05 and April 2006-07. The RM was purchased at a lesser rate.
But a less favorable Quantity variance in April 2006-07 was due to increased
production.
 The Scrap Variance in April 2005-06 was less unfavorable than April 2006-
07. In the year April 2006-07 new products were under development, as it was
initial stage percentage of scrap had increased. The decrease in the percentage
of scrap in April 2004-05 shows increase in the efficiency.
 Energy Rate Variance in April 2006-07 is more favorable than April 2005-06
and April 2004-05. The major reason being increase in the rate of electricity
and furnace oil, which is an external or uncontrollable factor affecting the
variance. Also consumption of energy has increased due to increased
production.
 Thus, on the basis of all the reasons for the above variances, it can be
concluded that with the help of the variances analysis the company had taken
the steps to reduce the variances to improve its performance in the year April
2006-07.

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5) Limitations:-

The following are the limitations of the study

 Collection of information is very tedious & it is as per the Balance Sheet of 2004-
05 to 2006-07.
 The information is collected only for three years because of time constrain.
 The duration of the project was 2 months so the study of the entire variance
analysis in industry is not possible.

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Industry Profile:-

Need for the study:-

There are few plans that turn out exactly as planned. Even when the overall objectives
of the plan are achieved, some, if not all components of the performance will have varied
from the sub-plans or standards that make up the overall picture.

As in any business, good points are encouraged; less positive points are discussed and
corrected. Variance analysis helps the business managers to know the deviations occurred
in actual and the business plan projected. The origin and the causes of the variance need
to be traced in order to take steps to reduce them. It provides a framework for business
managers to breakdown the overall performance of an organization, so that each
individual element of the business can be isolated and analyzed in turn. Through the
detailed analysis its performance can be improved for next time.

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The Indian Forging Industry:-

The Indian forging industry has emerged as a major contributor to the manufacturing
sector of the Indian economy. The salient features in the Indian company are summarized
in the below paragraphs:

Briefly, the composition of the Indian forging industry can be categorized in the four
sectors: large, medium, small and tiny. A major portion of this industry is made up of the
medium and small enterprises.

Only about 5% is made up by the large enterprises in terms of numbers. Out of 330
units the large sector consists of the about 9-10 units, small sector consists of about the
100 units and the units functioning under the tiny are many.

The industry was previously more labor intensive (it is estimated that this industry
provides direct and indirect employment to about 2,00,000 people), but now with
increasing globalization it is becoming more capital intensive. The total investment in the
large and medium is estimated to be US$700 Million. The small-scale units too are
increasing their capital investment to keep pace with the increasing demand especially in
the global markets as also broadening the areas of demand for forging. Many of them are
now suppliers to Original Equipment Manufactures (OEMs) in the automobile sector
also, which speaks volume about efforts at technology and quality up-gradation.

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Domestic and Export performance of the Indian Forging Industry

during the year 2006-07:-

The year 2005-06 was a good year for the forging industry. The revival, which started
in October 2002, picked up momentum since last couple of years. Overall production of
forging increased by about 27% to reach 929000 tones in the year. Capacity utilization
also improved considerably from 40-50 percent in the earlier years to 85% of additional
capacity added during last two year. This was largely due to the revival in demand from
the automotive sector and particularly the passenger car segment which recorded an
excellent performance in both the domestic and export market.The fortunes of the forging
industry are on a rise - it has consistently recorded a notable increase in production,
capacity utilization and exports. Among the various segments of the forging business, it
is the automobile-related segment that is being talked about the most these days. The
forging sectors fortunes are closely linked to that of the automotive industry, which at the
moment, is doing extremely well in the country. The other significant driver for this
sector is outsourcing and it is an indication that the industry’s potential is being
recognized world over. Global automotive giants are looking at India as a competent
supply base and are shopping for their components here
The automotive industry is the main customer for forgings, the industry’s continuous
efforts in upgrading technologies and diversifying product range have enable it to expand
its base of customer to foreign markets. The Indian forging industry is increasingly
addressing opportunities arising out of the growing trend among global automotive
OEMs to outsource components from manufactures in low-cost countries. As a result,
Indian forging industry has been making significant contribution to country’s growing
exports.
The Industry’s exports recorded a growth of almost 27% in 2005-06 and have reached
a level of US$ 310 Million. Technological developments have also contributed for the to
the export growth. The industry’s major markets are USA, Europe, and china.

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Indian Forging Industry for the year 2006-07:-

Number of units: - 400

Investment: - In US $700 Million approximately.

Employment: - 200,000(Direct and Indirect)

Capacity: - 1.5 Million MT/Year.

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Total production:-

Years Production (000 tones)

2002-03 440
2003-04 600
2004-05 732
2005-06 878
2006-07 983

Production (000 tones )

1200

1000

800

600 Production
(000 tones)
400

200

0
2002- 2003- 2004- 2005- 2006-
03 04 05 06 07
Production 440 600 732 878 983
(000 tones)

Interpretations:-
The production of the company has been gradually increasing from April 2002-03 to
April 2006-07.

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Exports by the forging industry:-

Years Exports (US $ million)

2002-03 145
2003-04 178
2004-05 250
2005-06 310
2006-07 360

Exports (US $ million)

400

350

300

250

200
Exports (US
150 $ million)

100

50

0
2002-03 2003-04 2004-05 2005-06 2006-07
Exports (US $ 145 178 250 310 360
million)

Interpretations:-
The exports of the company has also been gradually increasing from April 2002-03 to
April 2006-07.

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Company Profile:-

Name of the Organization: - Bharat Forge Limited

Location: - Mundhwa, Pune.

HISTORY OF THE COMPANY:-

Bharat Forge Limited is one of the “Kalyani Group” companies located in Mundhwa
Pune a part of Maharashtra. The Kalyani Group is one of the leading Industrial Houses in
India, having diverse business interest in Engineering steel, Forging, Auto components,
Non Commercial Energy and specialty chemicals.

Bharat Forge Ltd is one of the most innovative & exciting companies to emerge in the
history of the forging industry.

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The group’s annual turnover is over USD 2.4 Billion and has a joint venture with
some of the world leaders such as Arvin Meritor USA, Carpenter Technology
Corporation, USA, Hayes Lemmerz, USA, FAW Corporation, China, etc.

Bharat Forge Limited, the flagship company of the group is the second largest forging
company in the world and the largest domestic player with a share of 80% of Axle
Components and Engine Components.

Apart from Bharat Forge Limited the other major companies in the group are Kalyani
Steels, Kalyani Carpenters Special Steel, Kalyani Lemmerz, Automotive Axles, Kalyani
Thermal Systems, BF Utilities, Kalyani Net Ventures, Hikal Limited, Epiceter and Synies
Technologies. The Kalyani Group’s vertical integration with upstream steel making and
downstream machining coupled with international competitiveness at every step, benefits
their customers in terms of:
 World-class technology,
 High Quality,
 Partnership.

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The Bharat Forge Ltd., the flagship company of the US $ 2.4 billion Kalyani group, is
a leading global ‘FULL SERVICE SUPPLIER’ of forged and machined – engine and
chassis components. It is the largest exporter of auto components from India and leading
chassis component manufacturer in the world. With manufacturing facilities spread over
12 locations and 6 countries, four in India, three in Germany, one in Sweden, one in
Scotland, one in North America and two in China. The company manufactures a wide
range of safety and critical components for passenger cars, commercial vehicles and
diesel engines. The company also manufactures specialized components for the railway,
construction equipment, oil and gas and other industries. It is capable of producing large
volume parts in both steel and aluminum.

Since commencement of operations in 1966, BFL has achieved several milestones

and is today among the largest and technologically most advanced manufacturer of
forged & machined components.

Their customers include the top five passenger car & top five commercial vehicle
manufactures in the world. The list includes virtually every automotive OEM and Tier I
companies. Bharat Forge Ltd backed by a full service supply capability and dual-shore
manufacturing model, provides end-to-end solutions from product conceptualization to
designing and finally manufacturing, testing and validation.

Over the years, Bharat Forge has been investing in creating state-of-the-art facilities,
world-class capacities and capabilities. Their facilities include, fully automated forging
and machining lines, the largest of its kind and comparable to the best in the industry.

Bharat Forge has built up a strong capability in design and engineering, including a
full fledged product testing and validation facility, which gives Bharat Forge a full
service supply capability- from product conceptualization to designing to manufacturing
and product testing and validation.

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Its customer base includes virtually every global automotive OEM and Tier I
supplier, Daimler Chrysler, Toyota, BMW, General Motors, Volkswagen, Audi, Renault,
Ford, Volvo, Caterpillar- Perkins, Iveco, Arvin Meritor, Detroit Diesel, Cummins, Dana
Corporation, Honda, Scania and several others source their complex forging requirements
including machined crankshafts, front axle beams and steering knuckles from Bharat
Forge.

Bharat Forge Ltd is a recipient of several national and international honors,

recognition and awards. Forbes Magazine has listed it for consecutive three years in its
global “Best under a Billion” list.

Automotive Component Manufactures Association of India (ACMA) has honored

it over past four years for its export excellence. Outlook recognized Bharat Forge Ltd as
the Best Value Creator for 2004 among large companies. Bharat Forge Ltd has also been
awarded the Indo German Chamber Of Commerce (IGCC) Award for ‘Outstanding
Contribution towards Promotion of the Indo-German Economic Relations for the Year
2005’. Bharat Forge received GKD-NIQR award for “Outstanding Organization” on
23.4.2005.

Bharat Forge Ltd is a truly global company and one of emerging India’s first MNC’s
in manufacturing industry. Through organic and inorganic expansion, aimed at widening
global footprints in US, China and Europe, it is well on its way to become the largest
forging company in the world.

KALYANI GROUP:-

Group Turnover: - Over USD 2.4 billion.

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Employee Strength: - Over 10,000.

KALYANI GROUP:-

Automobile
Specialty Specialty
Sl.No Components & Service’s
Steel Manufacturing
System

-Bharat Forge Ltd

1) -Kalyani Steels -Hikal Limited -BF Utilities

-Kalyani
Carpenter -Kalyani Net
2) -CDP Bharat Forge -Kalyani Thermal
Special Steels Ventures
-Synise
-BF Technologies
3)
Aluminiumtechnik Epicenter

-Bharat Forge
4) America

-Bharat Forge
5) Kilsta

-BF Scottish
6) Stampings

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-FAW Bharat Forge
7)

-Automotive Axles
8)

-Kalyani Lemmerz
9)

Vision:-

 To be the No.1 Forging Company in the World by 2008. and a leader in every
aspect of our business.

 To aggressively grow business by accessing global markets

 To deliver the products and services of uncompromising quality and integrity

consistent with Kalyani brand and image.

 To be committed listening and responding to the needs of our customers’

associates and business partners and honoring their individual values.

 To be committed to the entrepreneurial spirit that fuels the growth of our

companies and increase shareholders value.

 We are now building partnerships with major global OEMs and Tier I
companies around the world, offering full service supply capability.

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 We have been building world class manufacturing plants and reaching global
scale capacities in our line of businesses.

MILESTONE OF BHARAT FORGE LTD:-

 1961 – Incorporation.

 1962 – Technical Agreement with SIFCO, USA for hammer forging technology.

 1966 – Start of hammer shop commercial production.

 1972 – Execution of maiden export order to Greece.

 1984 – Technical Agreement with Tokyo Drop Forge, Japan for technology up-
gradation and quality improvement for hammer forgings.

 1985 – Entry in the erstwhile USSR market by winning a large contract for under
carriage components.

 1986 – Technical Agreement with Jidosha Buhin Kogyo, Japan for front axle
beams.

 1990-91 – Major breakthrough in the developed markets of Japan, USA and UK

for the critical suspension and engine components like front axle beams
and machined crankshafts.

 1991 – Implementation of a large US & 50 million forging up-gradation

Program by commissioning of 16000 MT’s

 1993 – ISO 9002 Accreditation

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 1996 – Technical agreement with Metalart Corporation, Japan for small forgings
and commissioning of 4000 MT’s and 2500 MT’s mechanical press lines
for small forgings.

 1997-98 – Establishment of new machining facilities for crankshafts, front axle

beams and heavy steering knuckles.

 1999 – QS 9000 Accreditation

 2000 – Implementation of US $ 30 Million forging facility expansion program

by commissioning of second 16000 MT’s Weingarten (Germany) make
screw and 2500 MT’s mechanical press lines.

 2004 – Acquired Carl Dan Peddinghaus GmbH & co. KG (CDP), one of the
largest German Forging Companies with plants in Ennepetal and Daun.

 Acquired CDP Aluminiumtechnik now known as Bharat Forge

Aluminiumtechnik. Provided an entry into the hi-end & Fast growing aluminum
component business.

 2005 – Acquired Federal Forge now known as Bharat forge America Inc.
provided BFL with a manufacturing presence in USA- one of its largest
markets. Acquired Imatra Kilsta, AB, Sweden along with its wholly
owned subsidiary Scottish stampings, Scotland (together called as Imatra
Forging Group).

 Signed a JV with FAW corporation, - the largest automotive group in China. JV

named FAW Bharat Forge.

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CUSTOMERS OF THE COMPANY:-

Its customer’s base includes virtually every global automotive OEM and Tier I
supplier.
 Daimler Chrysler,
 BMW,
 General Motors,
 Volkswagen,
 Audi,
 Renault,
 Ford,
 Volvo,
 Caterpillar- Perkins,
 Iveco,
 Arvin Meritor,
 Detroit Diesel,
 Cummins,
 Dana Corporation,
 Honda,
 Scania

Several others source complex forging requirements including machined crankshafts,

front axle beams and steering knuckles from Bharat forge.

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TOP CUSTOMER OF BHARAT FORGE:-

EXPORT CUSTOMER:- DOMESTIC CUSTOMER:-

 Arvin Meritor - Mahindra

 Dana - TATA

 Daimler Chrysler - MARUTI SUZUKI

 Renault - Ashok Layland

 New Holland - ESCORTS

 Ford - BHEL

 CATERPILLAR - BAJAJ

 General Motors - Kirloskar

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EXPORT CUSTOMER:-

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DOMESTIC CUSTOMERS:-

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PRODUCTS OF THE COMPANY:-

Bharat forge is the country’s largest manufactures and exporter components and
leading chassis component manufactures is the world. With significant global market
share, it is ranked among the leading forging companies in the world.

With manufacturing facilities spread over 12 locations, 4 in India, 3 in Germany, and

1 each in Sweden, U.K., USA and 2 in China the companies manufacture a wide range of
safety and critical components for passenger cars, commercial vehicles and diesel
engines. The company also manufactures specialized components for railways,
construction equipment, oil and gas and other industries. Its capabilities to manufacture
complex forging out of both steel and aluminum are unique features of BFL’s
competitiveness. They are specialized in closed die as well as open die forgings. This
requires utilization of a variety of metals.

With the latest technology and an ISO 9002 and QS 9000 company, quality control is
never an issue as quality procedures are built into EVERY STEP of the manufacturing
process.

Bharat Forge’s consolidated forging capacity is around 560,000 MT per annum,

which is the largest in the world. In the year 2005-06 BFL significantly ramped-up its
forging and machining capacities by adding 70,000 MT to its total forging capacity at
Mundhwa Pune. With the installed capacity of 240,000 MT per annum as on 31 March
2007, the plant at Mundhwa Pune is the largest single location-forging unit in the world.

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CRANKSHAFTS:-

Bharat forge manufactures a wide variety of crankshafts ranging from single cylinder
crankshafts for light duty applications to large 12 cylinder crankshafts for heavy duty
applications like marine, power generation and heavy construction.

BFL has established a track record of supplying crankshafts to leading OEM’s all
over the globe. It manufactures crankshafts ranging from 2-2500kgs in forged and
machined category.

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FRONT AXLE BEAM:-

Bharat forge is a major supplier of Axle Beams to the world market and produces
over 700,000 axle beams a year. BFL caters to marquee OEM’s in Europe and US with
an US market share of over 50% in class 7 & 8 trucks.

BFL currently manufactures Front Axle Beams ranging from 50- 200 kgs in forged
and machined condition.

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STEERING KNUCKLES:-

BFL manufactures Steering Knuckles both in forged and machined condition in a

range of 2 - 50 kgs with an annual capacity of 750,000.

CONNECTING RODS:-

Bharat Forge currently manufactures forged Connecting Rods for leading global
OEM’s. Current range of connecting rods varies between 2-400 kgs. Bharat Forge
manufactures 20,00,000 pieces of connecting rods per annum. Plans are under way to
have an in-house machining capability.

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ROCKER ARMS:-

Bharat Forge manufactures a wide range of Rocker Arms up to 3 kgs weight range for
Diesel Engine applications.

TRANSMISSION PARTS:-

Bharat Forge manufactures Transmission Parts for passenger cars and SUV’s, used in
highly sophisticated manual as well as automated transmission.

Bharat Forge manufacturers a wide variety of parts such as input shafts, gears, sleeve
transmission counter shafts, output shafts ranging from 0.5 kg to 10 kg.

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HUBS:-

Bharat Forge manufacturers a wide variety of Hubs ranging from 1 kg to 50 kg for

automotive applications.

OIL AND GAS:-

Bharat Forge is a major player in the oil & gas segment, with products ranging from
valves, chokes, casing heads, shells etc in forged condition. Bharat Forge has developed
forged components for high-pressure applications in the oil & gas industry.

Bharat Forge currently manufacturers Oil & Gas forged products ranging from 15–
500 kgs. BFL Oil & Gas facility is API-6A Certified.

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Sales Turnover of Bharat Forge Limited:-

The sales turnover of the company for the years 2001 to 2006 is given in the
following table:

Sl.no. Years Sales Turnover (Rs in Million)

1. 2001-02 4,830.6
2. 2002-03 6,955.00
3. 2003-04 8,511.00
4. 2004-05 12,265.00
5. 2005-06 16,310.00

Sales Turnover (Rs in Million)

20,000.00

15,000.00

10,000.00 Sales Turnover

(Rs in Million)

5,000.00

0.00
2001- 2002- 2003- 2004- 2005-
02 03 04 05 06
Sales Turnover 4,830.6 6,955.0 8,511.0 12,265. 16,310.
(Rs in Million) 0 0 0 00 00

Interpretations:-
The total sales turnover of the company has increased from the year 2001 to 2006.

Export Revenue:-

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The company’s export revenue for the year 2002 to 2005 is:

Sl.no. Years Sales (Rs. in Million)

1. 2002-03 2,717

2. 2003-04 3,331
3. 2004-05 5,105

4. 2005-06 6,555

Sales (Rs. in Million)

7,000
6,000
5,000
4,000
Sales (Rs.
3,000 in Million)
2,000
1,000
0
2002-03 2003-04 2004-05 2005-06
Sales (Rs. in 2,717 3,331 5,105 6,555
Million)

Interpretations:-
The export sales turnover of Bharat Forge Limited has also increased in past five
years. There has been an increase in the exports revenue by 28% in the year.

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Organizational Chart:-

CHAIRMAN / MD

EXECUTIVE DIRECTOR

HEADS OF DEPARTMENT

 HUMAN  SALES
RESOURCE PROJECT  ENGG
MANAGER
 SAFETY  QUALITY
&
 FINANCE PROJECT  PRODUCTION
TEAM
 MATERIALS PLANNING AND
 CIVIL CONTROL
 HEAT
TREATMENT
 PLANT
ENGINNERING

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Manufacturing Process Flow:-

Raw Material Inspection / Testing

Raw Material Inward

Cutting (First Piece / Periodic Check)

Inspection

Billet Heating in Oil Fired Furnace

Forging (First Piece Check)

Primary Inspection (Visual)

Heat Treatment

Macro/ Micro Test

Hardness Check

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Shot Blasting

Final Inspection

Cleaning / Packing

Pre-Dispatch Audit

Dispatch

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Board of Directors as per the 46th Annual Report(2006-07):-

As on 20th May 2008, the Board of Directors of Bharat Forge comprised Sixteen
Directors. The Board consists of the Chairman and Managing Director, who is a promoter
Director, Six Executive Directors, including the Deputy Managing Director and Nine
Non-executive Directors, Eight of whom are independent, including one nominee
Director. Details are as given below:-

Sl.N
Name Of Director Category
o

B. N. Kalyani
Promoter, Executive and
1 Chairman & Managing Director
Managing Director

P. H. Ravikumar
2 Nominee of ICICI Bank Ltd. Non-executive, Independent

S. S. Marathe
3 Non-executive, Independent

S. M. Thakore
4 Non-executive, Independent

S. D. Kulkarni
5 Non-executive, Independent

P. G. Pawar
6 Non-executive, Independent

Dr. Uwe Loos

7 Non-executive, Independent

P. C. Bhalerao
8 Non-executive, Director

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 Bharat Forge Ltd., Pune. Variance Analysis
Lalita D. Gupte
9 Non-executive, Independent

Alan Spencer
10 Non-executive, Independent

G. K. Agarwal
11 Deputy Managing Director Executive

A. B. Kalyani
12 Executive Director Executive

B. P. Kalyani
13 Executive Director Executive

S. E. Tandale
14 Executive Director Executive

P. K. Maheshwari
15 Executive Director Executive

Sunil Kumar Chaturvedi

16 Executive Director Executive

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Bankers for the Company:-

 Bank of India

 Bank of Baroda

 Bank of Maharashtra

 Canara Bank

 State Bank of India.

 HDFC Bank Ltd.

 ICICI Bank Ltd.

 Citibank N A

 Standard Chartered Bank

 UTI Bank Ltd.

 ABN AMRO Bank N V

Auditors for the Company:-

Dalal & Shah, Chartered Accountants.

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Research Methodology:-

VARIANCE ANALYSIS:-

A) Introduction of Variance:-

Variance is the difference between the standards set and the actual incurred. When
the actual cost is less than the standard cost, this indicates efficiency and the difference is
known as the favorable variance. Actual cost higher than the standard cost is the sign of
inefficiency and the difference would be termed as unfavorable or adverse variance.
From the point of view of income, if Actual income is higher than the standard income is
know as favorable or visa-versa.

Meaning and Definition of Variance:-

Variance is the difference between a standard cost and the comparable actual cost
incurred during a period.

According to the CIMA London, VARIANCE ANALYSIS “is the process of

computing the amount of variance & isolating the causes of variance between the actual
and standard.”

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B) Objective: - “Study of the Variance Analysis in Manufacturing unit”

C) Sub-Objectives:-

 To study the steps in the process of variance analysis,

 To study the causes or reasons using variance analysis,

D) Sample Size:-

The sample size of the project is three years P & L Account and Balance Sheet.

E) Duration of Project:-

The duration of the project is two months i.e., from June 16, 2008 to August 16, 2008.

F) Limitation of The Study:-

The limitation of the study is that the duration of the project was only two months so I
could not have knowledge of calculating the variance analysis.

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Need to Study Variance:-

We have to study variance analysis to separate controllable from uncontrollable

variance. Variance comparison may be made between the standards and actual or
between basic standard and current standard. It is not only enough to calculate and know
the variance that has occurred in different areas, value & percentage from month to
month but the root cause of the variance needs to be traced in order to take steps to
reduce them in the future. For this purpose, an analysis of the total variance should be
made.

Analysis of variance consisting of breaking up the total variance into their component
parts in order to determine and isolate the cause giving rise to each variance and reporting
to the management the corrective action to be taken and ensure that the action is done.

A detailed probe into the variance helps the management to ascertain

 The amount of a variance.
 The cause for its occurrence.
 The factors responsible for it.
 The responsibility to be laid on the executives and department.
 Corrective actions, which should be taken to reduce the variance.

A detailed analysis of controllable variance will help the management to identify the
persons responsible for its occurrence so that corrective action can be taken.

Variance Analysis helps us to calculate the exchange rate of exports in raw materials
(i.e. quantity and price) due to currency fluctuations which helps the management to fix
some strategy to overcome these variance analyses in the company.

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Favorable Variance:-

Where the actual cost is less than standard cost, it is known as favorable or credit
variance. Any variance that has a credit effect or favorable effect on profit is favorable
variance. Positive variance will indicate favorable variance and favorable variance is
designated by capital letter (F).

Unfavorable Variance:-

Where the actual cost is more than standard cost, the difference is referred as
unfavorable or adverse or debit variance. Any variance that has an adverse effect or
unfavorable effect on profit is unfavorable variance. Negative variance will indicate
unfavorable variance and unfavorable variance is designated by capital letter (A).

Controllable Variance:-

If a variance can be regarded as the responsibility of a particular person, with the

result that his degree of efficiency can be reflected in its size, then it is said to be a
controllable variance.

E.g.:- Excess usage of material is usually the responsibility of the foreman concerned.
However, if the excessive usage is due to material being defective, the responsibility may
rest with the Inspection Department for non-detection of the defects.

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Uncontrollable Variance:-

If a variance arises due to certain factors beyond the control of management, it is

known as uncontrollable variance.

E.g.:- Change in the market prices of materials, general increase in the labor rates,
increase in the rates of power or insurance premium etc are not within the control of
management of the company.

Uncontrollable Variance is due to exchange rates of currency which keeps on

fluctuating continuous.

Principle of Exception:-

Finally, the division of controllable and uncontrollable variance is extremely

important. The management should place more emphasis on controllable variance as
compared to uncontrollable variance because controllable variance requires investigation
and possibly corrective actions whereas uncontrollable variance can be ignored. This is
known as “Principle of Exception”.

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Revision Variance:-

After setting certain standards, sometimes standard cost has to be revised on account
of unavoidable changes in prices of various factors like wages, materials etc.

These standard costs once set are not disturbed every now and then to account for
these uncontrollable factors.

Rather a revision variance is created and revision variance is the difference between
the standard cost originally set and the revised standard cost.

Revision Variance = Original Standard Cost _ Revised Standard Cost

Of Actual Output of Actual Output

Setting Up Of Standards:-

While setting up of standards in calculating variance analysis is due to past

performance, experience, assumptions etc.

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Types of Variance For Each Element Of Cost:-

The total cost variance is divided into 3 main variances. They are as follows:-
1) Direct Material Cost Variance.
2) Direct Overhead Cost Variance.
3) Direct Labor Cost Variance.

VARIANCE

DIRECT DIRECT DIRECT

MATERIAL OVERHEAD LABOUR

PRICE VARIABLE RATE

QUANTITY FIXED EFFICIENCY

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1). Direct Material Cost Variance:-

It is the difference between the standard cost of direct materials specified for the
output achieved and the actual cost of direct material used.

Material Cost Variance = (Standard Cost Of Actual Cost - Actual Cost)

(MCV) = (SC) - (AC)

OR

Material Cost = Standard Quantity * Standard _ Actual * Actual

Variance for Actual Output Price Quantity Price

MCV = (SQ * SP) - (AQ * AP)

Classification Of Direct Material Cost Variable:-

Direct material cost variable is further divided into two types. They are as follows:-
i) Material Price Variance.
ii) Material Quantity Variance.

i) Material Price Variance:-

It is that portion of the material cost variance which is due to the difference between
the standard price specified and the actual price paid.

Material Price Variance = (Standard Price – Actual Price) * Actual Quantity

OR MPV = (SP - AP) * AQ

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Reasons for Material Price Variance:-
It arises due to following reasons:-
 Change in the market prices of materials.
 Failure to purchase the specified quality, thereby resulting in a different price
being paid.
 Change in the quantity of materials, thereby leading to lower/higher quantity
discount.
 Not availing cash discount, when standards set took into account such discounts.
 Inefficient purchasing.
 Change in the delivery costs.
 Rush purchases.
 Purchases of a substitute material on account of non-availability of the material
specified.
 Change in the rates of excise duty, purchase tax etc.
 Off season purchasing for certain seasonal products like jute, cotton etc.

ii) Material Quantity (usage) Variance:-

It is that portion of the material cost variance which is due to the difference between
the standard quantity specified and the actual quantity used.

Material Cost = Standard Quantity * Standard _ Actual * Actual

Variance for Actual Output Price Quantity Price

OR MCV = (SQ * SP) - (AQ * AP)

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Reasons for Material Quantity Variance:-

It arises due to following reasons:-
 Use of defective or sub-standards materials.
 Carelessness in the use of materials.
 Pilferage.
 Poor workmanship.
 Defect in plant and machinery.
 Change in the design or specification of the product.
 Change in the quality of materials.
 Use of substitute materials.
 Use of non-standard material mixture.
 Yield from material in excess of or less than standard yield.

Classification of Material Quantity Variance:-

Material Quantity Variance is further classified into two variance. They are as
follows:-
a) Material Mix Variance.
b) Material Yield Variance.

NOTE:-
Material Mix Variance and Material Yield Variance is not so
important so I have just mentioned those two classification in my project. There is no
further detailed explanation about these classifications.

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2). Direct Overhead Cost Variance:-

According to C.I.M.A., London Direct Overhead Cost Variance has been defined as
“the difference between the standard cost of overhead absorbed in the output achieved
and the actual overhead cost”.

Overheads are applied at standard predetermined rates to standard allowed input. The
input can be one of the several bases used for absorbing overheads such as machine
hours, unit of output etc. but in standard costing, direct labor hour is the basis generally in
use. The standard overhead cost pertaining to job or a process is equal to:

Standard Overhead = Standard labor * standard overhead

Cost Variance hours allowed rate

OR
Standard Hour = Standard Labor Hours Required * Actual Number Of
Allowed To Produce One Unit Units Produced

Overhead Cost Variance is difference between the actual overhead incurred and the
overhead charged or applied into the job or process at the standard overhead rate.
Overhead cost variance and its component variances can be computed and analyzed
separately for the fixed and variable overheads and for each cost center.

Classification of Direct Overhead Cost Variances:-

Direct overhead cost variances is further classified into two variances. They are as
follows:-
i) Variable Overhead Variance.
ii) Fixed Overhead Variance.

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i) Variable Overhead Cost Variance (also known as Controllable
Variance):-
The costs, which vary with the production, are called as the Variable Costs. The value
of the variable cost varies with the production but remains constant in the percentage.

Variable Overhead = Std. Hours for * Std. Variable _ Actual Overhead

Cost Variance Actual output Overhead Rate Cost

OR VOCV = (Absorbed Variable Overhead - Actual Variable Overhead)

Classification of Variable Overhead Cost Variance:-

Variable Overhead Cost Variance is further divided into two variances. They are as
follows:-
a) Variable Overhead Expenditure Variance.
b) Variable Overhead Efficiency Variance.

NOTE:-
These classifications are not so important so they are not
explained in detail. They are mentioned to have knowledge about these variances.

ii) Fixed Overhead Cost Variance (also known as Volume

Variance):-
The costs, which do not vary with the changes in the production, are called as Fixed
Costs. Fixed Costs remains constant in the value but varies in the percentage.

Fixed Overhead = Std. Hours for * Std. Fixed _ Actual

Cost Variance Actual Output Overhead Rate Fixed Overhead

OR FOCV = (Absorbed Overhead - Actual Overhead)

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Classification of Fixed Overhead Cost Variance:-

Fixed Overhead Cost Variance is further divided into two variances. They are as
follows:-
a) Fixed Overhead Expenditure Variance.
b) Fixed Overhead Volume Variance.

NOTE:-
These classifications are not so important so they are not
explained in detail. They are mentioned to have knowledge about these variances.

3). Direct Labor Cost Variance:-

Labor Cost Variance is defined as “the difference between the standard direct labor
cost specified for the activity achieved and actual direct labor cost incurred.

Labor Cost = Std. Labor Cost _ Actual Labor

Variance of Actual Output Cost

OR LCV = SC - AC

Classification of Direct Labor Cost Variance:-

Direct Labor Cost Variance is further classified into two variance. They are as
follows:-
i) Labor Rate Variance.
ii) Labor Efficiency (or Time) Variance.

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NOTE:-
In this company, the costing and finance department will not
maintain the direct labor cost variance as the strength of employees is more than 10,000
employees which will create problem to maintain the records of employees. So in this
company they will not prefer to maintain the records. And hence they prefer to maintain
only two records i.e. direct materials cost variance and direct overhead cost variance.
In Bharat Forge Limited, the Variance Analysis is done under Costing head the and
under the Finance head. Under Costing the Variances that are analyzed are:
1) Material Variance.
2) Sales Variance.
3) Overhead Variance.

1) Material Variance:-
Material Variance is the difference between the actual direct material and the standard
direct material specified for the production achieved. The material cost variance arises
due to variations in the price of the material or in its usage. The Materials variance may
be analyzed under the head:
i) Raw Material Variance.
ii) Cut Weight Variance.
iii) End Piece Variance.
iv) Scrap Variance.

i) Raw Material Variance:-

This variance refers to the variation between the standard rates of purchases set by the
company and actual rates at which the raw material are purchased from the domestic
supplier is termed as the Raw Material Domestic Variance. The formula to derive this
variance is:

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Domestic price variance:
 Shipment qty: i.e. actual shipment
 Input weight (i/p wt): shipment qty* per piece input weight /1000
 Master per ton rate: i.e. B.P master rate (bp rt)
 Actual purchase rate (act rt): minimum rate and maximum rate
Now,
Variance = i/p wt* (bp rt- act rt)

ii) Cut Weight Variance:-

In the manufacturing process the Raw Material is cut into equal defined lengths,
which are called as Billets. There is a standard set for the Cut weight and that is
compared against the actual quantities at which the raw material is cut.

iii) End Piece variance:-

In the process of cutting the raw material into billets some part of the raw material
(i.e. the last piece) with lesser length than required, which cannot be used for the
production is known as the End Piece. The Company sets the standards for the no of end
piece. The end piece variance is the difference between the standards set for the end piece
and against the actual number of end piece.

iv) Scrap Variance:-

Normally, in the process of manufacturing the some percentage of scrap or waste
arises, which cannot be used for the production. The Scrap variance refers to the variation
between the actual scrap that arise and the standard set. The standard set is considered as
the normal percentage of the scrap.

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2) Sales variance:-
Sales variance (also called sales value or sales revenue variance) is the difference
between budgeted value of sales and actual value of sales achieved in a given period.
Sales variances may be analyzed as sales margin variance (i.e. on the basis of margin and
profits) or as simple sales variance based on turnover. The types of Sales Variances
analyzed are:-
i) Domestic Sale Variance.
ii) Export Sale Variance.

i) Domestic Sale variance:-

The domestic sales variance is analyzed with the help of the following variances they
are:-
a) Sale Price Variance.
b) Quantity Variance.

a) Sales Price variance:-

The domestic sales price variance is the sub-variance of the Sales Variance, is
obtained by the difference between the Actual selling price and the Standard selling price
multiplied at the actual quantity sold.
b) Quantity variance:-
The quantity variance is obtained by the difference between Actual quantity sold and
Standard quantity sold at the standard price of the products sold.

ii) Export sales variance:-

The other variance analyzed under the head of Sales Variance is export sales
variance. This comprises of
a) Export sale price variance.
b) Export quantity variance.
c) Export Exchange rate variance.

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a) Export sales price variance:-

One of the reasons for occurrence of export sales variance is the difference between
the standard prices projected and the actual prices of the products at which they are sold.
If the actual prices are more than the standard price then it is said to have a favorable
variance else visa-versa. The formula for calculating the price variance is:

Export Sale = Actual _ Standard * Actual * Standard Exchange

Price Variance Price Price Quantity Rate

Here the standard price refers to the Price of product in foreign Currency.

b) Export quantity variance:-

The difference between the planned quantity of products and the actual quantity sold
is termed as quantity variance. This is another reason for the occurrence of the export
sales variance. The formula used for deriving quantity variance is:

Export Quantity = Actual _ Standard * Standard * Standard Exchange

Variance Quantity Quantity Price Rate

Here the standard price refers to the Price of product in foreign currency, which
finally is expressed in terms of Rupees after considering the standard exchange rate.

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c) Exchange rate variance:-

Exchange Rate is one of the major reasons contributing to Export sales variance.
Exchange rate variance is the difference between exchange rated projected and the actual
or current exchange rate at the time of sales. This is calculated at the actual number of
products sold to the foreign customer (i.e. actual quantity). The currencies taken for
analysis are: US Dollar, EURO, and GBP.

Exchange Rate = Actual Exchange _ Projected Exchange * Actual * Actual Selling

Variance Rate Rate Quantity Price

Here the standard price refers to the Price of product in foreign Currency, which
finally is expressed in terms of Rupees after considering the standard exchange rate.

3) Overhead Variance:-
Also called as Overhead Cost Variance. The Overhead variance is analyzed under
two types of costs:-
i) Variable Cost.
ii) Fixed Cost.

i) Variable costs:-
The cost heads that are considered for the variance analysis are:-
a) Energy Cost Variance.

a) Energy Cost Variances:-

The consumption of the energy varies along with the production. Also the energy rtes
varies from one period to another. The energy cost variance refers to the variance in the
standard rates and the actual rates of the energy. The difference is multiplied with the
actual quantity of energy consumed.

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ii) Fixed costs:-
The cost heads that are considered under fixed costs are:-
a) Interest.
b) Depreciation.
c) Other Expenses.

Note:-
The Calculations of all the above Variances are displayed
in the end pages of this report.

Under Finance head the variances are derived between year-to-year bases. The major
heads are taken into consideration for the variance.

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Variance Analysis of Profit and Loss Account for the financial yr

2004-05, 2005-06 and 2006-07:-
The Profit or Loss Account of the year 2005-06 and 2006-07 was analyzed for the
Variance Analysis. The variances are calculated under the major heads like:-
1) Sales Variance,
2) Raw Material Variance,
3) Variable costs,
4) Fixed cost,
5) Financial.

1) Sales Variance:-
Under Sales variance further has following analysis:-
i) Domestic Sales analysis,
ii) Export Sales analysis,
iii) Scrap analysis, and
iv) Export incentives.

2) Raw material variance:-

Raw material variance further has following analysis:-
i) Price variance analysis.
ii) Quantity variance analysis.
iii) Cut Weight variance analysis.

3) Variable Cost:-
Variable Cost has further following analysis:-
i) Energy,
ii) Stores, and
iii) Sub-Contract variance.

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4) Fixed Cost:-
Fixed Cost further has following analysis:-
i) Salary, and
ii) Other expenses.

5) Financial:-
Financial further has following analysis:-
i) Depreciation analysis and,
ii) Interest analysis.

Items considered under Income:-

1) Domestic sales:-
The Domestic sales refer to the sales within the country. For the year 2004-05 the
percentage of sales was 42.6% whereas of 2005-06 the percentage of sales for the total
sales was 44.9% and there’s an increase in the percentage for the year 2006-07 to 47.1%.
The variance is favorable and the reasons attributable for the variance are:-
i) Increase in the volume of sales (due to
increase in demand)
ii) Increase in sales price of the products.

2) Export Sales:-
The export sales refer to the sales made out of the country. The percentage of export
sales to total sales has almost remained constant for both the years. The reason for the
slight variation may be due to:-
i) Increase in the volume of the sales
ii) Increase in the price of the products.

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3) Export Incentives:-
On exports of forged and machined products company receives certain benefit from
government under Export incentives and Benefit Scheme known as DEPB (Duty
Entitlement Pass Book). DEPB has decreased in the year 2006-07 to average 4% as
compared to the previous year 2005-06 at average of 7% and that of 2004-05 was average
of 11%.

4) Sale of Scrap:-
With increase in production there is increase in the scrap. There has been increase in
the value of scrap but the percentage of scrap to the total sale has remained constant for
both the years since the prices have remained same.

5) Other Income:-
Income from other sources basically from interest is categorized under other income.
There has been an increase in the other income in the year 2006-07 compared to the year
2005-06 and 2004-05 which has arise:-

i) Due to increases in the amount of deposits with better interest rates.

Items under Expenditure:-

1) Raw material:-
There has been increase in absolute value of the raw material due to increased volume
of production but the percentage of raw material to the total sales has almost remained
same (i.e. 44.94% to 45.10%)

2) Stores and spares:-

There has been increase in absolute value of the stores and spares due to the increased
in production and stores cost, but the percentage of stores and spares to total sales in the
current years have remained same as of previous year (i.e. 5.46% and 5.66%).

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3) Energy:-
The electricity charges for the pervious year (2005-06) was Rs.3.88/kwh and in the
current year (2006-07) charges have increased to Rs.4.94/kwh. There has been an
increase in the percentage of energy expense to the total sales due to:-
i) Increase in the production and
ii) Increases in charges of the Electricity, Oil and Gas.

4) Machining Charges:-
The percentages of the machining charges to total sales have almost remained the
same for both years.

5) Salary and wages:-

Compared to the year 2005-06 there is an increase in the salary and wages in the year
2006-07. This increase may be due to:-
i) Increment and incentives,
ii) New joiners, and
iii) Post change impact.

6) Interest (payment):-
There has been an increase in the payment of interest in the current year (2006-07) as
compared to the previous year (2005-06), which results because:-

i) Company was in Capex expansion during the financial year 2005-06, but
according to accounting standards the interest on the loan was getting
capitalized in financial year 06-07 when assets were put to use.
ii) Increased interest rates.
iii) Higher Working Capital loans.

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7) Depreciation:-
Increase in the depreciation amount in the year 2006-07 compared to the previous
year, (2005-06) which may be the result of:-

i. Installation of new additional machines in the current year.

ii. Depreciation for the machines bought pervious year (2005-06) was charged
during the FY 2006-07 when they were put to use.

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Variance Analysis for the year April 2006-07:-

Bharat Forge Ltd transactions are for various products with varied quantities added to
the difference customer base. Hence the analysis for the month for all products, all
customers become large. Keeping in view the understanding the concept of variance
analysis some of the customers have been taken under consideration for calculation of the
variance, its reasons and implications are as follows:-
1) Sales Variance.
2) Raw Material Variance.
3) Overhead Variance.

1) Sales Variance:-
Sales Variance is classified into two variance. They are as follows:-
i) Domestic Sales Variance.
ii) Export Sales Variance.

i) Domestic Sales Variance:-

Domestic Sales Variance is further classified into two variance. They are as follows:-
a) Domestic Sales Price Variance.
b) Domestic Quantity Variance.

a) Domestic Sales Price Variance:-

Domestic Sale = Actual _ Standard * Actual

Price Variance Price Price Quantity

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b) Domestic Quantity variance:-

Domestic Quantity = Actual _ Standard * Standard

Variance Quantity Quantity Price

Table 1:- Rs. In Million Favorable / (Adverse)

Domestic Sales Quantity Domestic Sales
Customer Prices Variance Variance (Rs. in Variance (Rs. in
(Rs. in Mln) Mln) Mln)
A 0.508 12.718 13.226
B 0.059 (0.479) (0.420)
C 0 (0.563) (0.563)
D 0.083 0.976 1.059
Total 0.650 12.832 13.482

The Domestic Sales Variance comprises of Domestic Sales Price variance and
Quantity Variance.
The favorable sales price variance is due to the actual selling price being higher than
projected & unfavorable quantity variance is due to the quantity of actual sales were
lesser than projected. The total domestic sales variance is Rs. 13.482 Million as
shown above.

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ii) EXPORT SALES VARIANCE:-

Export Sales Variance is further classified into three variance. They are as follows:-
a) Export Sales Price Variance.
b) Export Quantity Variance.
c) Exchange Rate Variance.
a) Export Sales Price Variance:-

Export Sale = Actual _ Standard * Actual * Standard Exchange

Price Variance Price Price Quantity Rate

b) Export Quantity Variance:-

Export Quantity = Actual _ Standard * Standard * Standard Exchange

Variance Quantity Quantity Price Rate

c) Exchange Rate Variance:-

Exchange Rate = Actual Exchange _ Projected Exchange * Actual * Actual Selling
Variance Rate Rate Quantity Price

Table 2:- Rs. In Million Favorable /(Adverse)

Sales Export
Custome Foreig Quantity Exchange
price Sales
r n Currency variance -rate variance
variance Variance
A EUR (1.459) (7.605) 1.014 (8.050)
B USD 0.000 (4.901) (1.262) (6.163)
C GBP 0.047 (3.376) 0.148 (3.180)
Total (1.411) (15.883) (0.100) (17.394

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)

The above table shows the Export sales variance of three customers, which comprises
of the Export Sales Price Variance, Quantity variance and the Exchange Rate Variance.
 The reason for the favorable exchange rate variance is actual exchange rate
was higher than projected & vice-versa.
 The reasons for the unfavorable export price variances are due to the decrease
in the actual sales price vis-à-vis projected for these customers.
 The total quantity variance for all three customers were unfavorable due to the
actual quantity sold was less than projected.

2) Raw Material Variance:-

Raw Material Variance is further classified into four variance. They are as follows:-
i) Domestic Raw material Variance.
ii) Cut Weight Variance.
iii) End Piece Variance.
iv) Scrap Variance.

i) Domestic Raw Material Variance:-

Domestic Raw Material Variance is further classified into two variance. They are as
follows:-
a) Raw Material Price Variance.
b) Raw Material Quantity Variance.

a) Raw Material Price Variance:-

Raw Material = Standard _ Actual * Actual

Price Variance Rate Rate Quantity

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b) Raw Material Quantity Variance:-

Raw Material = Standard _ Actual * Actual

Quantity Variance Quantity Quantity Rate

Table 3:- Rs. In Million Favorable /(Adverse)

Vendo Price Quantity
Raw Material Variance
r Variance Variance

A 0.176 0.177 0.001

B 6.660 (0.017) 6.643

C (0.076) (0.237) (0.313)
D 0.806 (0.178) 0.628
E (0.649) (0.009) (0.658)
Total 6.564 (0.261) 6.301

The Raw Material Variance (RMV) comprises of the RM Price Variance and RM
Quantity Variance.
 The reasons for the favorable RM price variances are the actual prices of the
raw material are less than the Standards or projections.
 Also the actual quantities of the RM bought were more than the projections,
which has resulted in to total favorable variance of Rs. 6.301 Mln

ii) Cut-Weight Variance:-

Cut Weight = Standard Cut _ Actual * Standard rate Of

Variance Weight Weight Raw Material

Cut weight is the actual weight of a cut billet

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iii) End Piece Variance:-

End Piece = Standard _ Actual * Standard Rate Of

Variance End Piece End Piece Raw Material

End piece is the difference between the Gross weight of a billet & the Cut weight

Table 4:- Rs. In Million Favorable /(Adverse)

Cut weight End Piece Defect
Vendor Total
Variance Variance Variance
A 0.028 0.047 0.000 0.076

B (0.087) 0.051 (0.057) (0.093)

C 0.112 (0.106) (0.031) (0.025)

D (0.596) (0.042) (0.128) (0.766)

E 0.043 (0.018) 0.000 0.025

Total (0.500) (0.067) (0.216) (0.783)

iv) Scrap Variance:-

The Company has set a standard for Scrap as 4% of total production. If the actual
percentage of the scrap is less than or equal to 4%, than it is considered as favorable
variance. The scrap variance for the year April 2006-07 was around 9%, which is
adverse. The reasons being some of the dies in April 2006-07 were Developing Dies (i.e.
new products development), due to which the scrap quantity was increased.

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3) OVERHEAD VARIANCE:-
Overhead Variance is further divided into two variance. They are as follows:-
i) Variable Cost Variance.
ii) Fixed Cost Variance.

i) Variable Cost:-
The variable cost head consists of the following variance:-
a) Energy Cost Variance.

a) Energy Cost Variance:-

Energy Cost = Standard Energy _ Actual Rates * Quantity

Variance Rates Per Unit Unit Consumed

Table 5:- Rs. In Million Favorable / (Adverse)

Unit of Energy Rate

Items
Measurement Variance
Superior Kerosene Oil-1 KLT (0.274)
Light diesel oil KLT 0.855
Superior Kerosene Oil-2 KLT (0.244)
High Speed Diesel LTR 0.001
Furnace oil KLT (1.371)
Liquid Petroleum Gas MT 0.059
Electricity KWH 15.943
Total 14.97

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The Energy Rate Variance for the year April 2006-07 is Rs.14.97 Mln, which is a
favorable variance.
 The reasons for the favorable variances are the energy rates for items like
Light Diesel Oil, LPG, and Electricity were lesser than the projected rates.
 The variance for the year April 2006-07 is less favorable compared to April
2005-06, major reason being the electricity, which was Rs.4.57 Per Kwh in
April, compared to Rs.5.12 Per Kwh in April 2005-06.

ii) Fixed cost:-

The fixed cost head consists of the following variance:-

a) Other Expenses:-
Under the head of other expenses come the expenses related to Printing and
stationary, Foreign Travel, Inland Travel, Conveyance, EDP, Sundry Repairs, Sundry
Expenses. Company has a projected Other Expenses for each month. There was an
unfavorable variance for the April 2006-07 of Rs. 3.5 Mln. The major reason for the
difference was:
 The actual expenses for EDP in April 2006-07 was around Rs 1.86 Mln
whereas the budget expense provided was for Rs.0.50 Mln, analysis revealed
that the budget was spread over one quarter whereas the actual had been
accounted in the first month itself.
 The foreign expenses incurred were Rs 5.5 Mln, which was higher than the
projected amount of Rs.3.0 Mln.

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Variance Analysis for the year April 2005-06:-

1) Sales Variance.
2) Raw Material Variance.
3) Overhead Variance.

1) Sales Variance:-

i) Domestic Sales Variance:-

a) Domestic Sales Price Variance:-

Domestic Sale = Actual _ Standard * Actual

Price Variance Price Price Quantity

b) Domestic Quantity variance:-

Domestic Quantity = Actual _ Standard * Standard

Variance Quantity Quantity Price

Table 1:- Rs. In Million Favorable /(Adverse)

Quantity Domestic Sales
Customer Prices Variance
Variance Variance
A 0.731 (3.443) (2.712)
B 0.040 0.135 0.175
C 0.198 0.048 0.246
D 0.273 4.376 4.649
Total 1.242 1.116 2.358

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The total domestic sales variance for the four customers was Rs. 2.358 Mln.
 The favorable price variance states that the Actual Sales Price was higher.
 The reason for favorable quantity variance was the actual quantity sold to the
customer D was higher than projected.

ii) Export Sales Variance:-

a) Export sales price variance:-

Export Sale = Actual _ Standard * Actual * Standard Exchange

Price Variance Price Price Quantity Rate

b) Export Quantity Variance:-

Export Quantity = Actual _ Standard * Standard * Standard Exchange

Variance Quantity Quantity Price Rate

c) Exchange Rate Variance:-

Exchange Rate = Actual Exchange _ Projected Exchange * Actual * Actual Selling

Variance Rate Rate Quantity Price

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Table 2:- Rs. In Million Favorable /(Adverse)

Export
Sales Sales
Custome Foreig Quantity Exchange
Price Variance
r n Currency Variance Rate variance
Variance (Total) (Rs
in Mln)
A EUR (0.683) (6.230) 1.012 (5.901)

B USD 0.000 3.624 (0.908) 2.716

C GBP 0.153 4.072 0.405 4.63

Total (0.53) 1.47 0.51 1.44

The total Export sales price variance for the above three customers was Rs. 1.44 Mln.
 The reason for the total favorable quantity variance was the increase in the
actual sales quantity, which was a major reason for total favorable variance.
 The major reason for the favorable exchange rate variance was the actual
exchange rates were higher for EUR and GBP.
 But the reason for unfavorable Sales Prices Variance was the actual prices
were lesser than projections.

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2) Raw Material Variance:-

i) Domestic RM Variance:-

a) Raw Material Price Variance:-

Raw Material = Standard _ Actual * Actual

Price Variance Rate Rate Quantity

b) Raw Material Quantity Variance:-

Raw Material = Standard _ Actual * Actual

Quantity Variance Quantity Quantity Rate

Table 3:- Rs. In Million Favorable /(Adverse)

Vendo Price
Quantity Variance Raw Material Variance
r Variance
A 0.027 0.202 0.299
B 1.691 (0.014) 1.677
C (0.075) (0.019) (0.094)
D 14.345 (0.016) 14.329
E (0.590) (0.004) (0.594)
Total 15.398 0.149 15.547

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The total Raw Material Variances was for five Vendors in April 2005-06 was Rs.
15.547 Million.
 The reason major reason for the favorable Variances was Actual RM Prices
had decreased.
 The quantity variance is less favorable than price as the actual quantity bought
was more than projected.

ii) Cut-Weight Variance:-

Cut Weight = Standard Cut _ Actual * Standard rate Of

Variance Weight Weight Raw Material

iii) End Piece Variance:-

End Piece = Standard _ Actual * Standard Rate Of

Variance End Piece End Piece Raw Material

Table 4:- Rs. In Million Favorable /(Adverse)

Vendor Cut-weight Var. End Piece Var. Defect Variance Total

A (0.023) 0.076 0.000 0.053

B (0.065) 0.000 (0.075) (0.138)
C 0.141 (0.05) 0.000 0.092
D (0.399) (0.032) (0.10) (0.53)
E 0.154 (0.02) 0.000 0.13
Total (0.191) (0.025) (0.174) (0.390)

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iv) Scrap Variance:-

The standard set for Scrap was 4%. The actual scrap for the year April 2005-06 was
4.37%; this showed an adverse variance of 0.37%, which was primarily due to some
high-end scrap product produced in the year. The scrap variance for April 2005-06 is less
adverse compared to April 2006-07. The reason for the adverse variance was some of the
dies were Developing Dies (i.e. new products development), due to which the scrap
quantity was increased.

3) Overhead Variance:-

i) Variable Cost:-
The variable cost head consists of the following variance

a) Energy Cost Variance:-

Energy Cost = Standard Energy _ Actual Rates * Quantity

Variance Rates Per Unit Unit Consumed

Table 5:- Rs. In Million Favorable /(Adverse)

Items Unit of Measurement Energy Cost Variance
Superior Kerosene Oil-
KLT (0.042)
1
Light diesel oil KLT 0.893
Superior Kerosene Oil-
KLT (0.177)
2
High Speed Diesel LTR -
Furnace oil KLT (2.34)
Liquid Petroleum Gas MT 1.00
Electricity KWH 9.121

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Total 8.46

The Energy Rate Variance for the year April 2005-06 is Rs8.64 Mln, which is a
favorable variance.
 The variance for the year April 2005-06 is less favorable compared to April
2004-05, major reason being the electricity, which was Rs.4.57 Per Kwh in
April 2005-06, compared to Rs.5.12 Per Kwh in April 2004-05.

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Variance Analysis for the year April 2004-05:-

1) Sales Variance.
2) Raw Material Variance.
3) Overhead Variance.

1) Sales Variance:-

i) Domestic Sales Variance:-

a) Domestic Sales Price Variance:-

Domestic Sale = Actual _ Standard * Actual

Price Variance Price Price Quantity

b) Domestic Quantity variance:-

Domestic Quantity = Actual _ Standard * Standard

Variance Quantity Quantity Price

Table 1:- Rs. In Million Favorable /(Adverse)

Prices Quantity Domestic

Customer
Variance Variance Sales Variance

A 0.542 -3.443 (2.901)

B 0.65 0.768 1.418
C 0.854 0.067 0.921
D 0.456 5.788 6.244
Total 2.502 3.18 5.682

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The total domestic sales variance for the four customers was Rs. 5.682 Mln.
 The favorable price variance states that the Actual Sales Price was higher.
 The reason for favorable quantity variance was the actual quantity sold to the
customer D was higher than projected.

ii) Export Sales Variance:-

a) Export sales price variance:-

Export Sale = Actual _ Standard * Actual * Standard Exchange

Price Variance Price Price Quantity Rate

b) Export Quantity Variance:-

Export Quantity = Actual _ Standard * Standard * Standard Exchange

Variance Quantity Quantity Price Rate

c) Exchange Rate Variance:-

Exchange Rate = Actual Exchange _ Projected Exchange * Actual * Actual Selling

Variance Rate Rate Quantity Price

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Table 2:- Rs. In Million Favorable /(Adverse)

Export
Forei Sales Quant
Cust Exchange Sales Variance
gn Price ity
omer Rate variance (Total) (Rs in
Currency Variance Variance
Mln)
A EUR -0.786 -5.78 1.387 -5.179
B USD 0.82 2.897 -0.879 2.838
C GBP 0.234 3.456 1.767 5.457
Total   0.268 0.573 2.275 3.116

The total Export sales price variance for the above three customers was Rs. 3.166
Mln.
 The reason for the total favorable quantity variance was the increase in the
actual sales quantity, which was a major reason for total favorable variance.
 The major reason for the favorable exchange rate variance was the actual
exchange rates were higher for EUR and GBP.
 But the reason for unfavorable Sales Prices Variance was the actual prices
were lesser than projections.

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2) Raw Material Variance:-

i) Domestic RM Variance:-

a) Raw Material Price Variance:-

Raw Material = Standard _ Actual * Actual

Price Variance Rate Rate Quantity

b) Raw Material Quantity Variance:-

Raw Material = Standard _ Actual * Actual

Quantity Variance Quantity Quantity Rate

Table 3:- Rs. In Million Favorable /(Adverse)

Raw
Vendor Price Variance Quantity Variance Material
Variance
A 0.067 0.267 0.334
B 1.234 -0.011 1.223
C -0.54 -0.017 -0.557
D 12.44 -0.013 12.427
E -0.59 -0.002 -0.592
Total 12.611 0.224 12.835

The total Raw Material Variances was for five Vendors in April 2004-05 was Rs.
12.835 Mln.

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 The reason major reason for the favorable Variances was Actual RM Prices
had decreased.
 The quantity variance is less favorable than price as the actual quantity bought
was more than projected.

ii) Cut-Weight Variance:-

Cut Weight = Standard Cut _ Actual * Standard rate Of

Variance Weight Weight Raw Material

iii) End Piece Variance:-

End Piece = Standard _ Actual * Standard Rate Of

Variance End Piece End Piece Raw Material

Table 4:- Rs. In Million Favorable /(Adverse)

Vendo Cut-weight End Piece Defect

Total
r Var. Var. Variance

(0.084
A -0.23 0.123 0.023
)
(0.062
B -0.03 0.043 (0.075)
)
C 0.241 (0.04) 0 0.201
(0.847
D -0.325 (0.122) (0.4)
)
(0.016
E 0.254 (0.87) 0.6
)

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(0.808
Total -0.09 (0.866) 0.148
)

The total Raw Material Variances was for five Vendors in April 2004-05 was Rs. -
0.808 Million. So it is unfavorable variance.

iv) Scrap Variance:-

The standard set for Scrap was 6%. The actual scrap for the year April 2004-05 was
6.78%; this showed an adverse variance of 0.78%, which was primarily due to some
high-end scrap product produced in the year. The scrap variance for April 2005-06 is less
adverse compared to April 2004-05. The reason for the adverse variance was some of the
dies were Developing Dies (i.e. new products development), due to which the scrap
quantity was increased.

3) Overhead Variance:-
i) Variable Cost:-
The variable cost head consists of the following variance

a) Energy Cost Variance:-

Energy Cost = Standard Energy _ Actual Rates * Quantity

Variance Rates Per Unit Unit Consumed
Table 5:- Rs. In Million Favorable /(Adverse)
Unit of
Items Energy Cost Variance
Measurement
Superior Kerosene Oil-1 KLT (0.056)
Light diesel oil KLT 0.965
Superior Kerosene Oil-2 KLT (0.187)
High Speed Diesel LTR -
Furnace oil KLT (2.254)

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Liquid Petroleum Gas MT 1.34

Electricity KWH 9.112
Total 8.92

The Energy Rate Variance for the year April 2004-05 is Rs8.92 Mln, which is a
favorable variance.
Findings:-

1) Sales Variance:-

a) Domestic Sales Variance:-

Customer 2006-07 2005-06 2004-05

A 13.226 2.712 -2.901
B -0.42 0.175 1.418
C -0.563 0.246 0.921
D 1.059 4.649 6.244

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Domestic Sales Variance

20

15
2004-05
10
2005-06
5
2006-07
0

-5
A B C D
2004-05 -2.901 1.418 0.921 6.244
2005-06 2.712 0.175 0.246 4.649
2006-07 13.226 -0.42 -0.563 1.059
Customer

Interpretations:-
From the above chart we can say that Customer A has increased its domestic sales,
Customer B has decreased its domestic sales, Customer C has also decreased its domestic
sales and Customer D has also decreased its domestic sales from 2004-05 to 2006-07.

b) Export Sales Variance:-

Customer 2006-07 2005-06 2004-05

A -8.05 -5.901 -5.179
B -6.163 2.716 2.838
C -3.18 4.63 5.457

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Export Sales Variance

15
10
5
0 2004-05
-5 2005-06
-10 2006-07
-15
-20
-25
A B C

2004-05 -5.179 2.838 5.457

2005-06 -5.901 2.716 4.63
2006-07 -8.05 -6.163 -3.18
Customer

Interpretations:-
From the above chart we can say that Customer A has decreased its export sales,
Customer B has decreased its export sales and Customer C has also decreased its export
sales from 2004-05 to 2006-07.

2) Raw Material Variance:-

a) Domestic Raw Material Variance:-

Customer 2006-07 2005-06 2004-05

A 0.001 0.299 0.334
B 6.643 1.677 1.223

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C -0.313 -0.094 -0.557

D 0.628 14.329 12.427
E -0.658 -0.594 -0.592

Domestic Raw Material Variance

30

20
2004-05
10 2005-06
2006-07
0

-10
A B C D E

2004-05 0.334 1.223 -0.557 12.427 -0.592

2005-06 0.299 1.677 -0.094 14.329 -0.594
2006-07 0.001 6.643 -0.313 0.628 -0.658
Custom er

Interpretations:-
From the above chart we can say that Customer A has decreased its domestic raw
material, Customer B has increased its domestic raw material, Customer C has also
decreased its domestic raw material, Customer D has also increased in 2005-06 but it
decreased in 2006-07 its domestic raw material and Customer E has decreased its
domestic raw material from 2004-05 to 2006-07.

b) Cut Weight and End Piece Variance:-

Customer 2006-07 2005-06 2004-05

A 0.076 0.053 -0.084
B -0.093 -0.138 -0.062
C -0.025 0.092 0.201

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D -0.766 -0.53 -0.847
E 0.025 0.13 -0.016

Cut Weight and End Piece Variance

0.5
0
-0.5 2004-05
-1 2005-06
-1.5 2006-07

-2
-2.5
A B C D E

2004-05 -0.084 -0.062 0.201 -0.847 -0.016

2005-06 0.053 -0.138 0.092 -0.53 0.13
2006-07 0.076 -0.093 -0.025 -0.766 0.025
Custom er

Interpretations:-
From the above chart we can say that Customer A has increased its cut weight and
end piece, Customer B has decreased its cut weight and end piece, Customer C has also
decreased its cut weight and end piece, Customer D has also decreased its cut weight and
end piece and Customer E has increased its cut weight and end piece from 2004-05 to
2006-07.

3) Overhead Variance:-
a) Variable Cost:-
i) Energy Cost Variance:-
2005- 2004-
Items 2006-07
06 05
Superior Kerosene Oil-1 -0.274 -0.042 -0.056

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Light diesel oil 0.855 0.893 0.965
Superior Kerosene Oil-2 -0.244 -0.177 -0.187
High Speed Diesel 0.001 0 0
Furnace oil -1.371 -2.34 2.254
Liquid Petroleum Gas 0.059 1 1.34
Electricity 15.943 9.121 9.112

Energy Cost Variance

40

30
2004-05
20
2005-06
10
2006-07
0

-10
Superior Light Superior High Furnace Liquid
Electricity
Kerosen diesel oil Kerosen Speed oil Petroleu

2004-05 -0.056 0.965 -0.187 0 2.254 1.34 9.112

2005-06 -0.042 0.893 -0.177 0 -2.34 1 9.121
2006-07 -0.274 0.855 -0.244 0.001 -1.371 0.059 15.943
Item s

Interpretations:-
From the above chart we can say that Superior Kerosene oil-1 has increased its
energy cost, Light diesel oil has decreased its energy cost, Superior Kerosene Oil-2 has
also decreased its energy cost, High Speed has also increased its energy cost and Furnace
oil has decreased its energy cost, Liquid Petroleum has also decreased its energy cost and
Electricity has increased its energy cost from 2004-05 to 2006-07.

Suggestions:-

Variance analysis refers to simple difference between what the company has expected
or projected and what it has received in actual. As observed variances relate to cost and
also income of manufacturing enterprises. The elements of the cost for such company are:

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 Material, and
 Overhead.

As already known, Bharat Forge Ltd deals with a large quantity of customized
products and has maintained a large volume of customer base. The variances analysis for
all the products, all the customers become large. Hence some of the customers and the
vendors were taken into consideration for calculation of variances. Variance analysis not
only helps the management to compare standards with actual, but also helps to chalk out
reasons for the variances.

 The Domestic Sales Variances for the year April 2006-07 is more than the
year April 2005-06, but in the year April only one customer had a high
variance. In the year April 2005-06 all customers had favorable variances,
which states that Sales were increased. But in April 2004-05 has decreased its
domestic sales but it had favorable variance. So the variance for April 2005-
06 is considered as better.

 The Export Sales Variances in the year April2005-06 has increased its exports
and is favorable, where as in April 2006-07 it is decreased and there was
unfavorable variance. But in April 2004-05 the exports was more and it was
having favorable variance. The favorable variances in April 2004-05 state that
the sales price and the quantity of sales were increased. This indicates the
corrective measures were taken to reduce the variance.

 The Domestic Raw Material Variances in April 2005-06 is more favorable

than April 2004-05 and April 2006-07. The RM was purchased at a lesser rate.
But a less favorable Quantity variance in April 2006-07 was due to increased
production.

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 Bharat Forge Ltd., Pune. Variance Analysis
 The Scrap Variance in April 2005-06 was less unfavorable than April 2006-
07. In the year April 2006-07 new products were under development, as it was
initial stage percentage of scrap had increased. The decrease in the percentage
of scrap in April 2004-05 shows increase in the efficiency.

 Energy Rate Variance in April 2006-07 is more favorable than April 2005-06
and April 2004-05. The major reason being increase in the rate of electricity
and furnace oil, which is an external or uncontrollable factor affecting the
variance. Also consumption of energy has increased due to increased
production.

 Thus, on the basis of all the reasons for the above variances, it can be
concluded that with the help of the variances analysis the company had taken
the steps to reduce the variances to improve its performance in the year April
2006-07.

Bibliography:-

Books:-

K.L.E. Society’s Institute Of Management Studies and Research, Hubli. 92

 Bharat Forge Ltd., Pune. Variance Analysis

 N. D. Kapoor.
 Annual Reports of the company.

Websites:-

 www.aifi.com
 www.bharatforge.com

Annexure:-

P & L Account and Balance Sheet:-

K.L.E. Society’s Institute Of Management Studies and Research, Hubli. 93

 Bharat Forge Ltd., Pune. Variance Analysis

Income Statement
31-Mar- 31-Mar- 31-Mar-
As on( Months )
07(12) 06(12) 05(12)

Profit / Loss A/C Rs mn Rs mn Rs mn

Net Sales 16913.59 14098.20 10725.58

Operating Income (OI) 18723.29 15906.30 12258.44

OPBDIT 4754.66 4065.66 3605.70

OPBDT 3958.42 3512.70 3002.34

OPBT 2960.05 2748.17 2476.77

Non-Operating Income 705.54 400.76 4.01

Extraordinary/Prior
-187.32 -154.27 -7.11
Period

Tax 1027.29 924.40 858.35

Profit after tax(PAT) 2450.98 2070.26 1615.33

Cash Profit 3449.35 2834.79 2140.90

Dividend-Equity 779.28 667.96 615.55

Balance Sheet
As on 31-Mar-07 31-Mar-06 31-Mar-05

Assets Rs mn Rs mn Rs mn

Gross Block 17344.30 12642.82 9477.44

K.L.E. Society’s Institute Of Management Studies and Research, Hubli. 94

 Bharat Forge Ltd., Pune. Variance Analysis

Net Block 11513.00 7744.11 5264.16

Capital WIP 2748.03 3707.04 2758.97

Investments 2434.15 1905.04 383.47

Inventory 3027.89 2542.66 1860.83

Receivables 2539.52 1885.54 1430.60

Other Current Assets 15065.52 13523.06 4598.66

Balance Sheet Total(BT) 37328.11 31307.45 16296.69

Liabilities Rs mn Rs mn Rs mn

Equity Share Capital 445.40 444.62 395.60

Reserves 12713.95 11075.81 3776.56

Total Debt 14115.38 10018.06 4375.26

Creditors and Acceptances 5612.79 4826.94 3914.69

Other current liab/prov. 4440.59 4942.02 3834.59

Balance Sheet Total(BT) 37328.11 31307.45 16296.69

K.L.E. Society’s Institute Of Management Studies and Research, Hubli. 95