Labour Accounting & Factory Accounting

PRODUCTION PLANNING IN ORDNANCE FACTORIES

INTRODUCTION

Ordnance Factories are basically manufacturing units, though of late, certain

new responsibilities like marketing & export and research & development have been
added to it in order to improve their capacity utilization and give better products &
services. Despite this, its basic character which emanates from ‘one customer – one
producer’relationship has not undergone any substantial change. The new products
are designed and developed by DRDO and given to the Ordnance Factories for
establishing production. The factories establish mass production of the items through
a development process, which is generally divided in three stages viz.

a) Manufacture of a pilot batch

b) Establishment of batch production having scope for further improvement in

technique or manufacturing methods and

c) Final establishment of manufacture by standardization of technique and

manufacturing methods.

Once an item is established, the factories get repeat order from Army via
Ordnance Factory Board which is discharged on annual basis. It is imperative that
the factories meet the annual targets without fail in order to ensure defence
preparedness and simultaneously ensuring optimum capacity utilization for
producing goods at minimum cost. This dictates the need to have a sound and
foolproof production planning & control system in the organization which does exist
for a very long time. In this unit we shall be discussing the “Production Planning &
Control System” of the organization.

Any activity related to production entails expenditure which is required to be

budgeted, compiled, controlled and finally allocated to the products for recovery
through sales. His implies the need of a financial and cost accounting system which
is available in he organization commonly known as “Factory Accounting Rules”. We
shall be discussing this in the subsequent units. In factory accounting, we talk about
the Rules, Procedures, Powers and the Cost Accounting methodology related to
each factor of production which is so inextricably interwoven with PPC System that it
becomes difficult to give a separate identity to each one of them. Therefore, there
would be lot of cross – references and mapping of PPC procedures on Factory
Accounting Rules and vice – versa.

OGANISATION OF THE FACTORIES

In order to proceed further, we must take a look of the factory organization

from the production planning and cost accounting point of view. The factory is
divided in three groups viz.

(i) Production

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(ii) Service Section and

(iii) Administrative Sections.

Production Sections are those sections or shops which are engaged in

production activities and from where the saleable output comes. The Service
Sections are those sections which support the production sections by providing
maintenance services, tools, equipment, material and other services (.g.
Electrical/Mechanical maintenance, Tool Room, PV, Stores, Design Office, Quality
Assurance, R&D etc.). The Administrative Sections are engaged in Planning,
Regulation & Control functions (e.g. Planning Office, Works Office, Rates &
Estimates Section, Budget, Marketing, MCO, Personnel Administration, Welfare,
Hospital etc.).

Out of the above classification, the Central Planning Office, Works Office and
Rates & Estimates Section form the core group of Production Planning & Control
Sections. The Marketing Section which is dealing exclusively with the Civil Trade has
inter-alia now assumed the role of Central Planning Office in its own domain.

CUSTOMERS

India Army is the prime customer of the organization. Besides there are other
customers also to whom the organization is serving. They are classified in the
following categories for the purpose of receiving orders, discharging their workload
and monetary transactions:

A ARMY
B Navy, Air Force and Other Defence Departments
C Establishments under Ministry of Home Affairs
D Central Govt. & State Govt. Department
E Public Sector Undertakings
F Private Civil Indenters
G Employees of the Ordnance Factories

ORDERS

The orders from the customers are received through one of the following
documents:

A INDENT (ARMY, Navy, Air Force MHA)

B Supplementary Work Order Drafts (SWODs)
(Small orders from the establishments under MoD)
C Purchase Order (CG/SG/PSUs/Pvt. Civil Indenters)
D Payment Service Requisitions from OF Employees

Indents and some of the SWODs are received at the P&P Section of OFB
while other orders are received at the factory level.

Indent: The Services viz. Army, Navy & Air Force conduct annual review of
their requirements of Arms and Ammunition sometimes in September/October every
year and place their demand on OFB. The documents through which the demands

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are placed are called Indents. These indents, which emanate from their respective
Headquarters (Army : Director General Ordnance Services (DGOS)), indicate the
Store, Quantity on Order, Anticipated Date of Requirement (ADR), Unit Cost,
Previous Source of Supply, Inspecting Authority, Consignee etc.

The Services are supposed to place demands on OFB by 31st March every
year covering heir entire requirements for the next years. Out of this, the requirement
for the first year is firm and final. There is a provision for placing Supplementary
Demands for additional quantity against an existing indent or reduction/cancellation
of an existing indent partly or wholly through Reduction Demands. These demands
are further validated in the Target Fixation Meetings held annually in the month of
January where the target for the ensuring year are firmed up taking into
consideration the budgetary provisions of Army and the Price List issued by OFB.

While placing order, and advance copy of the indent is forwarded to OFB
while three more copies are routed through Authority Holding Sealed Particulars
(AHSP) who certify the correctness of technical specifications/drawings and
availability of paper particulars. The indents received at OFB are scrutinized by the
P&P Section of OFB who give a registration number, which incidentally happens to
be the Extract Number, and forward it to the concerned Production Section of OFB
for issue of Extract (discussed subsequently). The Indent thus is the authority for
OFB to undertake manufacture of the Service Stores.

On receipt of an Indent. OFB has to indicate within a period of 3 months

whether it shall be possible to supply to stores within the ADR. If it is not possible to
supply within the ADR. A revised date is given known as probable data. Of
completion (PDC). The Army Hqrs must respond within 2 months and reconfirm for
acceptance of the revised date. The PDC of an indent is generally decided mutually.
In case the supplies are not completed within the ADR/PDC, the Services are free to
cancel the order and the financial repercussion of the same will have to be borne by
DGOF. In case an indent is cancelled within the ADR, the financial repercussion of
the same will have to be borne by the Services.

Indents are also received from the Para Military Organizations and the Central
Police Organizations under MHA. The MHA indents are also treated on the similar
lines.

SWODs: R&D Organizations and Proof Establishments under MoD require

certain items in small quantities for which they place SWODs on DGOF. These
SWODs have the same status as that of an indent and are processed in the similar
manner. Sometimes the factories also receive the SWODs directly for which they
obtain ex-post facto sanction of OFB.

Purchase Order: The Central Government Departments like Railways, State

Government Departments, Public Sector Undertakings and Private Civil Indenters
can place their purchase orders directly on the Ordnance Factories. These orders
are processed by the Marketing Sections of the individual factories under the
provisions of the Civil Trade Instructions.

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Payment Service to OF Employees: Ordnance Factory Employees are entitled to

purchase the OF Products and obtain certain services on payment at confessional
rates. The employees submit a Payment Service Requisition to their respective
General Managers who are authorized to accept such requests.

EXTRACTS

Ordnance Factories are required to undertake any job at their works on the
specific authority of the Ordnance Factory Board. This authority is given in the form
of Extracts which are classified in five categories.

Class I - For Army

(Erstwhile Free Issues)
Class II - Payment issues (Navy, Air Force, MHA, CG, SG, PSUs &
Pvt. Civil Indenters)
Class III - Inter Factory Demands
Class IV - Factory’s internal work (Open Extract)
Class V - Capital Services undertaken by a factory.

The indents on receipt at OFB, as mentioned above, are scrutinized and a

decision is taken regarding manufacture of stores along with quantities in different
Ordnance Factories. Extracts are then issued by OFB to finishing factories for
manufacture of these items specifying the details of Indent, quantity on order,
nomenclature of store, inspection authority, item code, PDC, and consignee details.
The extract is thus the authority for a factory to undertake production of the specific
item as mentioned in the extract.

INTER FACTORY DEMAND (IFD)

While executing an Extract of an end store, the finishing factories some times
require assistance of a sister factory in the form of empties, explosives or raw
materials. This is obtained through an IFD on the authority of the extracts issued by
OFB. The IFD becomes authority for a sister factory to undertake manufacture of an
item. He IFDs get the blanket sanction of OFB and treated as a Class III Extract.
Every year a matrix of Class III Extract Numbers are issued by OFB to cover the IFD
transactions between two factories which is required to be quoted by the demanding
factory while placing an IFD on the sister factory.

CENTRAL DEMAND

When an extract for an end store is issued by OFB to the finishing factory, it is
expected that the stores would be promptly delivered. But as mentioned above, the
finishing factory may have to take assistance of the sister factory for which it will
place an IFD. In some cases, the sister factory on which the first IFD has been
placed may further place an IFD on the second factory. Thus the factory which is
required to deliver the raw material or component first is last in the chain to get
information which delays the whole planning schedule. In order to circumvent this
delay, OFB issues a Central Demand almost simultaneously with the issuance of the
Extract on the intermediate factory (with quantities covering the requirements of
extract) for the empties etc. which has got the same status as that of an IFD floated

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between two factories. CD is thus the authority simultaneously issued by OFB to

intermediate factories to undertake production of semi – finished jobs (empties)
which are required for executing the extract by the final issuing/finishing factory to
meet the demands of the Services.

Generally, CDs are placed for major sub-assemblies or components

manufactured by Intermediate Factories and issued to finishing factories. The list of
such items and the intermediate factories where these are required to be
manufactured is decided by OFB in advance. The intermediate factories take up
manufacture of empties/major sub-assemblies immediately on receipt of CDs.

PRODUCTION PLANNING AND CONTROL

Central Planning & Progressing (CPP)

All incoming Extract/SWOD/IFD/CD are received by the Central Planning

(CPP) who maintain a register of such documents and record the details. A copy of
these documents is forwarded to the respective Cost Centers for obtaining technical
clearance from Quality Assurance Wing in the factory and Material Planning Group.
In case the order is not accepted (mostly in case of IFDs), the documents are
returned by CPP to the originator (say the demanding factory).

Sassed on the total workload available in the factory through all the
outstanding orders and the capacity available in the factory in man-hour terms and
machine – hour terms, target for each store is fixed by CPP in consultation with the
Cost Centres and an Yearly Production Programme and Monthly Production
Programme is notified to all concerned.

While the Cost – Centre Planning takes over the detailed planning and
operation scheduling at this stage, monitoring of Production and Issues and
monitoring of achievement in respect of the Principal Items continues to the done by
the Central Planning CPP also monitors the Vale of Production, Production in terms
of SMH and Monthly Capacity Utilisation w.r.t. the laid down targets and w.r.t. the
De-rated/re-rate Capacity of the factory.

Central Planning Section is the Custodian of Extracts and receipt, progressing

of he closure and liquidation of the same falls exclusively in their domain.

Cost – Centre Planning (CCP)

With the reorganization the factories at the unit level, the cost-centre planning
offices have been created. These offices are entrusted with the responsibility of
carrying out pre-production planning activities and raising requisition for Warrants on
the Works Office.

If an order for a new item is received, the same is required to be got

established by the respective Cost – Centre. Simultaneously the Cost – Centre
Planning (CCP) with the help of their Drawing Office and Pattern Office prepares the
Process Schedule, Tool Schedule and Gauge Schedule. The Process Schedule is
sent to the Rates & Estimates Section for preparation of Materials Estimates &

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Labour Estimates which are essentially required for material planning, manufacturing
and detailed operation scheduling.

Rates & Estimates Section (RE)

The Rates & Estimates Section of a factor is considered as the custodian of

estimates. They are entrusted with the responsibility of preparation of spot estimates
and regular estimates for production, both provisional and standard, carrying out
temporary and permanent revision of estimates. This section issues Indirect
Warrants, does Overhead Budgeting, Cost Estimation and take stock of the Annual
Accounts of the factory.

Works Office (WO)

A production section cannot undertake manufacturing activity without specific

authority of the General Manager. This is issued to the production sections in the
form of a Warrant, which is done by the Works office. Works office issue the
warrants, monitors its progress and closure. Works Office arranges for Stock Taking
on last working day of the financial year and preparation of Semi Statement for the
outstanding warrants with the shops. Works Office deals with all matters pertaining
to the Warrants, they are designated as the custodian of warrants.

WO is in general entrusted with responsibility of dealing with the Test Audit &
Internal Audit matters and the Annual Audit Certificates.

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PREPARATION OF LABOUR MATERIAL ESTIMATES

ESTIMATING & RATE FIXING

Manufacture of any job is undertaken in the production sections of a factory

on the authority of Warrants. The warrants authorize the sections to deploy men and
material in a particular sequence. In order to have predetermined control over the
factors of production. Estimates are prepared by the Rates & Estimates Section. The
estimates have two parts viz. (i) Labour Estimate and (ii) Material Estimate which
are/prepared on a special form No. G.S. 48 (all estimates are now computerized and
printed on normal/preprinted stationery).

The estimate has a header record which gives the Component Description.
End Product or Component Code. Work Order Number, Drawing & Specification
details, Customer (Services) for whom sanctioned, Section and the Quantity for
which it is valid (Per … .).

The Labour Estimate (Part – I) gives s chronological description of the

operations to be performed in a section with the following details.

Section, Operation No. Operation Class of Labour / Man – Hours (incl. 25%
incentive).

The Material Estimate (Part – II) lists out the materials required for
manufacture of the end store with the following details :

Description / Folio / UQ Quantity (incl. unavoidable rejection allowance) / Source of

Supply / Rate / Value.

The basic documents required for preparation of an estimate are the

Component Drawings and Process Schedule.

As soon as an order is received, the availability of the estimate is checked. If

the estimate is not available being a new item and the store is previously made by
one of the factories, a copy of the estimate can be obtained form that factory to
progress the work temporarily. Such an estimate is, however, to the used only as
rough guide because –

(a) The plant in the new Factory may be different from that in the old Factory.

(b) The sequence of operations and the labour rates applicable to the various
operations may differ from those of the old factory.

(c) The quantities to be made may differ greatly from the quantities visualized
when the old estimate was prepared.

(d) The original piecework rates may not be accurate.

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PREPARATION OF NEW ESTIMATES

Preparatory Data: The basic data required by Rates and Estimates Section for
preparing the estimates are :-

(a) A list of the production groups in the various shops. The number of groups are
kept to the minimum necessary to distinguish between different types of
operation, e.g., autos, capstans and turrets, lathes, shapers, planers etc.
Subgroups may be used as necessary, e.g., heavy presses and light presses,
fine, medium, and rough fitting etc. Each production group is given a series
number, preferably factory wise and not a shop series.

(b) The grade(s) of labour applicable to each production group i.e. the type of skill
required to operate the machines.

(c) Data on feeds and speeds most suitable for machining each material used in
the factory. If necessary, it is collected for each production group and tye type
of tool material applicable for each speed is also recorded.

The speeds and feeds of machines are normally taken from Maker’s
Specifications. If the estimating staff find hat a machine cannot be run at the maker’s
specified speed, the matter is reported to the Works Manager who decides whether
to have the speed altered or to fix timing on existing speeds.

(d) Standard data sheets previously prepared as necessary for the use of the
Estimating Staff and carefully checked by the senior staff before being placed
on record for use, which indicate the time required for various type of
operations.

Preparation of Operation Schedule : The preparation of an operation schedule is an

essential preliminary to Rate Fixing. The responsibility for preparing this document is
allocated to the head of the Drawing Office in conjunction with the Tool Design
Office. An operation schedule for a component contains the following information : -

(i) Raw material to be used, including sizes,

(ii) Operations involved in a numbered sequence,
(iii) Production group number of each operation,
(iv) Tools, jigs or fixtures and gauges for each operation.

Division of machining rates: All machine rates are divided into two portions,
viz., a preparation allowance and an operating time per piece. The total time allowed
for a job will therefore be preparation allowance + (operating time x number of pieces
finished). The preparation allowance is, of course, to be paid only once for each run
of the job on a machine, irrespective of the number of pieces in the run.

The elements entering into the make up of preparation allowance are –

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1. Taking instructions from supervisor. It must be understood that materials is

already at the machine, and that the supervisor has obtained the necessary
drawing in advance.

2. Obtaining tools, jigs or fixtures and gauges.

3. Preparing machine and setting up tools.

4. Restoring machine to normal condition and returning tools, etc. at the end of
job.

The factors comprising the operating time per piece are (1) Securing and
setting work in machine; (2) Cutting time; (3) Changing tools as necessary and
allowance for Grinding, if this is not done centrally; (4) Starting out and sizing
(sometimes averaged as a percentage of cutting time); (5) Gauging and (6)
Allowance for rest and minor breakdown of tools, machine or belt. This is normally
taken as 12.5% of the neat working time i.e. items 1,2,3,4 & 5. An allowance of 25%
is added to the total time for profit. In view of the percentage time allowed for minor
breakdowns, etc., there is no provision for payment of idle time to piece workers
during minor breakdowns extending up to 1 hour per shift. The exercise of both
observation and judgement is necessary in estimating the total time required for this
rate as lot of subjectivity is involved in deciding the rating or efficiency of the
operator.

Preparation and use of provisional rates – Utilizing the data described in the
forgoing paragraphs, the Rate prepares a Rate Form (I.A.F.O. 1881) which shows
the estimated time allowed for each operation. This Rate is generally given sufficient
trial on day-work basis.

It would be a matter of interest to the reader that prior to correlation of piece-

work rates with reference to Vth CPC pay scales, piece-work rates were calculated
by multiplying the allowed time (expressed in hours upto fourth place of decimal) and
hourly rate (expressed as Rs./hour upto fourth place of decimal) and the final value
arrived were expressed correctly upto 2 places of decimal. This is no more valid after
1.4.2000 and all the rates are now being expressed in hours only correctly up to 4
places of decimal.

When manufacture of a component gets established on day-work basis on the

scheduled equipment at reasonable level, a time study is done for the operations
concerned, and adjustments made as necessary to the estimated timings. The
revised rate forms for the operations, checked and supported by detailed time study
data, is approved by the Works Manager of R&E Section. All new piece work rates
are marked and treated in all respects as “provision” until they have been finalized.

As mentioned earlier, the material estimates descend from the Bill of Material
and the Operation Schedule. As this stage, material estimates are also reviewed and
the quantities provided in the initial estimates area also changed as per experience.

Finalization of provisional rates by time study – It is generally seen that

the run of work should be large enough to enable a time study man to make

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adequate number of observations to prove the rates. Under normal circumstances,

the process gets stabilized within a period of one year. At this stage a series of time
& motion study is carried out and with necessary amendments, the estimates are
finalized. The estimate is then frozen which is called a Standard Estimate. A report
on the standardization of estimates is also sent to OFB.

A certain continuity of manufacture is necessary for the operation of piece-

work rates. Diminution of value of orders below the minimum on which piece-work
rate is based will cause failure of rates as the workmen will not be able to complete
the requisite quantities and earn the intended profit. This will also be true if a person
of lower skill is employed against the higher skill job provided in the estimates.
However, if a person of higher skill is employed than was originally intended, he will
earn sufficient profit by producing less number of components which would result
into reduction of productivity as well as escalation of cost. Such employments,
therefore, must be only temporary expedient due to administrative necessity and
alternatives must be found out at the earliest opportunity.

Permanent Revision of Estimates – Even after standardization of estimates,

necessity arises for carrying out amendments to the rates as well as quantity of
materials provided therein due to change in produces, plant and machinery, plant
layout etc. These amendments are of permanent nature and carried out through
‘Revision Forms’. These RFs pertaining to a particular estimate are sequentially
numbered and approved by the Works Manager of R&E Section before carrying out
amendments. The FRs list out the previous entry and the revised entry which is
being incorporated.

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PROGRESSING OF WARRANTS

WARRANT

Warrant is the authority of General Manager to a Section to undertake

production. A warrant is basically a derivative of the Extract from where the quantity
on order is taken and the estimates from where the allowed quantities of labour and
material inputs are taken. Life of a warrant is normally six months from the date of
issue during which it is required to be closed by the production shop. If order to keep
a warrant alive beyond this period, permission of OFB is required.

A warrant comprises of two parts viz. Manufacturing Warrant and Material

Warrant. A warrant is generally given a 5 digit serial number e.g. 9123/0 where the
first digit indicates the year of issue, 2nd to 4th digits indicate the running serial
number against a particular work order and the last digit indicates the status viz. “0”
for original warrant, “1” for NRR, “2” for NRM, “3” for replacement orders, “4” for
additional warrants and “5” for warrants which have been issued in anticipation
ofreceipt of extract (e.e. “Extract Due Status”).

MANUFACTURING WARRANT

It is issued on the basis of Labour Estimate and Extract. It has a Header

record consisting of Description / Drg. & Part No. / EPC / Extract No. & Date /
Estimate No. Section / Work Order No. / Warrant No. / Qty Ordered & Cost Head.
This is followed by a series of entries of all the operations giving Estimate Sl.No. or
Operation No. / Operation / Grade of Operator / Allowed Time per 100, all in seriatim.

The production sections while operating the Warrant can accordingly deploy
authorized labour. Simultaneously, they have to keep the record of quantity
manufactured (i.e. accepted qty. and rejections due to bad material/bad
workmanship), labour booking for each operation (Card No. / Date / Wty.) and also of
the non-recurring rate, replacement orders on the warrant itself.

MATERIAL WARRANT

It is issued on the basis of Material Estimate and Extract. It has a Header

record consisting of Description/Drg. & Part No. / EPC / Ext. No. & Date / Estimate
No. / Section / Work Order No. / Warrant No. Qty Ordered & Cost Head. This is
followed by a series of entries of all the materials viz. Estimate Sl. No./Mtl.
Description / AU / Qty. / Rej Allowance / Ledger Folio No.

The production sections while operating the Warrant can accordingly draw
authorized material. Simultaneously, they have to keep the record of booking viz.
Demand Note / RD Note / Return Note, material issued in-lieu, non-recurring
material and recoveries.

A warrant (comprising of manufacturing and material warrant) is printed in

duplicate and one copy is sent to the Shop while the second copy is sent to the
Accounts Office on the basis of which a cost-card is opened by A.O. After completion
of the warrant, the shop copy is returned to Works Office which after necessary

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scrutiny is forwarded to the Accounts Office. A monthly list of the completed warrants
is issued by WO, which forms the basis of closure of the respective Cost Cards.

As mentioned earlier, as the manufacture progresses, the I/Note quantity is

progressively recorded in the warrants, Out of these, the Inspection Notes against
customers’orders emanating out of various warrants are routed through the Works
Office where it is centrally numbered. The I/Notes after numbering assume the status
of ‘O’Vrs (Outurn Vouchers) which help in production accounting. Works Office
maintains Production Ledger Cards in which posting of ‘O’ Vrs. Is done and from
where the position of outturn, issue and balance in hand can be obtained.

Non-Recurring Revision to Rates (NRR) and Non-Recurring Revisions to

Materials (NRM)

The standard estimates provide for various labour operations as well as

various materials required for a job. Cases occur where due to certain defects in
manufacture due to materials not being to the correct size or shape and various
other reasons, 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. Authorisation for additional labour operation is provided as Non-
Recurring Rates and for materials as Non-Recurring Material which is treated as
temporary revision to the estimates limiting its life till pendency of that warrant.

DGM/R&E is authorized to sanction NRMs upto Rs. 5000/- per warrant

beyond which sanction of the GM is necessary. The financial effect is the difference
between the value of the new material and material provided initially, Regarding
NRRs, DGM has got full powers. For sanction of NRRs/ NRM, prescribed forms are
used and reasons necessitating issue of NRRs/NRMs is recorded on these
documents. Reasons for sanction of NRR/NRM are scrutinized by the Accounts
Office as well and follow up action taken for ensuring remedial measures in cases
where the recurrence can be avoided.

The Rates & Estimates Section keeps Shop-wise record of NRR/NRM in

separate registers. All NRRs/NRMs sanctioned are posted warrant-wise in the
register. Accounts Office also collects the figures monthly from the various abstracts
with reference to the entries in the registers maintained by the factory. Based on this
reconciliation and other detail remedial measures are taken.

ADDITIONAL WARRANT

Sometimes during execution of a warrant, it becomes to necessary to include

certain operations and materials which do not find place in the main warrant like
manufacture of a new component altogether. Provision for labour and material in
such a case is made through additional warrants.

REPLACEMENT ORDERS

Sometimes there is heavy rejection during manufacturing and it is not possible

to complete the warrant. Such heavy drawl of material and labour is permitted

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through are placement order which is granted after a preliminary Board of Inquiry
and proper justification.

SEMI STATEMENT

There is a system of Annual Stock Taking of all the production items on the
last day of the financial year i.e. 31st March. Works Office prepares a list of all part
completed warrants and circulates to the shops. W.O. insists that maximum number
of warrants should be closed by 31st March. However, for each outstanding warrant,
the shop records.

Section / W.O. / Warrant No./

(i) the quantity of each material drawn/in-hand and
(ii) the stage of manufacture & quantity for part finished work.

This is called the “Statement of Work-in-Progress” which is priced by the Accounts

Office to ascertain the amount locked up as WIP and the annual Cost of Production.

The factories where “Except System” is in vogue, a “Statement of Finished Semi”

indicating warrant wise quantities of the finished components held as intermediate
stock with the shops is also prepared and priced on the similar lines.

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DIRECT - INDIRECT RATIO & COST CONTROL

The industrial employees by virtue of their deployment are placed in two

categories – Direct and Indirect, Those who are employed in Production Shops to
manufacture stores against customers demand are called ‘Direct worker’ and all
storage, material handling etc. are called indirect workers. If someone desire to
increase production, it is necessary to deploy more men as direct workers but the
total strength of IEs being fixed, this can be done only upto certain extent as
withdrawal of workmen from the indirect services will have adverse effect on
productivity. On the other hand excessive deployment of men on indirect services
will adversely affect production activities and simultaneously inflate production cost.
Therefore, a balance has to be struck and the optimum strength of direct and indirect
workers is fixed for deployment in a year.

I order to keep track of their deployment pattern and also to achieve cost
control, an index known as “Direct-Indirect Ratio”is used. Two indices are used:

1. Direct – Indirect Ratio by Strength

This is ratio of the number of Direct Workers employed in all the Production
sections to number of Indirect Workers employed in all the Service sections. This is
expressed as 1: X where X is the fraction of indirect workers for each production
worker.

2. Direct – Indirect Ratio by Charge

This is ratio of the total payment made to the Direct Workers employed in all
the Production sections to the total payment made to Indirect Workers employed in
all the Service sections. This is also expressed as 1 : X where X is the fraction of
payment made to the indirect workers in relation to one rupee paid to the production
worker.

Ideally, the D/I ratio by strength and charge should remain same but due to
changes in the deployment pattern with reference to the plans and consequent part
booking of piece-workers as day-workers, the D/I ratio by charge will increase. This
will consequently increase the overheads and shrink the direct labour base, thus
increasing the unit cost of production. As long as the variation between the two
indices is minor and wit permissible limits. It is not of much consequence, but a
major departure could alter the whole cost structure and the published price list may
become redundant. Therefore, D/I Ratio is an important cost-control tool and its
curious monitoring and review is necessary so as to keep the ratio by charge as
close to the ratio by strength.

MANAGEMENT INDICES

In order to see the performance of Ordnance Factories, OFB has laid down 10
Management Indices. These ratios cover the areas like Capital Management,
Inventory Management, Manpower Cost & Productivity Management, Surplus &
Disposal and Maintenance Management. For this purpose 14 type of data are taken
as the base, which are known as Raw Data. The Raw Data and Management
Indices commonly known as Management Ratios are Derived from these data as
follows.

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RAW DATA

1. Annual Cost of Production.

2. Value of Material consumed during the year
(Director & Indirect Stores consumed).
3. Manpower Cost
(Direct labour & Indirect labour + Supervision charge paid during the year).
4. Number of Employees
(Other than Casual, Medical, Canteen, Security & DSC personnel).
5. Net capital employed for Building, Machinery, Gas, Water Mains etc.
(excluding Stock Piles) as on 31st March of the Year.
6. Finished Goods & Completed Articles as on 31st March of the year.
7. Raw Materials and Component Inventory (Stores in hand & Stores-in-transit)
as on 31st March of the year.
8. Work-in-Progress inventory as on 31st March of the year.
9. Value of Disposal during the year
(by sale proceeds of surplus, obsolete and waste).
10. Value of waste, obsolete and surplus stores as on 31st March of the year.
11. Value of stores in transit as on 31st March of the year.
12. Value on working stock (Total of slow moving, non-moving and active stock)
as on 31st March on the year.
13. Value on Maintenance stores as on 31st March on the year.
14. Capital Value of Plant & Machinery as on 31st March of the year.

MANAGEMENT RATIOS

A. Manpower Cost / Cost of Production (%)

(3) * 100/(1)

B. Average Capital employed per employees (Rs. In lakh)

(5) / (4)

C. Average Monthly Emoluments per employee (Rs. )

(3) / (4) *12

D. Cost of Production per man-month (Rs. In lakh)

(1)/(4) * 12

E Finished Goods, Completed Article inventory

(In terms of number of days of cost of production)
(6)*365/(1)

F. Raw material and component inventory

(in terms of number of days consumption).
(7)*365/(2)

G. Work-in-Progress inventory
(in terms of number of days of cost of production).
(8)*365/(1)

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H Waste, obsolete and surplus index

(9)/(10)

I. Store in transit index

(11)/(12)

J. Maintenance stock index

(13)/14)

In addition to the above, following additional information are also required by

OFB :

1. Productivity Index

Factor ‘X’(Output S.M.H. in Lakh)

=
Factor ‘Y’(Input Manhours in Lakh)

2. Piece Work Profit % of the factory as a whole

3. Over Time

a) O.T. Hours (Hrs.)

b) O.T. Payment (Rs.)

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UNI LEVEL MANAGEMENT COMMITTEE

During 1992, Ordnance Factories were passing through a critical phase in

their existence and were facing peculiar situation of which they had been insulated
from right from their inception. The workload situation in many of the factories was
causing concern and this position was not likely to improve in the immediate future
due to resource crunch and change in geo-political situation and economic
environment.

In this context, it became essential that the Ordnance Factories come out
from total dependence on orders from the Services and find workload from other
than defence sector for optimal utilization of the nation’s resources available with
them. To operate efficiently in a free market economy, it was essential that the
organization structure be given a proper orientation to meet the end objective. In this
background, certain decisions were taken by OFB for re-organization at the unit level
which are indicated in the succeeding paragraphs.

It was decided to adopt the Cost Centre type of structure for the OFs and a
‘Committee’form of functioning at the apex level to firm up policies and review and
monitor the performance of the ‘Production Cost Centres’and the Unit as a whole.
Accordingly each factory has been divided in 3 or 4 “Production Cost Centres” on the
basis of the production activities (the factories excluded from the purview are OFBh,
OCFC,OPF, OCFAVD, OEFH, OFDC, HAPP & EFA). Each Cost Centre has a
connected QC, Plant Maintenance, purchase of direct materials & P&P support with
them. Centralised Staff and other functions like General Utility Services, Large
Centralised Staff and other functions like General Utility Services, Large projects,
Personnel, Marketing, Quality Assurance, R&D, Common bulk purchases and
Finance & Accounts functions to from separate staff functions.

In the committee form of functioning, the General Manager acts as the Chief
Executive of the unit and the Addl. GMs function as head of the Production Cost
Centres & Centralised Staff Functions (including F&A) and report to the GM. GM &
AGMs form a Unit Level Management Committee (ULMC) in each of the factory with
the GM functioning similar to the Managing Director and the Addl. GMs as Directors.

The ULMC sets targets for all the sectors for the Key Result Areas and meets
at least twice in a month to take stock of the performance by the various sectors and
the nit as a whole at the apex level, lay down policy parameters, issue guidelines,
discuss and sort out inter-sectoral problems and direct & monitor performance of the
factory as a whole.

In the Cost-Centre type of approach, each Cost Centre is given a specific

yearly budget allotment, physical/financial targets and management indices and
each Head of the Cost Centre has been made responsible for living within the means
and ensuring cost of production of items to be within the predetermined costs fixed in
advance. Each cost Centre has essentially to justify its existence with reference to
inputs and outputs and ensure return on the money invested by the Govt. and
provision of value for money to the customer.

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ULMC is also responsible for formulating the system of delegation of powers

to the Cost-Centre Heads and evolving formats for MIS which are required to be
rendered to the concerned Operating Divisions. ULMC is required to evolve a proper
mechanism of monitoring for carrying variance analysis on a monthly basis.

Simultaneously with the re-structuring of the organization at unit level,

preparation of Quasi-commercial Accounts has also started. In this connection,
ULMC is responsible to ensure preparation of Proforma Profit and Loss Account by
the Units and its monitoring.

Ordnance Factory Board has prescribed for ULMCs to monitor certain KEY
RESULT AREAS as under:

1. Physical Production Targets.

2. Production of items within the pre-determined costs.
3. Inventory holdings (RM, WIP, FS)
4. Declaration of surplus and disposal of scrap and conversion of them into
monitory resource speedily.
5. Realization of dues from indenters/customers other than Army, Navy and Air
Force.
6. Maintenance Management.
7. Quality Management by way of planned reduction/removal of
defective/rejection rates.
8. Regulation of manpower utilization by review of piece-work rates and over
time working.
9. Project monitoring for compliance to time and cost frames.

The underlying theme behind the re-structuring exercise is to being about a

structural change in the functioning of the OFs with the accent on with the accent on

1. Sect oral division of the factories and thereby establishing centres of

Accountability
2. Total responsibility and accountability of the Head of the Sector to the
Management Committee of the Factory.
3. Providing sufficient freedom to the individuals and also compelling them to
direct the esources available effectively towards achieving specific
measurable objectives both in financial terms as well as achievement of
various indices.
4. Maximising capacity/resource utilization within the shortest possible time by
resorting to diversification, civil trade and export.

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CAG AUDIT & INTERNAL AUDIT

Ordnance Factories Organization is a department of the Government of India.

Therefore it comes under the purview of Statutory Audit as laid down in the
Constitution. The audit is carried out by the Comptroller & Auditor General of India
as per the laid down rules and norms. Since the officers of the CAG organization do
not carry out 100% check of all the documents and carry out only a test check on
different items of expenditure, it is also called ‘Test Audit’.

Apart from this there is a second level of audit which is carried out by the
Internal Audit. Organization working under the Controller of Accounts (Fys). The
purpose of this audit, which is friendly in nature, is to point out deficiencies in
maintaining documents so that prompt corrective actions could be taken.

STATUTORY AUDIT

The Comptroller & Auditor General of India is a constitutional functionary. He

is appointed under Art. 148 of the constitution by the President of India. The
Parliament under Art. 149 of the Constitution has prescribed his duties and powers in
a comprehensive manner enacting a legislation known as the Comptroller & Auditor
General’s (Duties, Powers and Conditions of Service) Act, 1971. Under Art. 151(1)
of the Constitution, Report of the C&AG relating to the Accounts of Union is
submitted to the President who causes them to be laid before each house of the
Parliament (For States: Governor: Art 151(2) : Legislature).

DUTIES OF C & AG

Compilation of Accounts of the Union and each of the State & UTs is done
under Section 10 of the Comptroller & Auditor General’s (Duties, Powers and
Conditions of Services) Act, 1971 from the initial and subsidiary accounts rendered
by the treasuries. Defence departments are exempted from his and from 1976,
some other Ministries have also been exempted.

General provisions relating to Audit of Expenditure is given in Section 13,16 &

17 of the Act of Expenditure is comprehensive which includes:

(a) Audit against provision of funds.

(b) Regularity Audit – whether expenditure conforms to the authority who
governs it.
(c) Proprietary Audit – looking beyond formality of the expenditure to the
wisdom, faithfulness and economy which an executive has to
experience.
(d) Efficiency – cum – performance Audit - appraisal as to what extent the
social and economic objectives sought to be achieved have been

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achieved and at what cost. It is also examined as to how far the agency
or the department is adequately discharging its financial responsibilities
and ascertaining whether the schemes are being executed and their
operations conducted economically.

POWERS OF C & AG
CAG is authorized u/s 18 of the Act to:
(a) Inspect any office of Accounts under the control of Union or State,
(b) Require the production of any document which deals with ofr forms the basis
or otherwise relevant to the transactions to which his duties in respect of audit
extends,
(c) Put such questions or make such observations and call for such information
as he may require for the preparation of any account or report.

CAG is also authorized u/s 21 of the Act to delegate any power exercisable by him
under the provisions of the Act to any officer of his department by a general or
special order.

RESPONSIBILITY OF HELD OF OFFICE/DEPARTMENT

Sbu-section 2 of section 18 enjoins on the person in-charge of any office or

department of offer all facilities for such inspection and comply with the requests for
information in as complete a form as possible with all reasonable expedition.

ORDNANCE FACTORIES AUDIT ORGANIZATION

The Indian Audit and Accounts department functions under the CAG of India.
It has various wings and branches to conduct audit. The audit of the Ordnance
Factories has been put under the Principal Director of Audit (OFs) at Calcutta under
whom there are Regional Heads of the rank of Director/Dy Dir of Audit at Calcutta,
Kanpur, Jabalpur, Kirkee & Avadi. The Jabalpur office has also got a sub office at
Ambajhari.

PROCEDURE OF AUDIT

Local Test Audit Parties (LTAP) visit various factories and conduct Test Audit
of the initial accounts (Material, Costing, Labour, Cash, Funds & Misc. A/cs). And
annual accounts. In some of the large factories, LTAPs also remain permanently
stationed. Observation Letters (OLs) are issued to the Management and Accounts
during the course of audit. OLs are to be replied within 3 days to LTAP. OLs are
discussed at the end of each Audit Cycle, which are pre-declared as per programme
of audit and settled on the basis of replies from the Factory Management and
Accounts by the Audit Officer.

Unsettled observations are pursued at the Unit level through Local Test Audit
Reports (LTAR). LTAR items are again replied, discussed in the similar fashion but
are settled only by the Regional Director of Audit.

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The higher level of observations which lead to compilation of the Audit Report
of CAG include cases of Waste, Losses and Extravagant & Nugatory expenditure
are initiated by RDsA on OFB. The first level of such observation in the Factual
Statement of Case (FSC). This first level of such observations is the Factual
Statement of Case (FSC). This is replied by F/PAC Section of OFB and examined by
the PDA (OFs), Calcutta. The next level is Draft Para (between PDA & OFB) which
gets condensed and converted into a Revised Draft Para. A detailed reply on this
along with ‘Present Status’and ‘Remedial/Corrective Action’taken is submitted by M
o D.

AUDIT REPORT

Matters of outstanding importance arising out of audit are reported through

the Report of C&AG of India (DS) as AUDIT PARA. As mentioned above these
cases are initiated by the Regional Offices and finalised by the Principal Director of
Audit taking into account the replies of the factories, OFB and the Ministry. The
Audit Report is submitted by the CAG to the President who causes it to be laid
before each house of the Parliament.

This report is examined and considered by the Parliamentary Committee of

Public Account (PAC) which functions under the Rules of Procedure and Conduct of
Business of Parliament. Secretaries to the Govt of India and Heads of the
department are also examined and called for oral hearing. PAC makes their
recommendations in the form of a Report which is sent to the Govt. for taking
necessary action on the recommendations. In pursuance of the same, Govt, sends
Action Taken Notes(ATN) to PAC. Adequacy of action taken by the Govt. are again
examined by the PAC. The case is finally closed when PAC is satisfied the normalcy
has been restored in all respect as per Govt. regulations.

INTERNAL AUDIT

Prior to 1.4.79, there was no separate identity for Internal Audit. The then
CDA (Fys) organization was entrusted with the responsibility of providing Accounting
and Internal Audit cover to Ordnance Factories. Since 1.4.79 separate identity of
Internal Audit came existence and a Cell headed by the Chief Internal Auditor (Fys)
was formed at OFB level and Internal Audit Officers (Fys) were posted on zonal
basis. These IAO(Fys) were provided with different Audit Partied headed by
Assistant Accounts Officers. CIA(Fys) was reporting to Member/Finance.

These parties were normally carrying out Audit on quarterly basis except
Cash Audit which is done on half yearly basis. Cash Audit was he sole responsibility
of the IAO (Fys) himself. The objections raised during the quarterly audits by
Internal Audit were replied by the sections concerned to the Cell for settlement. In
case some objections was not settled at Factory level, the same was referred to OFB
for sorting out the issue at their level with the CIA (Fys).

OFB vide order No. 27 (BS) dated 17-8-79 specified 9 different functions to be
carried out by Internal Audit Cells. These were:-

a) Checking of pay entitlement of Industrial Employees.

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b) Checking of pricing of Piece-work Cards

c) Checking of rates/pricing of Demand/Return Notes & Estimates
d) Audit of Service books of Industrial Employees
e) Local Audit of stores and cash inspection
f) Audit of Hospital. MT & other miscellaneous items
g) Percentage audit of provisioning, ordering and payment of supply
orders
h) General scrutiny of cost accounting function
i) General Scrutiny of issues of labour/maerial against warrants etc.

The Internal Audit Function as highlighted in OFB order cited above were not
fully taken up by CIA because of limited staff that was placed at his disposal. As a
result the functions listed at (g) to (i) above are not being discharged by him.

Reorganization of Internal Audit Function.

Keeping in view, the separation of OFB budget-with the Army and posting of
Controller of Finance and Accounts in a number of factories, it was felt that the entire
role of internal audit needs a fresh look so that management has the benefit of
financial advice in the spirit in which it is expected from them. It was felt that these C
of F & A in the factories should be entrusted them. It was felt that these C of F & A
in the factories should be entrusted with responsibility of the audit in additional in
their functions of F&A. It was though that, Internal Audit function should include not
only the functions presently being discharged by CIA but also Cost Audit as well as
System Audit functions. A system must be devised, in such a way that a quarterly
report of GMs is rendered highlighting the financial position of the factory in areas
like Inventory management, Cost Efficiency, Outstanding Dues, Unlinked Spot-
payments, Outstanding Warrants etc.

Keeping in view the above points DDP&S vide letter No. 4 (1)/94/D (B&C)
dated 7.11.94 issued instructions for reorganization of Internal Audit function in
Ordnance Factories. Vide para 2of the above letter the IA cells maintained their
separate identity and it was considered that their strength would suitably be
augmented from the overall strength of the Defence Account Department rendered
surplus due to computerization in OFs and Accounts Offices. With the issue of this
letter, revised functions to be discharged by IA cells goes as follows:

(1) Checking of pay entitlement of Industrial, Non-industrial, Non-gazetted and

Gazetted employees.
(2) Checking of pricing of piece of work cards.
(3) Checking of rates/pricing of demand/return note and correctness of average
ledger rates adopted.
(4) Audit of service books of IEs, NIEs, NGOs and GOs.
(5) Local Audit of cash account of Factory and Accounts Office.
(6) Local Audit of Store Accounts.
(7) Review of entire provisioning cycle right from need determination till final
usage.
(8) Scrutiny of Cost Accounting functions.
(9) Scrutiny of cost estimates which form basis for pricing.

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(10) Checking of drawl of material and labour usage against warrants based on
related estimates.
(11) Review of abnormal rejection cases including disposal thereof.
(12) Aspects specially entrusted by core groups like systems audit and
management audit.
(13) Audit of cost card and closure thereof.
(14) Any other miscellaneous item.

The above letter also instructs that CofA/Jt. CofA would render a quarterly
report to the GMs highlighting the state of financial affairs in the respective factories.
Taking due note of the comments received from the GMs, CFA will render quarterly
report at the end of March, June, September and December to the CCofA (Fys).
These reports would be endered by the end of the month following the close of the
quarter. CCFA(fys) would consolidate these reports and ender the consolidated
report to Member (Finance), OFB to be placed before OFB by the end of second
month following the close of the quarter. For this purpose, CCA (Fys) will be
assisted by a Jt. Controller (Internal Audit) along with nucleus staff.

It was also decided that OFB will constitute a core group under Member
(Finance) with representatives of Operating Divisions and Material Management
Division to impart both direction and thrust to the internal audit work. This core
group will give specific directions to CFA/Jt. CFA (Fys) to take up any specific
assignment as deemed essential. Though change in the organization structure of
the Internal Audit Cells have come into force, they continue to perform the initial six
functions on quarterly basis.

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FACTORY ACCOUNTING

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OVERALL OF FINANCIAL MANAGEMENT

Financial Management is primarily concerned with the acquisition and use of

funds by a business firm. The important considerations in raising the funds are the
size of the firm, its rate of growth & growth potential, composition of the firm’s assets
and the composition of the firm’s financing. The task of the Financial Manager,
therefore, becomes Financial Analysis and Monitoring, Financing and Investing.

Ordnance Factories are working in the governmental setup which meet their
full financial requirements from the Union Budget. Therefore the task of financing i.e.
identification of sources of finance and raising of funds gets limited to carrying out
only the budgetary exercises. Since the funds are available in hand all the time and
there is no surplus in commercial terms, the task of “investing” carried out by the
financial mangers is also absent. Management of current assets, which significantly
occupies the time of a financial manager, is also absent in our organization.

Analysis of financial condition and exercising financial control thus become

the main task of the Financial Management in the organization. Analysis of financial
condition is exercise through a series of Cost Accounting steps which culminate into
rendering of the Consolidated Annual Accounts of the organization. The Cost
Accounting system in the organization is quite elaborate.

The financial mangers are treated as specialists and placed in two categories.
The ‘Treasurer’ who is concerned with financing and the ‘Controller’ who is
concerned with accounting. Normally there are two distinct Heads for each of these
functions in any large commercial unit, but in the Ordinance Factories, the
responsibility of discharging these functions at the unit level has been vested in one
single person at all ranks.

The reader knows about the organization structure of the Finance & Accounts
department of the Ordnance Factories, which can be briefly recapitulated. At the
corporate level, we have a Member/Finance who is responsible for Finance,
Accounts and Internal Audit function. The Controller of Finance functions directly
under him on the Finance side. On the Accounting side, we have the Chief Controller
of Accounts who functionally comes under Member / Finance but administratively
comes under DGDA.

At the zonal and factory level, we have Controllers of Finance & Accounts
(Fys) who are responsible for Finance, Accounts and Internal Audit of a Group of
OFs. There is a hierarchy of Accounts personnel below him who perform all such
functions in common mode.

FINANCIAL ACCOUNTING

The amount receive through budgetary grants are spent for carrying out
production and the activities incidental to production. The stores produced are issued
to various customers who in turn pay for it and generate receipts to the organization.
All these transactions are recorded in the following categories :

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1. EXPENDITURE

REVENUE A. Manufacture (Pay & Allowances)

B. Stores Purchase
C. Civil Works
D. Movement of Personnel (TA/DA) & Stores
E. Miscellaneous Expense (I & M)
F. R & D Expenses

CAPITAL A. Renewal & Replacement of Plant & Machinery

B. New Capital
(Expansion, Diversification & New Project)
C. Capital Works

2. RECEIPTS/RECOVERIES

ISSUES A. To Services
B. To Other Defence Deptts.
C. IFD Issues

RECOVERIES
A. From CT/MHA/NMD
B. Sale of Surplus/Obsolete Stores
C. Sale of Waster/Scrap
D. Transfer from Stock Pile
E. Miscellaneous Receipts

COST ACCOUNTING

Since the Ordnance Factories are semi-commercial organization (profit is not

motive), it is necessary that the organization must have a Cost Accounting System in
order to capture the cost of products accurately. The department does have a very
old, elaborate and well laid down Cost Accounting System which has the following
objectives:

(i) Exercise control over expenditure incurred in the factory for production and

(ii) Ascertain the cost of manufacture of each article produced in the factory.

Analysis of Expenditure and Elements of Cost

The expenditure incurred in manufacture is classified under three main

categories viz. (a) Wages paid to Industrial Workers (b) Materials and (c) Other
Expenses.

In relation to product cost, the expenditure falling under the above three
categories is further classified as direct and indirect expenditure. For the purpose of
costing, wages are analysed into direct labour costs and indirect labour cost,
material into direct material costs and indirect material cost. Other expenses, the
bulk of which represents salaries paid to supervisory and administrative personnel,

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generally fall under the category of indirect expenditure. Indirect labour, indirect
material and other indirect expenses, together constitute the overhead expenditure.
While the direct labour expenditure and direct material expenditure incurred in the
manufacture of each product can be measured accurately and charged direct to
each job, over head expenditure representing the cost of providing various
production and administrative services incidental to production can not be charged
directly to each job. Such expenditure being common to all production activity is
apportioned to the cost of each job as equitably as possible, following certain will
well-recognized accounting principles.

By means of the above type of analysis, the cost of each article manufactured
in the Factory is compiled under the three elements viz.

? Direct Labour
? Direct Material
? Overheads

Syllabus of Works Order

Each item of outturn work done in the factory is given a distinctive work order
number consisting of 9 digits against which the expenditure falling under above three
elements are compiled. The code is divided into 3 parts. The first two digits are used
to indicate classification of work by indenters. For example, if work is being
performed for the Army, Code 90 is used in the first two digits. If the work is for
another factory against IFD, Code 70 is used. The next 5 digits stand for the
description of the item. The last two digits are sub-numbers generally used to
indicate the shop or the section where the expenditure / cost originates. These
outturn work orders are allotted by each factory separately and compiled in a book
called “Syllabus of Work Order Part – II”.

Syllabus of W.O. Part – I gives an exhaustive list of all the work orders which
are common to all the factories. These work orders relating to other item of work and
indirect expenditure also consists of 9 digits. Some of the common work order series
are 01 and 02 series relating to fixed and variable overheads respectively, Process
materials (03), Capital Services (04), Repair & conversion (05), Cost of Packing (06)
and Conversion of Timber (08).

The details in respect of all the work orders regarding structure, description
and application is available in the booklet “Syllabus of Work Orders” published by the
Principal Controller of Accounts, Calcutta on 24-9-9.

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LABOUR ACCOUNTING

Classification of Labour Charges

Wages paid to industrial establishment only are treated as labour charges.

Labour charges which are incurred for converting raw materials into finished
products and which can be measured conveniently and accurately are classified as
direct labour charges. The rest are treated as indirect labour charges and included
as part of overhead charges.

The wages are paid to a workman according to his Attendance and the Work
Content. If the workman is being paid on the basis of his attendance, he is
categorized as a Day Worker and if he is being paid on the basis of attendance as
well as output, he is categorized as a Piece Worker. According to the nature of work
allotted to him, he is designated as a ‘Direct Worker’if engaged on production or an
‘Indirect Worker’ if engaged on support activities. This classification is helpful in
calculating labour payments.

Recording Daily Attendance of Industrial Workers

Each worker is allotted a ticket number. Metal discs or the Tokens showing
the ticket numbers are hung on ticket boards placed near the factory gate and in the
shop concerned. The gate is opened half an hour before the time fixed for
commencement of work and closed punctually at fixed time. During this interval,
workers get in, remove their tickets from the boards under the supervision of the gate
office and deposit them on the ticket boards placed in their respective shops. Soon
after the Factory Gate is closed, the Time Office prepares a list for showing the token
numbers not removed from the ticket boards the purpose of mustering for each shop.
Late comers are admitted upto one hour, at intervals of fifteen minutes. The tickets
collected by the late comers from the gate office are deposited in separate boxes at
the gate, specially provided for the purpose, to record their particular hour a late
comer is admitted.

The workers go to their respective sections and hang their token in the
Section Ticket Board. Soon after commencement of the work, the sections examine
the tickets deposited by the workers on the section boards and also take attendance
by personal counting. Thereafter, a Casualty Repost signed by the Head of the
Section (JWM/Foreman) of the Section is sent to the Time Office.

When a worker is granted short leave, a leave pass is issued. When workers
are employed on overtime, Overtime Note signed by the authorized officers (D.O.)
are issued. The daily attendance of each worker is marked by the Time Office in the
Muster Rolls with reference to the tickets not removed, tickets deposited in the late
attendance boxes, short leave passes, overtime memos and leave orders notifying
grant of leave with or without pay, duly reconciling with the Casually Report.

The Muster Roll is sent to the Accounts Office, which with due verification of
the entries, becomes the authentic document for calculating the various elements of
wages for the workers.

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Labour Accounting & Factory Accounting

Methods of Remuneration of Industrial Workers

Each I.E. is appointed on a monthly rate of Pay in a progressive scale. The

scales vary based on trades and grades. As mentioned earlier, the workers are paid
under two methods viz.

(1) Payment on the basis of attendance (called Day Work).

(2) Payment by piece – work rates (called Piece Work).

The total wages paid constitute the following elements :

? DUTY PAY (Time Wages / Nominal Time wages)

? Other elements of Pay

Over Time
Leave Pay
Holiday Pay
Injury Pay
Idle Time

? Allowances
DA/HRA/CCA/Transport/CEA
OT Bonus
Night Shift Bonus
Night Duty Allowance
Incentive Bonus

? Piece – work Profit

Working Hours : For the purpose of calculation of duty pay and overtime,
standard working hours are taken. Normal Working is reckoned as 44.75 hours/week
with 8 hours a day from Monday to Friday and 4.35 hrs on a Saturday. Workmen are
eligible for 3.25 hrs payment for work not done on Saturday under departmental
rules which is known as Saturday Bonus. Sunday is the weekly holiday for which no
separate payment is admissible. The workers become eligible for Overtime payment
for working beyond normal hours.

Day Workers: For day workers the duty pay or the basic wages are calculated
for each month on the basis of actual attendance for the month according to the
following formula.

P * A / (N – S – H)

where various letters represent the

P - Monthly rate of pay of the worker,
A - Number of days present or attendance,
N - Number of days in a calendar month,
S - Number of Sundays in month and
H - Number of paid holidays, if any in the month.

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(No separate payment becomes due in respect of paid holidays because the monthly
rate is reduced to the daily rate in the above formula taking the number of working
days into account.)

Deduction for absence for part of a day are made at 1/8th of a days pay for
each hour of absence. The minimum unit of time for which the deduction are made is
15 minutes or ¼ hr.

Piece Worker: For piece – workers the duty pay is calculated for each month is

P * A / (N – S)

where the symbols have the same meaning as that of the day workers. The piece –
workers get separate payment in respect of paid holidays because the monthly rate
is reduced to the daily rate in the above formula taking the number of working days
and holidays into account.

Overtime: Industrial employees are entitled to additional pay for work done
beyond the normal working hours. There are two sets of rules applicable for overtime
payment viz. (i) Departmental rules (ii) Factories Act.

(I) OVER TIME PAYMENTS UNDER DEPARTMENTAL RULES (DOT)

For work beyond normal working hours and upto 9 hrs. a day or beyond 44.75
hrs upto 48 hrs in a week, overtime is paid under departmental rules.

In the case of Day Workers, the overtime is paid at the rate of Basic Pay +
Dearness Allowances + City Compensatory Allowance + Interim Relief + Personal
Pay + Special Pay + Pension to the extent as applicable (as taken into account for
fixation of pay), divided by 200 for each hour of overtime worked. The hourly rate is
the same for the work done both in Day & Night Shift.

In the case of Piece Workers no separate payment for O.T. under

departmental rule worked in day shift is made. They are entitled to piece-work
earnings only. For work in night shirt, an extra half an hour’s pay is admitted for each
hour of overtime worked under departmental rules. The hourly rate is calculated on
the basis of Basic Pay + Dearness Allowances + City Compensatory Allowance
divided by 200 which is known as Night Shift Bonus.

For cost accounting purposes, Pay/200 portion of the overtime is charged to

the concerned job and Allowance/200 portion is charged to indirect labour (W.O.
02/00004/00).

(II) OVER TIME PAYMENTS UNDER FACTORIES ACT

For work done beyond 9 hrs. a day or 48 hrs a week, payment is admissible
at twice the rate of pay plus all allowances. The extra payment over and above the
ordinary rate is called Over Time Bonus. The payments are same for Day Shift or
Night Shift. For cost accounting purposes, the payments made to Day Workers as

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Pay/200 per hour is charged to the concerned job and Pay + twice the allowances /
200 per hour is charged to indirect labour (OTB: W.O. 02/00004/00).

For piece workers, an additional incentive element equivalent to one fourth of

Pay is given during overtime worked under Factories Act and the Basic Pay is taken
as Pay + 25% of Pay (Incentive element) for calculating the Overtime Bonus.

For cost accounting purposes, the payments made to Piece Workers

calculated as Pay/200 per hour is charged to the concerned job which comes under
Piece – work earnings. (Here ‘Pay’is taken as Minimum of the Pay Scale and the
difference between actual Basic Pay and the Minimum of Pay Scale is paid
separately as ‘Pay Difference’). The portion Pay + Pay/4 + twice the allowances/200
per hour is charged to indirect labour (OTB: W.O. 02/00004/00). In this case the Pay
is the actual Basic Pay.

Holiday Pay: Pay in respect of each holiday, is separately calculated and paid
to piece workers according to the formula P/(N-S) for each paid holiday where the
symbols have their usual meaning.

Leave Pay and Injury Pay: Leave pay and Injury Pay for the Day – worker is
calculated at the daily rate of P/(N-S-H) and for Piece – worker @ P/(N-S).

Payment for Idle Time: Industrial workers are paid for the time they have actually
worked. Payments for idle time due to following causes as however admissible to the
workmen at the ordinary time rate of pay:

(1) High atmospheric humidity hindering certain operations in explosive factories

or unfavorable weather conditions hindering operations in optical works
depending on sunlight.
(2) Failure of power supply.
(3) Breakdown of plant and machinery.
(4) Temporary shortage of materials.
(5) Temporary shortage of work in highly specialized sections.

Idle time payments are treated as part of the overhead expenses and charged
to indirect work order No. 01/00011/00. General Managers are empowered for
payment of idle time up to 6 days only beyond that it is to be sanctioned by OFB.
Government sanction required for causes other than above.

Night Duty Allowance: Workers are entitled to get Night Duty Allowance @ 10
mins for each hour of work done between 2200 hrs to 0600 hrs in the night shift. The
prescribed hourly rate for NDA is (Pay + DA + CCA)/200. The amount paid as NDA
is booked as indirect labour in Work Order No. 02/00002/00.

Piece Work Profit : The piece – work system being followed in the department
serves as an incentive scheme. For all recurring items of production, we have seen
that appropriate piece – work rates in terms of hours are fixed b the Factory
Management. We also know that a worker is paid for the number of articles
completed by him and certified by the Inspecting Authority as “accepted”. This
implies that a worker who is engaged on piece – work system will earn Total Time

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(T) = (Q)*(t) where (Q) is the Quantity Produced and (t) is the allowed time per piece.
If a worker is present for ‘A’hours during a month and he earns ‘T’hours during that
month, his piece work profit expressed in percentage terms (PWP%) would be (T-
A)*100/A. Under normal circumstances, this would be 25% which is the built in
incentive element in the estimates. If a worker is more efficient, he can earn higher
profit, which shall be limited to the extent of 75%. The actual piece-work profit which
will be paid to the worker in monetary terms will be equal to his Nominal Time Wages
(NTW) *PWP%/100.

INDIVIDUAL PIECE WORKER AND GANG PIECE WORKER

Piece worker are divided into two categories viz, Individual Piece Workers and
Gang Piece Workers. When it is a single worker employed on piece-work system, he
is called an Individual Piece Worker. The nominal time wages of an individual is
equal to the Time Wages calculated at the rate of (I/(N-S))* No. of days present + OT
Pay (I/200 * OT Hrs) where I stands for minimum of pay scale of the worker.

When a number or piece workers are employed collectively on various repeat

items of production, it is known as a piece work gang. The collective piece work
earnings of each gang are calculated for the month with reference the number of
articles completed by the gang and the allowed time rate applicable to each item of
production. The total earning of the gang is divided by the total attendance of the
gang and unique PWP% is calculated which is applicable to all the members of the
gang. The piece – work profit for the individual members of the gang is calculated
separately

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reckoning this PWP% as if he is an individual piece-worker.

Piece work earning of each member =

(Total piece work earnings of the gang in hours / Total attendance of the
gang) * attendance of each member

Incentive Bonus to Essential Maintenance Workers :

An incentive bonus is paid to essential skilled and semi skilled maintenance

workers employed in the maintenance of plant and services within the factory
(unskilled workers excluded). The bonus that is linked with the profit earned by the
piece workers is paid at the following rates –

(a) For essential maintenance workers attached to production section at 50% of the
piece work profit earned in the month by all the piece workers, both individual and
gang workers of the production section.

(b) For essential maintenance workers not attached to any production section at 50%
of the average piece work profit earned in the month by all the piece workers both
individual and gang piece workers in the factory.

The percentage as calculated above are applied to the time wages of the essential
maintenance workers to arrive at the amount of bonus admissible. The amount paid
as incentive bonus is accounted for in the Work Order 02/00003/00.

Guarantee Pay : The IEs engaged on piece-work system are supposed to earn their
time wages and earn some profit because of the built-in incentive element in the
estimates. However, if a worker is not able to do that, he is supported by an element
known as Guarantee Pay which is equal to his (Time Wages + Incremental Pay + OT
Pay) less (PW Earnings + OT Bonus). This element of pay is admissible only for two
consecutive months during which period, it would be ascertained whether it is due to
fault of the workman or due to some inherent problems in fixation of the piece-work
rates. Based on the outcome of the investigation, suitable corrective action is taken.

Allocation of Allowances Paid to IEs :

Besides Pay, dearness allowance, house rent and city compensatory

allowances are also admissible to IEs as sanctioned by Govt. from time to time.
These allowances are treated as part of the basic labour costs and allocated to jobs
on the basis of a predetermined percentage calculated at the beginning of each year
in the following manner.

(i) The actual amounts paid as basic wages and as allowances during the
preceding year are separately ascertained from the records of A.O. in respect of
each section of the factory.

(ii) The above figure for basic wages are modified taking into account any
anticipated changes in the load of each section and consequent change in number of

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Labour Accounting & Factory Accounting

men and their composition. Similarly the figures for allowances are adjusted to
changes in the rates of allowances the have taken place.

(iii) Based on the figures modified in (ii) above a percentage of the allowances to
the basic wages is worked out for each section. This percentage is called the
constant D.A. percentage.

Total Expected Allowances to be paid to all the

Workmen of the Section in the Year
Constant DA % = X 100
Total Expected PW/DW Earnings in the Year.

These percentages are communicated to the EDP section of A.O. in the

beginning of each year for levy and inclusion in the labour cost of various work
orders and warrants while preparing the monthly labour abstracts. The difference
between and actual allowances paid for a month in each section and amount
allocated to various job at predetermined rates is included in variable overhead
expenses pertaining to that section.

Collection of Labour Charges

The labour charges are collected by the Accounts Office for cost accounting
purposes in two manners – by Job (direct Work Order) and by Expense (Indirect
Work Order). The primary cost account documents used for the collection of the
labour expenditure are :

a. Piece Work Card

b. Day Work Card
c. Allocation Sheets
d. Labour Punching Media

Piece Work Cards : As production is completed and certified as accepted, piece

work cards are prepared by the shops claimimg payments according to the rates
authorized for each article. These piece works cards show the 1) ticket number of
the piece worker or the piece work gang number who performed the job, (2) work
order and warrant number (3) description of the work performed (4) quantity
accepted (5) the time rate at which payment is due. These piece work cards are
received in the Accounts Office and checked with the Accounts Copy of manufacture
warrant and that the rates claimed are correct. For making payments to piece
workers all the piece work cards relating to the piece worker or a piece work gang for
the month are summarized and the total output hours due to each piece worker/gang
determined. Piece-work profit percentage for each individual/gang is calculated as
discussed earlier and payments made accordingly.

Day Work Cards : For day workers who are paid by attendance, the shops prepare
Day Work Cards showing the tickets number of the worker, the work order and
warrant number and the time spend on the job. Normally one card is prepared for
each week showing the various jobs and time spent on the job for a worker.

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Allocation Sheet : For workers, who are continuously engaged on the same job
throughout the month, the shops prepare a monthly allocation sheet, instead of Day
Work Cards. Such allocation sheets generally relate to indirect work orders. Here
again the Work Order No. / Ticket Nos. / Description of the Job and Time Spend on
the Job are mentioned.

The Day work cards and the allocation sheets received from the shops for the
month are priced by the Accounts Office by apportioning the total time wages earned
by each worker, between the various jobs performed by him according to the time
spent on each job.

Labour Punching Media : For booking payments pertaining to leave pay, holiday
pay, overtime bonus, dearness and other allowances, in cost accounts, the Accounts
Office prepares labour punching media showing the section code number, the work
order number and total amount. All these punching media relate to indirect work
orders only.

Preparation of Labour Abstract

All the piece work cards, day work cards, allocation sheets and the labour
punching media pertaining to a month are sent to the concerned EDP section for the
preparation of Labour Abstract. The Labour Abstract is prepared by the Accounts
Office section wise, showing each work order and the amount of the labour booked
against each. The labour charges shown in the labour abstract are inclusive of
allowances. Which are levied at the constant DA percentage. In certain EDP
installation, the variable and the fixed overheads levied are also shown in the labour
abstract. A top sheet or the summary sheet is also prepared by the EDP section
showing for each section the total labour charges booked against each work order
series and also the grand total for the section (Sec / Work Order No. / Total Labour
Charged).

In cases where combined labour and overhead abstract is prepared, the

portion relating to direct warrants are cut and posted on relevant cost cards
otherwise it is directly used for posting on cost cards.

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MATERIAL ACCOUNTING

Direct and Indirect Materials

For the purpose of ascertaining the cost of various articles produced in the
factory, materials utilized in production are classified as direct materials and indirect
materials. Material, which forms part of the finished product, is defined as direct
material. Materials drawn for general shop use, maintenance and repair services etc.
are treated as indirect material and charged as part of the overhead charges.

Direct materials of small value, which are not critical from the production point
of view and the total value of which does not exceed the maximum of half percent of
the value of toal are treated as indirect material. Items of indirect material which are
only incidental to production and materials required for common operations like
sealing, varnishing, binding, soldering etc. are also treated as “Indirect Material”.

Materials required for production are obtained in advance of the period of

utilization and working stocks are held at all times so that production may continue
without interruption. Provision of material is done on the basis of production
programme and the position of stock/dues of materials following the usual
provisioning procedure.

Receipt and Accounting of Stores

All the items of stores received in the factory are inspected and a Material
Inward Slip(MIS) is prepared in each case on the basis of Firm’s Challan/RR and
Inward Gate Pass(IGP), which serves the purpose of an inspection certificate-cum-
receipt voucher for the stores received. The store holder, on receipts of the stores
supported by the M.I.Slip duly endorsed with the inspection certificate, allots a
Receipts Voucher number to the M.I.Slip and endorses a certificate of the receipt of
the stores on the M.I.Slip. The M.I.Slip assumes the status of a Receipt Voucher, the
details of which once recorded on the Bin Card completes the process of taking an
item on stock charge.

The Store Holder maintains a Bin Card for each item of store wherein every
receipts and issue is entered and after each traction, balance is shown. Thus a
continuous quantitative account is maintained by the Factory for all materials.

Each material held on stock charge is indicated by a code number consisting

of 10 digits. The material code number allotted to each item is entered in the bin
card. These code numbers are invariably quoted on all the accounting documents for
materials.

In fact, two sets of accounting records are maintained for stores viz., Bin
Cards and Priced Store Ledgers. The first is a Bin Card while the second is a Priced
Stores Ledger(PSL) which is maintained by Accounts Office. PSL is a continuous
quantitative as well as monetary record of receipts and issue of stores in the factory
showing balance after each transaction. Te PSL maintains a separate folio for each
item of store on which the material code number allotted to each item of store is also
indicated.

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Pricing of Receipt Vouchers

Receipts are priced at the actual cost of purchase with reference to the rate
quoted on AT/Supply Order/Contract/Invoices etc. including incidental charges viz.
Sales Tax, Excise Duty etc. but excluding railway freight/transportation charges, if
any.

In the case of imported stores, receipt vouchers are priced with reference to
invoices including Customs Duty. Sea freight, railway freight/transportation charges
are, however, booked to overhead expenses of the factory.

Components and other manufactured material supplied by other factories

against inter-factory demands are accounted for as materials in the store ledges by
the receiving factory. The receipts vouchers are priced at the actual cost of
manufacture as intimated by the Accounts Officer of the supplying factory plus the
incidental charges on freight.

Components, Packing Boxes manufactured in the factory are also transferred

to stock and accounted for as receipts in the store ledgers. Such receipts are priced
at the actual cost of manufacture.

Scraps arising in production and surplus materials if any are returned by

shops to stores on return notes. These are accounted for as receipts in the store
ledger and priced at the latest ledger rates for the items.

If at the time of pricing the receipts vouchers, the actual charges are not
available, the vouchers are priced at Provisional rates and adjustment for the
difference between the provisional value and the actual value of the vouchers are
carried out through adjustment receipt voucher when the actuals are known.

Issue Accounting and Control

Material are issued by the Stores Department to shops only against

authorized requisitions. Such requisitions are called Demand Notes. (If any material
which has been issued against a demand note happens to be is excess of shop’s
requirement, the same is returned to the Stores department through a Return Note
which has the similar entries as that of a Demand Note and treated as negative of
Demand Note).

For direct materials required for production, the shops prepare the demand
notes showing the work order and warrant for which the material is required, the
ledger folio and description of the material and the quantity demanded. These
demand notes, together with the shop copy of the material warrant, are presented to
the stores department. The stores section allots serial numbers to the demand notes
from a running series and the quantity issued is noted in the material warrant against
each item.

In regard to petty casual work or minor internal factory services or repairs and
maintenance or for departmental store orders, the planning departments releases

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supplementary work order drafts (SWOD). The SWOD serves the combined purpose
of an estimate and the manufacture/material warrant. For materials required for
general shop use, maintenance etc. the planning department (R&E) issue “open
warrant” on quarterly basis which constitute the authority for the shops to draw
materials on a required basis. In both the above cases, the same procedure holds
good for the drawl of materials as that of direct material since the warrant is
available.

Materials issued to outside consignees are supported by Issue Voucher

quoting reference to the demand against which such issues are made.

Stock Verification

The physical balance of all stores held by the stores departments are verified
by actual count/wrighment to ensure that stock as per accounting records exist. This
verification is done by the Stock Verification staff who is attached to each factory but
function direct under the administrative control of the OFB Headquarters. They carry
out a continuous stock verification selecting a few items each day so that each item
is physically verified at least once during a year. Bin card as well as ground balances
are recorded in the stock taking (S.T.) sheets. A copy of S.T. sheet is sent to A.O. for
recording PSL (Priced Stock Ledgers) balances on that particular date.

If a discrepancy occurs between bin card balance and the actual stock or
between bin card balance and PSL balance, a Discrepancy (Surplus) or Discrepancy
(Deficiency) Voucher, as the case may be, is prepared and posted in the ledger with
a view to keeping the ledger balance always and at any time in agreement with the
physical ground balance. The discrepancy is subsequently investigated and settled.
If on final settlement, a surplus statement is necessary, the relevant surplus portion
of the discrepancy (surplus) voucher is completed by the factory and countersigned
by the Account Officer. If a loss statement is necessary, the loss statement portion of
the discrepancy (deficiency) voucher is completed and loss regularized under the
financial powers of the competent authority.

Pricing of Demand / Return Notes

The Demand and Return Notes are priced at the monthly average rate known as
Average Ledger Rate. The rate is calculated at the end of a month whenever there
are new receipt during a month which is valid for the following month. The monthly
average rate is arrived at by dividing the opening value balance + value of receipts
as per receipt vouchers during a month by the opening balance quantity + quantities
of receipts as per receipt vouchers during that month. Monthly average rates are
worked correct to two decimal places. (By adopting this method, the value balance
may not become “NIL”. Adjustment document is made out by Accounts Office so that
the value balance is “Nil”. )

The above system of calculation is applicable where the Priced Store Ledger
is maintained manually. This method has since been dispensed with by almost all
the Accounts Offices who have adopted computerized maintenance of PSL. In this
system, the Average Ledger Rate is updated instantaneously on receipt of fresh

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stock i.e. posting of the corresponding Receipt Voucher and the new moving
average is used immediately thereafter for pricing of new issues.

AVERAGE LEDGER RATE (ALR) : Computerised PSL

Qty Value Rate

Last Balance A X R1

Receipt Voucher B Y

New Balance A+B X+Y R2

R2 (New ALR) = (X + Y) / (A + B)

Material Abstract

The demand and return notes pertaining to a month, after they are priced and
posted in the Priced Store Ledger, and sent to the E.D.P. Section for preparing a
Material Abstract. The material abstract is a listing type of tabulation in which the
demand/return note-wise expenditure incurred against each work order and warrant
is shown. The summary i.e. the net total expenditure against each work
order/warrant is also shown which is posted in the cost cards pertaining to the
concerned warrant.

Ensuring correctness of Store Ledger posting

The store ledger is posted by the Accounts Office from receipt and issue
vouchers, demand and return notes on a day to day basis, from copies of these
vouchers received from the stores department. The ledger folios are maintained in
loose sheets and kept in binders with self-locking arrangement. The receipt
vouchers, issue vouchers, demand notes and return notes are arranged into
separate batches and the batch totals for quantity (numerical) and value are posted
in a control register. Thereafter the vouchers are posted in the ledgers. After all the
batches for a day are posted, the total obtained from the computer are compared
with the batch total recorded in the control register. Discrepancies, if any, are
reconciled by checking the postings from the back up sheet.

Priced Stores Account

Every month a “Priced Stores Account” is independently made out showing

the value of receipts and issues of stores during the month. Care is taken to ensure
that all primary documents viz., Receipt Vouchers, Issue Vouchers, Demand Notes
and Return Notes released during the month as per certificates furnished by the
Factory are accounted for in the “Priced Store Account”in the same month.

For this purpose, two Registers are maintained – one for ‘Receipt vouchers’
and the other for ‘Issue Vouchers’. The vouchers are entered in serial order and date
of receipt is noted against each voucher. The vouchers are priced and classified
according to sources of receipt/nature of issues. The values are noted against the
vouchers under the appropriate head/heads. Consolidated summary is made out
showing the total value of receipts, total value of issues and amount under each

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classified head. The total value of ‘Return Notes’ is shown in the ‘Register for
Receipt’ and that of ‘Demand Notes’ in the ‘Register for Issues’. The difference
between the total of Demand Notes and Return Notes should agree with the figure
as per “Material Abstract”.

From these summarises, Priced Store Account Schedules (PSA) for

“Receipts”and “Issues”are made.

The ‘Issue Schedule’ contains the value of issues during the month to
different factories, other parties and losses of stores due to various causes. In
addition, the value of Demand Notes is also shown. In the PSA for issues, a
summary is made out at the end showing.

a. Opening Balance of Stock plus Receipt during the month … ..

b. Less Total Issues during the month … …
c. Closing Balance of Stock as at the end of the month … ..

The total of ‘Receipts’and ‘Issues’must agree with the total recorded in the
control register. The total value of Demand Notes minus total value of Return Notes
must agree with the total of Material Abstract. Once every half year the value
balances in all the ledger folio are extracted by the Accounts office and their total
compared with the balance as per the store Accounts to ensure that the ledgers
have been correctly posted.

Comparison of the quantity balance in the ledger folio with the balance as per
Bin Card is done as on the date of Stock taking and the reconciled balance is noted
in the Stock Takling Sheet.

Stock-pile Items

Certain strategic stores, which are difficult to procure in case of failure of

normal supplies, and stockpiled. Such reserves of stores are financed from the
budget grant fro Capital Expenditure. These stores are accounted for in a separate
ledger called Capital Stores Ledger, as distinct from the regular store ledger and
separate bin cards are also maintained by the factory for these stockpile items. The
balance in the Capital store Ledger is shown as a separate item in the Capital assets
Account of the factory.

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OVERHEAD ACCOUNTING

Definition of Overheads

Overhead expenses may be defined as expenditure incurred for providing

various facilities and services, which are necessary, and incidental to production in
the Factory. Expenditure relating to such functions as Supervision, Security, Welfare,
Power and Water Services, Repair and Maintenance of Plant and Building, Care and
Custody of store etc., represent services common to all production. As such the
expenditure incurred on these heads cannot be charged directly to the cost of each
item of production in the factory and therefore, called indirect expenditure or
overhead.

All indirect labour charges, indirect material charges and such other expenses
like salaries paid to supervisory and administrative personnel, depreciation, etc.
together comprise the overheads. It is necessary to charge such expenditure,
ultimately, to each item of production in the Factory on a suitable basis to arrive at
the cost of production of the items.

Classification of Overheads into Fixed and Variable

To exercise control over indirect expenditure, it is essential to distinguish

items of expenditure, which vary sympathy with the volume of production in the
factory, from those, which tend to remain more or less constant. Overheads are
therefore classified under the two broad Categories “Variable Overheads” and “Fixed
Overheads”. Under each of these heads various expenses are further classified by
function, to facilitate control and for statistical purposes. Each such classified
expenses is denoted by a Work Order Number. ‘01’series of work orders represent
fixed overhead expenses. ‘02’series represent variable overhead expenses. In the
existing system, there are 54 work orders for fixed overhead expenses and 26 work
orders for variable overhead expenses (including two blank numbers). Such
classification being common to all the factories, a standard list of work order is
published in the syllabus of work order part I.

As explained earlier, the work orders relating to indirect expenditure also

consists of 9 digits. ‘0’in the fifth digit of the work order denotes ‘debit’and ‘1’credit.
‘1’at the third digit conveys that the expense has been kept our of production (KOP).
(The third digit of the work order, which is ‘0’ (zero is employed for conveying
information for control purposes in consultation with EDP Section.)

Some of the important heads of expenditure and their respective work orders,
both under Fixed and Variable overheads are listed below.

FIXED OVERHEAD – 01/XXXZZ/00

“ZZ”
Pay & allowances of
01 Clerical Staff
03 Orderlies
04 GOs & NGOs

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05 Security
06 Supervisors

Payment to IEs
02 DA/HRA/CCA
09 Holiday & Leave Pay
10 Compensation under IDA
11 Idle Time
12 IOD/IOFWP Fund

13 Superannuation Charges

14 Training

Maintenance of
15 Railway Siding
16 Electric Installations
17 Buildings, Roads
52 MT, OH Cranes etc.

Depreciation of
18 Capital Assets
19 Building
34 Machinery under capital grant under RR Fund Welfare
20 Hospital
21 Canteen
22 Lab Welfare Fund
23 Conservancy
24 Factory School

27 DGOF
28 CCofA
29 LAO

30 Care & Custody of Stock

36 Safety measures

37 I&M Expenses
38 Stationery

42 Moveable Shop Fittings

44 Preliminary Expenses
45 In-house R&D
49 in-house training

VARIABLE OVERHEAD – 02/XXXYY/00

“YY”

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Payment to IEs
01 General Shop Labour
02 Night Duty Allowance
03 Incentive Bonus
04 OT Bonus
05 Idle Time within control

07 Sundry Shop Stores

08 Tools for general shop use
09 Heat Treatment Cost of
13 Utilities
14 Fuel
16 Maintenance

Allocation and Departmenalisation of Overhead Expenses

Expenses for indirect material and indirect labour charges are captured
through the primary documents prepared by the factory, viz, demand/return notes,
day work/piece work cards and allocation sheets. These primary documents indicate
the relevant indirect work order number in the documents which facilitate compilation
of the overhead expenses. Expenditure relating to salaries, contingencies,
depreciation etc. which does not appear as labour or material, is booked in cost
accounts by the Accounts Office through monthly allocation sheets, with reference to
primary records such as, salary and contingent bills, records of capital assets etc.

After capturing the expenses, the next stage in overhead accounting is

departmentalization of the expenses i.e. identifying the departments in which these
expenses originate. For this purpose, the last two digits of the work order number are
made use of, by indicating the section code number, so that allocation of indirect
expenses and their departmentalization is achieved at the same time.

For example, the Engineering department undertakes repairs and

maintenance services for all production sections. The expenditure pertaining to a
particular production is booked against the concerned section by quoting the work
order as 02/00016/15 in the accounting documents, where 15 represents the code
number allotted to that production section.

From the primary documents sent to the AO/EDP Section each month, two
statements are prepared viz., (i) Statement of Sectional Variable Charges and (ii)
Statement of Sectional Fixed Charges. In these summary statements, the
expenditure is shown separately for each section under each work-order and under
each class of cost, i.e. labour, material and other expenses.

Apportioning of Service Section Expenditure to Production Section.

As stated before, the Factory is divided into Production section Service

section and Administrative sections. The expenditure incurred in the service and
administrative section is apportioned to the production sections so that it could be
finally charged to the cost of various item produced in these section. For this
purpose, step-ladder allocation method followed.

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Step-ladder allocation of Service Section Expenditure

For the purpose of allocation, the accounts office separately prepare a

‘variable’ and ‘fixed’ charge statement. In this statement, ‘Service Sections’ are
tabulated on the ‘left’side and ‘Production Sections’on the ‘right’side. 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 of electricity used for power and light

(b) Total direct labour in each section
(c) Number of workers in each section
(d) Percentage fixed by management.

Mixed Section

Certain Sections, through they are predominantly service sections, may be

doing work on direct work order e.g. manufacture of tools against direct outturn by
Tool Room or erection of machines by the Engineering Section. This is treated as
production work and the cost of erection is capitalized along with the cost of the
machine. In such cases, the section shown both on the left-hand side and right hand
side of the Step Ladder Statement. The indirect expenditure pertaining to the section
is first bifurcated between the production portion and service portion of the section
and the portion pertaining to each, is shown in the statement in the appropriate
place.

Charging of Overheads to Cost of Individual Jobs

For the purpose of charging variable overheads and fixed overheads to the
cost of individual jobs in an equitable manner, a rate (%) is worked out separately for
each production section / cost center.

Total Variable Charge of the Section

VOH % = x 100
Total Direct Labour of the Section

Total Fixed Charge of the Section

FOH % = x 100
Total Direct Labour of the Section

Pre-determined Rates of Levy

The rates for levy of variable charges and fixed charges are calculated
annually. The calculation of the rates does not, however wait till the actual charges
for the year are ascertained, as this would delay the working out of the costs of
individual items of production. At the beginning of each year, the charges are worked
out on the basis of estimates of Direct Labour Charges for each production section
and variable/fixed charges for each of these section. The estimates for the year are
approved by a Central Budget Committee formed by the factory for the purpose of
fixing appropriate rates for overhead levy and exercising control over expenditure.

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Budget Committee Procedure

The entire exercise of estimating the overhead expenses upto fixation of pre-
determined rates of levy of, a Budget Commiittee (comprising of the Divisional
Officer, Head of the Section, HoS of R&E Section and an Accounts Rep. for
preparing an estimate of direct labour charges and the variable charges for the
ensuring year taking into account the past actual and the current manufacturing
programme. In respect of service sections, the estimate is prepared showing only the
anticipated level of expenditure. These estimates are scrutinized and approved by
the Central Budget Committee (comprising of the Cost Centre Heads,
DGM/Planning, CofA/JCA which is headed by the General Manager).

After approval of the estimates, the Account Office prepares a statement for
apportioning the service section charges to various production sections. 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 re adopted for
the entire year. 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.

Under Absorption and Over Absorption of variable/Fixed Charges

As the rates of overhead levy are pre-determined, there is bound to be a

difference between the actual expenditure incurred and the amounts charged to
production in the year, either because of variation in the actual labour charges or in
the overhead expenses, or both, from the estimates. While the actual expenses
incurred against various work orders and reviewed with the estimated one at the end
of each quarter by the Shop Budget Committee and the Central Budget committee,
the percentage are not changed. Therefore, difference between expenditure and
charging continues.

If at the end of the year, the difference between the actual and estimated
charges is not more as than 5% of the actual charges then the difference is shown
as such in the Annual Production Account of the factory as “Under/Over Absorbed
Variable/Fixed Charges”. If the difference is more then 5% a supplementary levy is
made against various work orders to reduce the difference to the permissible limits.

Preparation of Overhead Abstract

The pre-determined percentages for Variable and Fixed Charges as decided

by the Central Budget Committee for a financial year are used by the EDP sections
of the A.O. to prepare the Overhead Abstract. The overhead charges are levied on
the basis of direct labour incurred against each work order and warrant and the
overhead abstract is prepared mechanically. A top sheet or the summary sheet is
also prepared showing.

a) the total of direct labour charges

b) the total of variable charges levied and
c) the total of fixed charges levied,

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in respect of each production section separately and grand total for the factory. The
overhead abstract is posted in the cost cards for the concerned warrants by the
accounts Office.

War Insurance Charges

Fixed charges are mainly comprised of

(1) Salaries paid to Gazetted, Non-gazetted and Supervisory personnel,
(2) Maintenance and repairs of building and depreciation of buildings and
(3) Share of expenditure pertaining to OFB HQrs. Organisation, CC of A (Fys) Main
Office and expenditure of the Accounts Office attached to the Factory.

Such expenditure does not vary in sympathy with the fluctuating volumes of
production in the factory from year to year. As the Ordnance Factories are required
to meet the demand from the services, both during peace times and in times of war,
there would be considerable idle capacity in the factories in peacetime. If the actual
fixed charged incurred in peacetime are charged in full to the cost of production,
regardless of the total volume of production in a year, the resultant costs will be
inflated and cost comparisons from year to year would be difficult.

It is, therefore, necessary to relate the levy of fixed charges to a normal

capacity production, so that when a factory is working below normal capacity of
production, due to lack of demands, the portion of the fixed charges representing idle
capacity is not charged to the cost of the item produced. Estimates of the charges
not required for current level of production against 01 series of work orders is made
by segregating the charges for

A. the number of posts of different categories of personnel (Staff and Officers)

not required for the current level of production,

B. Up-keep and Maintenance of plant and machinery installations,

buildings/shops inside the factory which are required to be used only in emergency
and

C. Excess provisions in the factory Estate, Hospitals etc.

For arriving at the chargeable FOH %.

Fixed charges for the posts against items ‘a’together with charges are ‘B’&
‘C’ constitute the ‘War Insurance Charges’, which thus segregated on account of
unutilized surplus capacity is shown as deduction in the Production accounts of the
Factory and Kept out of under 01 series of work order.

Special Points in Overhead Accounting

Power Cost Statement

Cost of electricity used for power and light is distributed to each section on the
basis of measured consumption. A monthly statement is prepared by the

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Management, showing the total number of units of electricity generated (or

purchased) and distributed for power and light purposes giving section-wise
distribution. The total variable expenditure incurred by the Power House Section as
ascertained from the Sectional Variable charges statement is posted in the power
cost statement by the A.O. and a rate per unit is calculated there from. The number
of units consumed in each section for power and light are then priced at this rate and
the amount pertaining to each service and production section is posted in the step-
ladder statement against the concerned sections.

(Similar statements are also prepared for charging steam and gas costs to
various sections in the chemical & explosive factories.)

Deferred Revenue Expenditure

All normal repairs to plant and machinery, required to maintain their working
capacity, are treated as variable overhead expenditure and charged to production of
the year is which the expenditure is incurred against W.O. 02/00016/00. If such
repairs are, however, very heavy in respect of any particular plant in a year, the
expenditure may be spread over a number of years. Prior approval of OFB is
necessary for the purpose. The portion of repair expenditure that is carried forward
for absorption in subsequent years, is shown as an asset, in the statement of assets
and liabilities, till it is completely charged to production in the subsequent years.

Preliminary Expenses

When a new factory is planned, or new project is added to an existing factory,

expenditure is incurred on salaries and various other miscellaneous items. These
charges cannot be levied immediately in the year in which incurred and carried
forward till production is established. These expenses are levied as ‘Preliminary
Expenses’. When the factory project starts production, the preliminary expenses are
charged to production on the basis indicated below:

i) Preliminary Expenses should be in terms of rupees per unit of product(s).

ii) Rate of charging preliminary expense should be based on the programmed

production over a period, which should not extend beyond ten years.

iii) Rate of charging should be reviewed periodically so that these charges are
liquidated with in a period of ten years.

Accounting for Tools

Tools, Gauges, etc. which are peculiar to a particular out-turn are

manufactured against direct work orders. This is done by allotting sub-number to the
main out-turn warrant.

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“Tools” and “gauges” of standard type as well as tools for general shop use
are manufactured and repaired under work order 02/00008/00. Cost of these general
and standard tool are levied on jobs as an item of variable overhead. The last two
digits of the work order 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.

This procedure applies to the tools and gauges costing up to Rs. 20,000/-
only. Tools costing Rs. 20,000/- and above, and having life more than two years
require to be capitalized both in engineering and in other factories and depreciated at
the rate of 5% per annum. However, in case of expensive tools with short life, a
separate flat rate is fixed by the General Manager in consultation with the LAO so
that the total cost of tools minus residual value is wholly charged off production of the
given quantity of items which uses up the given tool completely.

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COST COMPILATION

Compilation of Job Cards

The document used for compilation of unit cost of an item is known as Cost
Card. As soon as a Warrant for manufacture of an item is released by the planning
department and the Account’s copy of the same is received by A.O., a corresponding
Cost Card for each warrant is opened by the Costing Section of A.O. in which the
costs are compiled.

An entry regarding the work order & warrant number, the DGOF extract
number on the authority of which the warrant is issued, the quantity, description of
the article ordered for manufacture and the production section undertaking the
manufacture is made in the cost card from the details furnished in the manufacture
warrant. The estimated cost of the quantity on order is worked out from the estimate
for the item and posted in a separate cage provided at the back of the cost card,
showing the element-wise analysis of total cost. The cost card is posted monthly
under the various elements o cost viz. Labour, Material, VOH, FOH and other
Charges from the material, labour and overhead abstracts to find out the Total Cost.

Completed Warrants

When a warrant is completed by a shop, the shop returns the shop copy of
the manufacture warrant and the related material warrant to the planning
department. The planning department prepares a consolidated monthly list of
completed warrants, and sends the list to the Accounts Office together with the shop
copies of the warrants. On receipt of these, the relevant cost cards are picked out by
the Accounts Office for closing and working out the cost of production, in respect of
each completed warrant.

Closing of Cost Cards

The expenditure posted in the cost card is totaled and the summary of the
total expenditure, showing the element-wise costs, is posted at the back of the cost
card in a separate cage provided for the purpose. The total quantity manufactured,
quantity accepted, and quantity rejected, which are noted in the shop copy of the
manufacture warrant, are also noted by the Accounts Office in the cost card, after
verifying the same, with the inspection notes received in the Accounts Office.

If the rejection on the warrant exceeded the normal provision for unavoidable
rejection for the item, the value of the excess rejection is proportionately worked out
by the A.O. from the expenditure recorded in the cost card and deducted from the
total actual expenditure for the warrant. The net actual expenditure, after deduction
the value of avoidable or excess rejection, represents the cost of production of the
quantity produced and accepted on the warrant. From the net expenditure and the
quantity accepted, the actual cost per unit is worked out, separately, under each
element of cost and in total as well.

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Scrutiny of Cost Cards

The actual cost as worked out in the above manner is compared with the
estimated cost, and the variation between the actual and estimated costs the
scrutinized. The reasons are recorded in the remarks column of the cost card. If the
variation between actual and estimated cost is more then 10% under Labour and/or
Material, detail reasons for the variations are analysed. For example, the variation in
material cost may be due to variance in prices or variance in quantity or both. After
recording the details, the cost card is sent to the G.M. for information and remarks.

Priced Production Card

Simultaneously with the opening of a cost card, the A.O. opens a production
card for each warrant. The production card serves the purpose of a ledger folio. The
receipts of articles completed and accepted in inspection are posted in the
production card from the inspection notes received from the Factory. As the
completed articles are issued to the indentures, the “P” issue vouchers, received
from the Factory are posted in the production card of the concerned warrant on the
issue side. The balances in the production 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.

Semi Manufacture

For the purpose of compiling the annual production accounts, it is necessary

to find out the value of work-in-Progress as at the end of the year, so that the total
cost of production of all articles competed during the year can be ascertained. The
system of stock-taking has already been described in the Production Management
Block.

These statement are checked by Account 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 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.

Closing of Part-completion Warrants

From the work-in-progress abstract, work order, warrant wise postings are
made in the cost card as credit entry in a separate column provided for the purpose.

In respect of warrants on which part quantities have been competed and

vouchered through inspection notes, the actual cost of the competed article is
working out with reference to the expenditure recorded in the cost card and the value
of semi. Each cost card is totaled and from the total expenditure, the value of semi,
which is posted in the cost card, is deducted to arrive at the cost of the articles
completed during the year on the warrant.

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PROCESS COSTING

In the Ordnance Factories, most of the time we come across jobbing situation
in which the products have many input materials and they come out after undergoing
a number of operations. The total cost is nothing but the sum total of Direct Labour,
Direct Material, VOH & FOH. Contrary to this we find situations, mostly in processing
and metallurgical factories, when

(i) Different grades of finished products are obtained by processing a single raw
materials or

(ii) One final product involves processing through successive stage.

In these cases, the procedure for compiling the cost f finished product differs from
the of job (or warrant) costing and this system is known as Process Costing.

Examples of the first type of production are conversion of timber logs to

planks at the Gun Carriage Factory, Jabalpur, and production of tanned leather from
raw hides, at Ordnance Equipment Factory, Kanpur, Examples of the second type
are the production Cordite at Cordite Factory, Aruvankadu, and T.N.T. at High
Explosives Factory, Khadki.

The procedure for ascertaining the costs of various types of finished products
is described below.

I. Conversion of Timber Logs to Planks

For conversion of logs to planks, a work order under “08” series is allotted
which is a process work order. Logs are drawn from stock against this process work
orders on demand notes and converted to planks of different grades. Labour charges
incurred for conversion are also booked to this work order through piece work cards.
At the end of each quarter, a statement showing the following is prepared by the
factory:

1. Opening balance of logs, carried over form the previous quarter,

2. Logs drawn during the quarter,
3. Logs in hand at the end of the quarter,
4. Quantities and grades of planks produced,
5. Loss in conversion and
6. Quantity of firewood and saw dust recovered.

The output i.e. the planks are graded according to length, width and
thickness. Weightage is given to each grade of planks in terms of the lowest grade
for the purpose of costing. For example, 1 Cft. of Grade I planks is equal to 3 Cft. of
Grade III planks, 1 Cft. of Grade II planks, is equal to 2 Cft. of Grade III planks. The
fire wood and saw dust recovered are returned to sores on a return note to the credit
of the process work-order.

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The above statement is priced by the AO. with reference to the expenditure
on material, labour and overheads, as ascertained from the monthly abstracts. The
working of cost of planks produced is illustrated below:

Quantity Value (Rs.)

(Cft)
1. Opening balance of logs 100 100
2. Addl logs drawn during the quarter 500 500
Total 600 600
3. Less logs carried over 200 200
4. Logs consumed during the quarter 400 400
5. Credit value of the saw dust recovered - 20
6. Net value of material consumed 400 380
7. Labour & overhead charges for conv. Total - 520
900
8. Qty of planks produced in eqv GrIII units - 450 Cft.
9. Rate per cft of GrIII plank = 900/450 = Rs. 2/-

Planks produced and cost of production

Grade of Planks Quantity Equivalent Value Rs. Rate per cft.

(Cft) GrIII units for each grade
I 50 150 300 6(300/50)
II 100 200 400 4(400/100)
III 100 100 200 2(200/100)
Total 400 900
Loss in process 150 Cft

The planks are transferred to stock and the receipt vouchers are priced at the
rates calculated as above for each grade of planks.

II. Manufacture of Tanned Leather

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.

The production of tanned leather involves processing of the hides through

several stages. For each such stage, a process worked order is allotted. While the

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raw hides are drawn against the work order for the first process, labour charges and
subsidiary material required for each process are booked against the concerned
work order.

Every quarter, the Factory prepares statement 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 and
iv) hides in process at the end of the quarter
These statements are priced by the A.O. 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 difference 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.

III. Cordite

Cleaned cotton waste is soaked in a mixture of Sulphuric and Nitric Acids and
becomes gun cotton. The gun cotton is then mixed with Nitroglycerine to make
cordite paste. For each process (including the manufacture of Acids, Nitroglycerine
and Acetone) a process work order is opened. Every quarter, the Management
furnished 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. A process cost statement is prepared by the A.O. for
each process and the transfers are made from process to process, to arrive at the
cost of Cordite Paste. The Cordite Paste is drawn against a stock series of work
order, under which separate warrants are issued for making the finished cordite.
Transfer voucher are prepared by the A.O. for debiting the cost of cordite to the
concerned warrants and crediting the process work order.

IV. Foundry Costing

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. A process work order is allotted for the
production of ingots. The ingots are classified according the composition, into
different class of steel. A set of foundry statement is prepared every month for
working out the cost of different classes of ingots produced.

The Management prepares Foundry from III by showing the details of different
material consumed in respect of each class of ingots and the quantities of ingots
produced (by weight). This statement is priced by the A.O. to arrive at the value of
material consumed.

The labour section of the Accounts Office prepares Foundry Form II showing
the direct labour charges incurred. VOH & FOH charges are levied there on at the
rate applicable.

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The Management also prepares Foundry Form I which is a production and

issue statement, showing the distribution of the ingots produced to various work
orders and warrants. The total cost of production for each class of ingots is complied
in this statement by the Accounts Office from Forms II and III, and a rate per unit (kg)
is worked out. The ingots issued to each out-turn work order are priced at
appropriate rates in the statement, and the total value shown against each work-
order/warrant. A transfer voucher is prepared by the A.O. for debiting each out-turn
work-order/warrant by crediting the process work order.

SPECIAL POINTS RELATING TO COSTING

Development Expenditure

Expenditure incurred on the development of new items of production is

compiled separately in respect of each item under 60 series of work order.

The development work is generally divided into three stage viz. (A)
manufacture of a pilot batch, (B) establishment of batch production i.e. of technique
or manufacturing methods and (C) final establishment of manufacture by
standardization of technique and manufacturing methods.

Separate warrants are issued to make the completion of each stage of

development. Articles which are successfully manufactured at stage (A) and (B) are
coasted at estimated rates and the value transferred to the regular out-turn work
order for the item by crediting the development work order. The net development
expenditure incurred at stage (A) and (B) for each items is charged to the cost of
subsequent production of the item at the rate fixed by the Management. The rates
are so fixed that the development expenditure can be fully charged off within a
period of 7 years.

The balance of development expenditure remaining to be charged at the end

of each year is shown as work – in – progress in the production account of the
Factory.

At this stage it is important to note that the development expenditure is

different than the R & D expenditure which is booked against W.O. No. 01/00045/00
but compiled separately for each project. For incurring expenditure against each
project, budgetary sanction of OFB is necessary and at the end of the financial year;
share of each factory against the R&D work order is finally intimated by OFB
irrespective of the expenditure incurred.

Except System of Accounting for Components

In some of the factories like AFK, OFK, RFI, SAF, OFV, OFT & VFJ,
manufacture of components required for producing ammunition, weapons or vehicle
is undertaken on a separate work order under 40 Series for each component. The
components are not transferred to stock nor accounted for in store ledgers. The
components remain on production charge as finished semi and are drawn for
assembly on the assembly work order, through Red Demand Notes. The red

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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. It is thus virtually a transfer voucher. These red demand
notes are priced by the A.O. and a separate component abstract is prepared. 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.

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COST CONTROL PROCEDURE

In the earlier part of this block, the importance of Cost Control as a major
function of cost accounting was stressed. Cost Control is a procedure by which the
activities and performance of a factory are carried out under controlled conditions so
that the expenses can be controlled before or during the course of production. Thus
Cost Control is a preventive function leading to maximinisation of efficiency and
reduction of costs. Cost control consists of the following processes :-

(a) Setting up a target norm either in physical or monetary terms. The target may
take the form of standard cots, estimates, budgets or even historical data for
the previous accounting periods.

(b) Measurement of actual performance. This is equivalent to recording the actual

cost, i.e. cost finding or cost ascertainment.

(c) Comparison of actual with the pre-determined target.

(d) Analysis of variations between the actual and the target in order to locate the
caused leading to such variations and establishing a reporting system by
which these variations are communicated to the appropriate level of
management. Any failures or deviations from the target or any achievements
towards better efficiency are promptly brought to notice.

(e) Investigation of the causes leading to these variations and corrective action to
remove them.

Cost is obviously not incurred in the Cost Accounts Office. It is incurred as a

result of executive action at all levels and every production activity costs money. The
incidence and direction of cost is initially determined when the targets are fixed by
the top management. Thereafter, the action of the various executives at lower levels,
such as the Production Manager, Shop Foreman, Purchase Manager etc. has an
impact on cost. Further down the level, the individual action of the worker also
determines,

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To a large extent, the efficiency and cost of production. It is, therefore, correct to
state that the control of cost starts on the shop floor at the point where cost is
incurred. Physical control and control on the spot by the shop executives are more
effective than mere reporting and furnishing of data by the cost Accountant. Unless,
therefore, there is a full co-ordination, fusion of efforts and cost consciousness at all
levels of the management, any system of cost control is bound to fail.

Viewed in the above context, the measures taken in the Ordnance Factories
towards effective cost control may be summarized below.

Cost Control methods in the Ordnance Factories can be examined under two
aspects, viz., (a) Control of direct cost i.e., direct material and direct labour and (b)
Control of overhead charges.

Control of Direct Costs

In the Ordnance Factories, direct material and direct labour constitute about
75% of the total cost of production. These two elements therefore, provide a
significant area for effective cost control. The standard estimates lay down the total
of each type of material and the quantity, rate and the material cost for a specified
unit of output. Similarly, the labour portion of the estimates, which is prepared after a
careful time-study, shows the name of each operation, the grade of the workman, the
hourly rate or piece rate and the total labour cost. Quantitative or physical control
over the utilization of material and labour is exercised through material an
manufacture warrants, which provide the break-up of the direct material and direct
labour for a specified batch of production, and the shop foreman is allowed to draw
material and utilize labour within the limits set.

Concurrent Review of Costs

The costs are computed monthly, in the various E.D.P. tabulations and posted
in the relevant cost cards. The Accounts Officer keeps a watch over the progress of
expenditure and reports to the management appreciable variations and other
significant features while the work is still in progress, so that remedial measures may
be taken in time. For this purpose, the Accounts Officer selects some warrants
where heavy expenditure is incurred and points out the progress of expenditure
against these warrants, the progress of issues as against the quantities
manufactured, the quantities of rejections and significant variations in cost as
compared to the estimates. The Accounts Officers also highlights heavy and
abnormal rejections, and any other abnormal features which warrant the attention of
the Management.

Control of Overhead Costs

As, by their nature, overhead charges are not identifiable with or related to
specific units of production, their control is not so easy as in the case of direct costs.
Fixed charges are mostly in the nature of “Policy costs” and are hardly controllable at
the lower levels of management. Further, the Ordnance Factories incur fixed
overheads in excess of day to day requirements in order to meet the needs of the
war-load.

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Labour Accounting & Factory Accounting

It is because of the differences in the nature of the various items of overhead

charges that these have been classified into fixed and variable. Control over the
variable overheads is exercised with the help of budgets, which constitute the target
or ceiling upto which expenditure on each specific item can be incurred. The system
of budgetary control of variable overheads ha already been discussed while the
Budget Committee Procedure.

Cost Reporting

To sum up, while the physical control of expenditure primarily rests with the
management at different levels, the Accounts Officers renders assistance by way of
providing useful tools for the purpose in the form of correct and prompt reporting of
information. It is with this end in view that number of cost report and returns have
been provided. Management by exception being the keynote of the procedure of
reporting, information regarding deviation from the estimates and budgets is
highlighted and the performances which conform to the norms are not reported upon
unless specifically called for.

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Labour Accounting & Factory Accounting

ANNUAL ACCOUNTS

The Accounts Office of each factory consolidates all the financial accounts
and cost accounts of their factory at the end of a financial year and present a
Consolidated Annual Accounts. This is a very elaborate exercise which continues up
to June 30the following the financial year to which the accounts pertain to. The
accounts are compiled in two volumes which has got the following statements:

VOLUME I

1. Consolidated Production Account

2. Finished Stock Account
3. Statement of Assets & Liabilities –
4. Consolidated Capital Accounts
5. Consolidated Capital Account
6. Indirect Expenditure Statement – Fixed
7. Indirect Expenditure Statement – Variable
8. Losses sanctioned during the year
9. Summary of Cost of Outturn including IFD production
10. Summary of Cost of Outturn other than IFD production
10A Summary of cost of Inter-departmental production

VOLUME II
8. Cost of Principal items of work done
8(a). Comparative Statement of Unit Cost of Production of articles manufactured in
more than one Ordnance Factory.
8(i). Cost of Non-Principal items of work done

These statements are supported by detailed schedules and formats in which

the comparative figures for the previous year and comments on the reasons for
variation with reference to the estimates/previous years are also included. The
annual accounts so prepared are furnished to the General Manager of the respective
factory for acceptance and finally thereafter, the same are sent to PCofA(Fys),
Calcutta for consolidation and preparation of the Annual Accounts of the organization
as a whole, which is a published document.

For the purpose of preparing the annual accounts, a principal ledger is

maintained in each Accounts Office. The accounts 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.

The main accounts and the information available in each account are
mentioned below.

1) Wages and Salaries Accounts – The amount of wages and salaries paid to all
factory personnel, as per financial compilation, are shown on the debit side of the

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Labour Accounting & Factory Accounting

account. On the credit side, the value of amount in cost accounts under direct labour,
indirect labour and supervision (overhead) charges is shown.

2) Store Account – This account on the debit side shows the value of opening stock
and receipts during the year. On the credit side the value of a) direct material issued
to production b) indirect materials issued to production c) issues to outside parties
and d) closing stock at the end of the year, are shown.

3) Overhead Expenses Account – This account on the debit side shows the total
overhead expenses incurred under various sub-head like a) indirect labour b) indirect
material c) supervision charges d) contingent expenses etc. There is no credit side in
this account. This account is balanced by transferring the expenditure to the work-in-
progress account.

4) Work in Progress Account – The debit side of the account shows,

a) Opening balance of work in progress.

b) Expenditure incurred.
c) Over absorption of variable and fixed overheads charge (if any)

and the credit side of the account shows,

a) Cost of production of articles completed during the year for Army, payment issues,
other factories, stock and of capital works.
b) Unfinished semi carried over at the end of the year.
c) Under absorption of variable and fixed overhead charges.

5) Capital Assets Account : This account shows the value of land, buildings and
machinery and reserve stock-pile at the beginning of the year and expenditure
incurred during the year on debit side and on the credit side depreciation charges for
the year, value of assets disposed off and the value of land, buildings and machinery
and reserve stock pile items at the end of the year.

Based on the information provided in the principal ledger, the annual a) Store
Account b) Production account c) Finished stock Account d) Capital assets Account
and e) the Statement of assets and Liabilities as on 31st March (Balance Sheet) are
prepared for the Factory. From the individual accounts of the factories, as stated
above, combined accounts for all the divisions of OFB and the factories falling in the
respective divisions are prepared by PC of A (Fys), Main Office, Calcutta.

The important features and the entries made in all these accounts/statements
are summarized below.

STATEMENT NO. 1 CONSOLIDATED PRODUCTION ACCOUNT

Dr.
1. Opening Work-in-Progress
Labour
Stores
Overheads

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2. Director Labour During the year

3. Direct stores consumed
4. Overhead Charges
A. Supervision Charges
B. Transportation Charges
C. Miscellaneous Charges
Contingent Charges
Cost of DGOF
Cost of DAD
Superannuation Charges
Govt. Contribution to PF
Indirect Labour
Indirect Stores
Other Misc Charges
D. Depreciation Charges
E. Transfer from Capital Ac.
F. Losses on Sale/Charge of Stores
G. Misc. adjustments
H. Overabsorbed FOH
I. Overabsorbed VOH
J. Less expenses on A/c of Arrears

Cr.
1. Relief to Overhead Charges
A. Miscellaneous Credits
Rent Electricity Etc.
B. Surplus at Stock Taking
C. Transfer to Capital A/c
D. Profit on Sale of Stores
E. Misc. Adjustments
F. Closing down expenses
G. Care and Custody of Stock
H. Infructuous Expenditure

2. Deptt. Stores utilised

3. Closing Work-in-Progress
Labour
Stores
Overheads
4. Underabsorbed FOH
5. Underabsorbed VOH

6. COST OF PRODUCTION ON COMPLETED ARTICLES

7. Underabsorbed PE written off
8. Cost of Rejection KOP

STATEMENT NO. 2 FINISHED STOCK ACCOUNT

Dr.
1. Opening Value of Finished Article

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2. Opening Value of Components

3. Production Accounts (COST OF PRODN)
4. Profit on IFD Issues
5. Profit on Payment Issues

Cr
1. Issues to Army, Navy, Airforce, ODDs
2. IFD Issues
3. Work on Capital A/c
4. Work for Own Stock
5. Issues to MHA, CG, States, PSUs,
Foreign Govts & Pvt. Indentors
6. Closing Value of Finished Article
7. Closing Value of Components
8. Loss on IFD Issues
9. Loss on Payment Issues

STATEMENTS NO. 3 : STATEMENT OF ASSETS & LIABILITIES

LIABILITIES
1. NET CAPITAL
2. Amount due to Fys.
3. Suspense adjustment
4. Profit on Issue of Finished Article
5. Overabsorbed Fixed charges
6. Overabsorbed Variable Charges

ASSETS
1. Land / Building / Machinery Unfinished Semi on Capital & MES work
Stock Pile
2. Value of Stores in hand/WIP/CA/Comps/Stores in transit/ Machine in transit
3. Amount due to the Fys. On account of Payment Issues; Sale of Stores & M/c;
Rent
4. Imported Stores not recd.
Payment made for the Stores not recd.
Payment made for the Machinery not recd.
Custom Duty paid for the Stores not recd.
5. Unabsorbed Prelim Expenses
Deferred Revenue
6. Suspense Adjustment
7. Cash in hand
8. Loss on issue of Finished Article
9. Underabsorbed Fixed Charges
10. Underabsorbed Variable Charges

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STATEMENT NO. 4 : CONSOLIDATED STORES ACCOUNT

Dr.
1. OPENING BALANCE
2. Cost of Stores taken on charge
3. Stores recd. From ODD, Capital A/c, Fy Mfr.
4. IFD Stores Recd.
5. Profit on Sale of Stores
6. Surplus at Stock Taking
7. Misc. Receipts/Adjustments

Cr.
1. Stores issued to Shops
2. Sale of Stores
3. Stores issued to Services/ODD/IFD/Other indentors
4. Stores transferred to Capital a/c
5. Miscellaneous Issues
6. Losses
7. Other Adjustments
8. CLOSING BALANCE

STATEMENT NO. 5 : CONSOLIDATED CAPITAL ACCOUNT

Dr.
1. NET CAPITAL (OPENING)
(a) Land; Bldg; M/s; Equipment
(b) Semi (Incomplete Services)
2. Sundries
3. Stock Pile Items
4. Transfer from
Capital
Store Pile
5. Misc Adjustments

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Cr

1. Depreciation
2. Values written off
3. Items sold
4. Loss of Stock Pile
5. Transfer to:
Capital Items of Fys.; ODD;
Stock; Inventory; Stock Pile
6. Misc Adjustments
7. CLOSING BALANCE
Net Capital
Semi

STATEMENT NO. 6: INDIRECT EXPENDITURE – FIXED

STATEMENT NO. 7: INDIRECT EXPENDITURE – VARIABLE

(WORK ORDER WISE DR/CR AMOUNTS IN SERIATIM)

STATEMENT NO. 8: PRINCIPAL ITEMS OF WORK DONE

Work Order No./Description/Year of Mfg./Qty. mfd./

A B C D

Total Cost/Cost Per Unit/UQ

E F G

C: Prev 2 Yrs
Current Yr F: Stores
Estimated Labour
VOH
FOH
Tool Charges
Preliminary Expenses
Total

8(a). Comparative Statement of Unit Cost of Production of articles manufactured in

more than one Ordnance Factory

- Qty/Cost/Unit Cost for 3 years.

8 (i). Non-Principal items of work done

STATEMENT NO. 9: LOSSES SANCTIONED DURING THE YEAR

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FY wise

CASH : Over Payment of Wages

STORES : Theft/Fraud
Difference in actual
Not due to Theft/Fraud
Misc. Causes
Transit Loss
Defective Storage

PRODUCTION : (Not Pertaining to Stores)

STATEMENT NO. 10: SUMMARY OF COST OF OUTTURN

- including IFD production

- other than IFD production
- Inter – departmental production

FY/Stores/Labour/FOH/VOH/TOTAL

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QUASI – COMMERCIAL ACCOUNTING

With the separation of OFB budget from Army budget from 1.4.87, the
accounting requirement for the organization has changed. OFB therefore decided in
January 1993 that the Accounts of the factories be brought out on commercial lines
so that the same may be better understood by the executives to know the financial
health of their respective units. Since switching over to the new format was a
massive task and it was not advisable to stop the existing system of accounting
abruptly, it was decide that Quasi Commercial Formats be developed for better
presentation of financial data. The financial data available in the annual accounts
were used to fill these restructured formats. There are two main formats in this
system:

1. Profit & Loss Account

2. Balance Sheet or Cash Flow Statement

Profit & Loss Account: This account contains all the revenue transactions during
the year. This account is supported by four basic schedules compiled on the basis of
annual accounts viz.

Sch. 1 - Issues and Services Rendered

Sch. 2 - Manufacturing Expenses

Sch. 3 - Non – operating Income

Sch. 4 - Non – operating Expenditure

These transactions are presented under two broad headings i.e.

(a) Revenue Receipts – collected from Sch. 1 & Sch. 3

(b) Revenue Expenditure – collected from Sch. 2 & Sch. 4

The difference between these two categories is shown as net surplus or (loss).

Balance Sheet or Cash Flow Statement:

The Balance Sheet, which shows the resources and the distribution thereof in
various assets, is constructed from the following schedules:

Sch. 5 - Net Block (Fixed Assets, addition/deletion to it &

Depreciation)

Sch. 6 - Capital WIP, Capital goods in transit & Advances

against capital goods

Sch. 7 - Misc. Assets (Stock Pile)

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Sch. 8 - Inventories

Sch. 9 - Accounts receivable

Sch. 10 - Loans & Advances

Sch. 11 - Current Liabilities

Sch. 12 - Misc. Expenditure (Prelim expenses & deferred

revenue expenditure)

The fundamental principle in construction of a balance sheet is that the

Liabilities shown on the left hand side must match with the Assets shown on the right
hand side. In other way, it amounts to saying that the Sources of Funds match the
Application of Funds. On the liability side (i.e. the sources of funds), the balance
sheet shows the Capital Funds = Total Assets – (Current Liabilities + Net Operating
& Non-operating Surplus (Loss) carried forward from Profit and loss account). Here
the Total Assets are nothing but Fixed Assets plus Current Assets. There can be
constructed as follows:

(a) Fixed Assets - Sch. 5, Sch. 6 & Sch. 7

(b) Current Assets - Sch. 8. Sch. 9 & Sch. 10

(c) Current Liabilities - Sch. 11 & Sch. 12

SINGLE POINT PERFORMANCE INDEX

Along with the Quasi – commercial Accounting Formats, two performance

indices commonly known as “Single Point Performance Index” were also introduced.
There are “Return on Capital Employed” and “Return on Fixed Capital” which are
basically like various financial ratios utilized for analysis in the commercial
organizations.

Net National Operating Surplus

1st Performance Index = ----------------------------------------------- x 100
(Return on Capital Employed) Net Capital at the end of the year –
Excess of Working Capital over
justified amount)

Notional Operating Surplus

2nd Performance Index = ------------------------------------------------------ x 100
(Return on Fixed Capital) Total of Fixed Capital (depreciated value)
as shown at the end of the year.

At present there is no cost of capital in the Ordnance Factories, i.e. there is no

interest payment and also there is no profit motive. If the factories start functioning

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Labour Accounting & Factory Accounting

on the commercial lines, then both the factors come into play. Keeping that in view,
the concept of national profit and notional interest has been introduced and under
those circumstances, notional return is worked out.

OFB has also decided that General Managers (Chairman of the ULMC) will, at
the end of each year, send a Director’s Report analyzing the financial health of the
unit on the basis of the quasi – commercial formats which will also include the above
two indices.

Steps for Calculation of SPPIs

The single point performance indices are calculated on the basis of following
steps:

1. Calculate Justified Requirement of Working Capital:-

Add (i) Six month’s holding of raw material plus maintenance

stores in terms or yearly consumption and

(ii) Lowest holding of W.I.P., Finished Stock & Finished

Components during last 3 years.

2. Calculate National Operating Surplus:-

Add (i) 15% mark-up on cost of issue to Defence

Departments & IFDs.

(ii) any profit arising out of the difference between price &
cost in respect of such cases and

(iii) actual profit or loss from other issues i.e. MHA, PSU
etc.

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3. Calculate National Operating Expenditure -

18% notional interest on excess of working capital over justified working

capital (as calculated under step – I above) where Actual Working Capital is
taken as total of stores in hand, SIT, WIP, F/S & F/C in Annual A/cs.

4. Calculate Net Notional Operating Surplus -

Notional Operating Surplus (step -2) minus

Notional Operating Expenditure (step-3).

5. Calculate single point performance indices as defined above.

There are instructions of OFB to calculate half yearly indices following the
above steps. For each of the indices, two figures are calculated – one based on the
actual performance obtaining on 30th Sep. and the other based on the six-monthly
production targets.

All the formats and schedules pertaining to Quasi Commercial Accounting

System are given on the subsequent pages for reference.

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BALANCE SHEET AS ON 31ST MARCH

(All Figures : Rs. In Lakh)

PARTICULARS
SOURCES OF FUNDS :
CAPITAL FUNDS
ADD. OPERATING SURPLUS P & L A/c
ADD. NON – OPERATING SURPLUS P & L A/c
TOTAL LIABILITIES
APPLICATION OF FUNDS:
FIXED ASSETS :
GROSS BLOCK
LESS, DEPRECIATION
NET BLOCK SCH : 5
CAPITAL WIP (incl capital goods in transit) SCH : 6
MISC. ASSETS SCH : 7
CURRENT ASSETS :
CASH IN HAND
INVENTORIES SCH : 8
RECEIVABLE SCH : 9
LOANS & ADVANCES SCH : 10
LESS, CURRENT LIABILITIES SCH : 11
MISC. EXPENDITURE SCH : 12
TOTAL ASSETS

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PROFIT AND LOSS ACCOUNT

(All Figures : Rs. In Lakh)

PARTICULARS
REVENUE :
1. OPERATING INCOME SCH : 1
2. NON – OPERATING INCOME SCH : 3
EXPENDITURE :
1. OPERATING EXPENDITURE SCH : 2
2. NON – OPERATING EXP. SCH : 4
SURPLUS (LOSS) :
1. OPERATING SURPLUS SCH : 1 - SCH 2
2. NON – OPERATING SURPLUS SCH : 2 - SCH 4

NET SURPLUS (LOSS)

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Labour Accounting & Factory Accounting

SCH : 1 – ISSUE & SERVICES

(All Figures : Rs. In Lakh)

Sl. Particulars
No.
1. BY VALUE OF SERVICES TO ARMY
2. BY VALUE OF SERVICES FOR SISTER FYS
3. BY VALUE OF WORK DONE BY FACTORY
a. On Capital Accounts
b. On Proforma Capital Assets A/c
4. BY VALUE OF SERVICES ON PAYMENT TO
Navy
Air Force
Other Defence Deptts
5. BY VALUE OF SERVICES TO MHA
6. BY VALUE OF SERVICES FOR OTHER
CENTRAL GOVT DEPTTS
7. BY VALUE OF SERVICES FOR STATE
GOVTS/Uts
8. BY VALUE SERVICES FOR FOREIGN
GOVT/PSUs
9. BY VALUE SERVICES FOR PVT. Indent
10. ISSUE TO OWN STOCK
11. LESS after sales service
TOTAL SCH : 1

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SCH : 2 – MANUFACTURING EXP.

(All Figures : Rs. In Lakh)

Sl. Particulars
No.
1. Direct and Indirect stores consumed
Less, stores utilized in Indirect orders
Material consumed
2. Employees Remuneration :
Direct Labour
Indirect Labour
Supervision charges
Cost of DGOF ;
Effective charges
Non – effective charges
Cost of DAD ;
Accounts
Internal check
Superannuation charges
Govt. contribution to provident fund
3. Transportation charges not allocated to stock
4. Other miscellaneous charges
5. Contingent charges
6. Depreciation :
RR Fund allocated
Depreciation (other that P & M)
RR Fund (Arising from depreciation)
7. Transfer from capital account
8. Inventory :

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Value of work-in-progress (Op. bal)

Completed articles in hand as on 1st April
Value of components as on hand on 1st April as
working stock
Value of WIP (Closing Balance)
Completed Articles in hand as on 31st March
9. DEDUCTIONS :
Transfer to capital account
In fructuous expenditure
Unabsorbed preliminary expenses Written off
closing down expenses
Closing down Expenses
TOTAL SCH : 2

SCH : 3 – OTHER (NON – OPERATING) INCOME

(All Figures : Rs. In Lakh)

Sl. No. Particulars

1. Rents and rates recoverable
2. Electricity & water charges recoverable
3. Unclaimed wages lapsed
4. Sale proceeds/recoveries from machinery
Less, Residual Book Value of Mach. Sold
5. Other miscellaneous credits
6. Surplus at Stock – taking
7. Profit on sale of stores
8. Misc. adjustment
TOTAL SCH : 3

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Labour Accounting & Factory Accounting

SCH : 4 OTHER (NON – OPERATING) EXPENSE

(All Figures : Rs. In Lakh)

Sl. No Particulars
1. Losses on stores :
a) On sale of surplus stores
b) On sale of obsolete stores
c) On sale of waste and scrap
d) Loss of stores on charge
e) Other losses on stores
f) Other losses not pertaining to stores (Actual
as distinct from trading losses)
g) Loss of stock – pile items
2. Miscellaneous adjustments
In fructuous expenditure
Unabsorbed preliminary expenses written off
Closing down expenses
TOTAL SCH : 4

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Labour Accounting & Factory Accounting

SCH : 5 – FIXED ASSETS & DEPRECIATIONS

(All Figures : Rs. In Lakh)

Sl. No. Particulars

MACHINERY :
1. Opening balance
2. Depreciation
3. Addition
4. Closing balance

OTHER THAN MACHINERY :

1. Opening Balance
2. Depreciation
3. Addition/(Deletions)
4. Closing Balance
Closing Balance (Other than machinery)
Closing Balance (Machinery)
NET BLOCK :

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Labour Accounting & Factory Accounting

SCH : 6 – CAPITAL GOODS & WORK-IN-PROGRESS

(All Figures : Rs. In Lakh)

Sl. No. Particulars

1. Unfinished Semi on Capital Works
2. Unfinished Semi on MES Works
3. Machinery in transit between the factories
4. Value of Europe machinery invoiced but not
received.
5. Payment made during the year for machinery
not received.
TOTAL SCH : 6

SCH : 7 – STOCK – PILE ITEMS

(All Figures : Rs. In Lakh)

SL. NO. PARTICULARS

OPENING BALANCE :
STOCK – PILE ITEMS
ADDITIONS / (DELETIONS) during the year
CLOSING BALANCE :
A) STOCK – PILE ITEMS
B) EUROPE STOCK – PILE ITEMS
INVOICED NOT RECEIVED
C) EUROPE STOCK – PILE ITEMS
PAYMENT MADE BUT NOT RECEIVED
TOTAL SCH : 7

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Labour Accounting & Factory Accounting

SCH : 8 – INVENTORIES

(All Figures : Rs. In Lakh)

SL. NO. PARTICULARS

1. STORE –IN-HAND
2. VALUE OF W.I.P.
3. i) VALUE OF COMPLETED ARTICLES IN HAND
ii) VALUE OF COMPONENTS IN HAND AS ON
31ST MARCH
4. STORE IN TRANSIT BETWEEN FYS.
TOTAL SCH : 8

SCH : 9 – ACCOUNTS REEIVABLES

(All Figures : Rs. In Lakh)

PARTICULARS
AMOUMT DIE PM A/C OF:
i) services rendered on payment
ii) Work done for civil govt. deptt./PSUS
iii) Work done for private civil indenters
OUTSTANDING RECOVERY ON A/C OF :
i) Sale of stores and machinery
ii) Rent etc.
MISCELLANEOUS
I) Suspense adjustment
TOTAL SCH : 9

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Labour Accounting & Factory Accounting

SCH : 10 – LOANS AND ADVANCES

(All Figures : Rs. In Lakh)

PARTICULARS
1. Value of Europe stores invoiced but not recd.
2. Payment made during the year for stores but not read.
3. Trade charges paid to the adjusted in next year
4. Custom duty paid for stores not recd.
TOTAL SCH : 10

SCH : 12 – MISC. EXPENDITURE

(All Figures : Rs. In Lakh)

PARTICULARS
1. Unabsorbed preliminary expenses
2. Deferred revenue
TOTAL SCH : 12

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Labour Accounting & Factory Accounting

SCH : 11 – CURRENT LIABILITIES

(All Figures : Rs. In Lakh)

PARTICULARS
1. CREDITORS :
A. Local and Central supplies of stores
B. Local / Central supplies of machinery
C. Local / Central supplies stock-pile-items
D. Europe stores received (invoice not recd.)
E. Europe M/c received (invoice not recd.)
F. Europe stock – pile items received (invoice not recd.)
G. Supplies from other departments of Govt.
H. Trade Ch. Payment o/s on 31st March
1. Outstanding Rent for hired building
2. LOANS AND ADVANCES :
A. Services rendered on payment
B. Work done for Civil Deptt./PSUs
C. Work done for Pvt. Civil Indenters
D. Sale of M/cs and store
3. MISC. LIABILITIES
A. Share of central administration
B. Wages for March 97 paid in April 97
C. MES charges for which payment is O/s
D. Custom duty payable in ensuing year
E. Unclaimed wages in hand on 31st March 1997
4. SUSPENSE ADJUSTMENT
TOTAL SCH : 11

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BUDGETING IN GOVERNMENT

INTRODUCTION TO GOVERNMENT BUDGETING

The word ‘Budget’does not find place in the Constitution of India. In fact, it is
the ‘Annual Financial Statement of Receipts & Disbursement’ as described in Art.
112 of the Constitution, which is laid before Parliament and commonly known as
‘Budget’. More as matter of convention than rule, Budget is presented to Parliament
on the last day of February each year at 5 PM as the stock market closes by that
time. However, there have been exceptions in some years.

All receipts of Govt., all recoveries, borrowings, loan grants received by Govt.
go to the Consolidated Fund of India. No expenditure can be incurred from the
Consolidated fund of India without the approval of Parliament. These details of
receipts and disbursements are included in the Annual Financial Statement, which is
presented to Parliament annually, relating to the period 1st April till 31st of March.

Since it takes time for the Parliament to deliberated and approve the detailed
demands for grants for each Ministry, which will entitle Govt. Departments to incur
the expenditure during the next financial year, Parliament approves ‘Vote on
Account’ by 31st March each year, which authorizes Govt. to incur essential
expenditure on its ongoing activities during the ‘Vote on Account’period. Govt. is not
empowered to incur expenditure on new schemes/projects for which provisions have
been made in the budget but are yet to be approved by Parliament (it is, however,
known to the reader that while the budget is presented to Parliament and both the
houses discuss the budget, it is the Lok Sobha which really plays an important role in
the discussion where demands for grants of various Ministries are discussed.).

Govt. of India’s budget is prepared on gross basis. Irrespective of the

expected receipt by any Ministry/Deptt., no expenditure can be incurred by the
Ministry/deptt. without the approval of Parliament. While seeking approval in the form
of Demands for Grants, the Budget estimate reflects gross expenditure figure and
not the net figure. To clarify the point, if Ordnance Factories are expecting a receipt
of Rs. 100 Crore, for issues to civil trade/non-defence organization and for that they
need to incur Rs. 110 Crore, approval of Parliament is sought for the gross amount
of Rs. 110 Crore and not for the net amount Rs. 10 Crore (Rs. 110 Crore minus Rs.
100 Crore). As a result if, during the course of financial year, expenditure is to be
incurred, even though backed by matching receipt, formal supplementary grant is to
be obtained for incurring the expenditure.

Govt. of India’s budget is no cash basis and not accrual basis. Budget
estimates reflect expected cash receipt and cash expenditure to be incurred in a
financial year. No receipts which are likely to accrue in the next financial year are
included in the Annual Financial Statement.

Funds provided in the Budget estimate but not incurred in that financial year,
lapse to Govt. There is no provision to carry over uninsured expenditure catered for
in the Budget Estimate of a financial year, to the next financial year.

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Labour Accounting & Factory Accounting

In the annual Financial statement, the budget is presented Major Head wise
reflecting both receipts and disbursements. Major Heads reflect the main functions of
Govt. The way ‘Major Heads’have been listed gives a clear picture about the nature
of provision, whether it is receipt/disbursement etc. Major Heads between 0010 to
1999 are Receipt Major Heads, 2000 to 3999 are Revenue Expenditure Major
Heads, 4000 to 5999 are Capital Expenditure Investment Major Heads, 6000 to 7999
are Major Heads or loan to be advanced. For example for shipping the Major Heads
are as follows :-

1052 Receipt Major Head

3052 Revenue Expenditure Major Head
5052 Capital Investment Head
7052 Loans to Shipping Company

In this case first digits signify the nature of provision and last two digits, the
functions that it reflects.

Demands for grants for each Ministry/Deptt. are presented Minor Head wise.
Each Minor Head reflects the main activities for which expenditure is to be incurred.
Detailed Demands for grant reflect schemes and projects and the unit of expenditure
under each scheme and project.

Govt. of India budget provides for ‘Voted’ and ‘Charged’ expenditure. While
major portion of Govt. budget is voted by Parliament, budget provision made to
discharge Court decree, is not subject to Vote by Parliament. These provisions are
made ‘charged’. Expenditure which is meant to be utilized for obligatory payments, to
be made as a result of Court decree, salaries of President of India, Supreme Court
Judges. C & AG etc. are also to be included as ‘charged’expenditure as these are
also not subject to vote by Parliament.

Demands for grant provide separate budget estimates for Plan and non-plan
expenditure. Budget provision cannot be changed from plan to non-plan and vice-
versa without approval of the Parliament.

Demands for grants provides for Revenue and Capital expenditure. Normally
revenue expenditure is meant to carry on the established activities of Govt. whereas
capital expenditure is meant to provide or assets which are likely to generate
resources for the future.

In any financial year demands for grant of only few Ministries/Deptts. are
taken up for a detailed discussion. The demands for grant of rest of the
Ministries/Deptts. Are guillotined on the last day fixed for the budget discussion.

MINISTRY OF DEFENCE BUDGET

As stated above, the Demands for Grant is presented to the parliament

ministry wise. In the Defence Service Estimates Demand is shown mainly under four
categories ARMY, NAVY, AIR FORCE and DEFENCE ORDNANCE FACTORIES as
follows:

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Labour Accounting & Factory Accounting

DEFENCE SERVICES ESTIMATES FOR THE YEAR XXXX-YYYY

BUDGET ESTIMATES XXXX-YYYY

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

GROSS RECEIPTS RECEIPTS & NET

EXPENDS. RECOVERIES EXPENDITURE

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

REVENUE EXPENDITURE

DEMAND NO. 18-ARMY

Charged
DEMANAD NO. 20-AIR FORCE
Charged
DEMAND NO. 21-ORD. FYS
Charged

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

TOTAL REVENUE EXPENDITURE

Charged
-------------------------------------------------------------------

CAPITAL EXPENDITURE

DEMAND NO. 22-CAPITAL OUTLAY ON DEFENCE SERVICES

Charged
GRAND TOTAL
(REVENUE & CAPITAL)

As mentioned above, charged expenditure is for payment of any amount on

account of Court order and the same is dealt with case by case by M of D and
individual allotment is made by M of D from the DGOF Charged expenditure grant,
centrally. The requirement from the factories are processed and sent to OF/Budget
which after getting it vetted by OF/Finance (Main) is sent to M of D for sanction.
(The voted expenditure is fully provided to DGOF for utilization.)

ORDNANCE FACTORIES BUDGET

The budget is prepared and projected in a particular format which is given

below. The estimates are made under different classification codes and projected
minor head wise.

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Labour Accounting & Factory Accounting

REVENUE MAJOR HEAD 2009

Sl. Minor Head of A/c Classification

No. Head Code
1 2 3 4 5
1. 001 Direction & Admin 01/804/01-05
2. 004 Research 01/812/01-03
3. 053 Maintenance M&E 01/807/01-02
4. 054 Manufacture 01/805/01-09
5. 105 Transportation 01/808/01-03
6. 110 Stores 01/806/01,02,04,06,08,10,
11,12 &14
7. 111 Works 01/809/01,02,06,07
8. 106 Renewal & 01/813/01-03
Replacement
9. 797 Transfer to RR Fund 01/814/01
10. 800 Other Expenditure 01/810/01-03
SUB TOTAL

RECOVERIES
11. 901 Issues to Army 01/811/10-19
12. 902 Issue to Navy 01/811/02
13. 903 Issue to Air Force 01/811/02
14. 904 Issue to ODD 01/811/05
SUB TOTAL
(Issues to Services)
15 GROSS REVENUE
OTHER RECOVERIES
16. 797 Tfr. From RR Fund 01/814/02
17. 110 Deduct Sale Proceeds of 01/806/11
Scrap & Waste
18. 110 Deduct Cr. Amt on A/c of 01/806/12
Trf from Revenue to
Capital
19. 110 Deduct MTPF M/cs 01/806/14
SUB TOTAL
MAJOR HEAD 0079 RECEIPTS
20. 101 Sale of Surplus & 01/800/01
(i) Obsolete
21. (ii) Total CT & & 01/800/02-08
EXP/MHA/NMD/State
Police
OTHER RECEIPTS
22. 800 A1. DGOF Misc Rcpts 01/801/01
23. A3. DGOF Land Rcpts 01/801/02
24. B. Ord Fys. Misc Rcpts 01/802/01-06
25. TOTAL RECEIPTS &
RECOVERIES (incl. RR Fund)
26. NET REVENUE

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DEFENCE CAPITAL OUTLAY MAJOR HEAD 4076

SUB MAJOR HEAD 04 (Cap Outlay Ofs)
27. 052 Mach & Equipment 01/922/31-33
28. 111 Works 01/920/31-34
29. 799 Suspense (Stock Pile) 01/925/31 (32)
30. Gross Capital
31. Deduct Sale P&M 01/922/35
32. NET CAPITAL
33. NET REVENUE & CAPITAL

Gross Revenue

To arrive at the Gross Revenue Expenditure of the Ordnance Fys, the value
of Issues made within the Defence Deptt (excluding IFDs) viz. Army, Navy, AF &
Other defence Deptts. (NCC, MES, R&D, Inspectorates) is deducted from the Total
Revenue Expenditure. This is because the amount of issues to those departments
will figure as the expenditure under their Revenue budget. DGOF Budget reflects
Issues to Services as minus expenditure to avoid reflecting double expenditure
under M of D. Therefore, it can be concluded that Gross Revenue is basically
budgetary supported provide to Ordnance Factories only for such activities which are
not specifically required for any other defence deptts.

Other Recoveries and Receipts

Other Recoveries

Under this heading all the revenue earning are accounted for. The same is
done under the category ‘Recoveries’ excluding recoveries shown under Issues to
Services. The earnings like scrap disposal etc. are shown as minus expenditure i.e.
deduct head.

Receipts

This heading shows all ‘Receipts’ on account of sale to Civil Trade, MHA,
other Govt. Deptts., Export etc. Besides it also includes Sale of Surplus & Obsolete
Stores, Misc Receipts (like License Fee) etc.

Gross Capital and Net Capital

The Capital Budget Heads are shown in the formats, which are similar to the
Revenue Heads.

GENERAL RULES FOR PREPARATION OF BUDGET ESTIMATES

A reasonable correct initial estimate of the sums required to finance the

Defence Services for any particular financial year is of paramount importance, as on
the correctness of this initial budget estimate depends the whole financial
administration of the year.

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Labour Accounting & Factory Accounting

No precise rules can be laid down for determining the amounts to be included
in budget estimates, or for checking the amounts included in them but an intelligent
discretion and utmost foresight must be exercised with reference to the effect that
events, occurring or impending at the time the estimates are under preparation, are
likely to have on the receipts or expenditure. In all cases, account should be taken
of factors such as the expenditure in previous year changes of policy and the
probable trend of prices etc.

The following general principles are, however, observed on the preparation of

these estimates:

1. Only sanctioned expenditure may be included in the budget but at the end of
the estimate any fresh charge requiring sanction that is likely to be incurred during
the year should be noted. While it is desirable that provision be made for all items of
fresh expenditure requiring sanction that can be foreseen, it is essential that no
provision is made for such expenditure without due justification and that when such
provision is made, the amount provided for is restricted to the absolute minimum
necessary. The estimates should be prepared on the basis of what is expected to
actually received or paid under proper sanction during the ensuring year, including
arrears of previous years, and not only for the demand or the liability falling the within
the year. Any fresh charge requiring sanction that is likely to be incurred during the
year should be noted but at the end of the estimate.

2. All variations between the provision for the ensuring financial year and that for
the current year must be explained and when such variations are due to the orders
of the Government the number and ate of the order should be quoted.

3. Fixed charges and those for supplies and services for which scales etc. are
laid down will be based on those data with due regard to past experience. In making
estimates in respect of fixed charges, it must be borne in mind that what are called
fixed establishments are not irrevocably fixed for all times and should be brought
under the formal review of controlling officers from time to time. Even when there is
no thought or intention of making any change in establishments, controlling officers
should review the entire estimate of the requirement of their departments or services.

4. The estimates, so are as they relate to establishments and salaries, will be

based on the existing orders of the Government of India applicable in each case. No
deviation from such orders is permitted without the previous sanction of that
authority. In cases, however, where the existing strength of personnel happens to
be less than their authorized establishment mainly due to the non-availability of
suitable personnel, delay in training etc. The estimate should be based on the
existing strength suitable increased to provide for further recruitment and availability
of such personnel. In the case of progressive salaries, the rate of pay which will be
due on the 1st September of the year to which the budget related should be adopted.

5. Fluctuating charges. Such as traveling allowances, contingent and

miscellaneous charges etc., for which no scales are laid down, will be calculated with
reference to the average normal expenditure of the previous three years. The
estimate of such varying charges should not be merely an arithmetical average of
three years figures. The average is a guide but it should not be taken absolutely,

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and the budget provision should taken into account all orders affecting the
expenditure and other factors such as changes in strength, progress of supplies etc.
Sanctions to recurring charges will be reviewed by the estimating authorities and
large variations in the budget provision and the average expenditure of the previous
years should be explained.

6. All temporary and supernumerary office and establishment should be shown

separately from permanent establishments.

7. In respect of pay and other charges which are payable in arrears after the
close of the month to which they relate, provision should be made for the amount
due for the period 1st March to 28-29th February. In respect of other charges which
are payable as soon as incurred, provision should be made for charges likely to be
incurred during the period 1st April to 31st March, Pay and Allowances which are fixed
at the daily rates should be calculated for 365 days 366 days in the case of a leap
year and not on a monthly basis.

8. No lump provision should be made in the budget estimates except under

definite orders.

9. Provision for losses should not be made in the estimates unless otherwise
authorised in the regulations or special sanction is obtained.

The process of estimating does not end with the preparation of the original
budget estimates for the year, but continues throughout the year and at intervals, the
budget figures are reviewed in the light of the progress of the actual expenditure and
other factors affecting the budget estimates for the year.

a. Periodical Report
This estimate takes into account the progress of actual and other relevant
factors and shows the extent to which the sanctioned budget estimates for the year
are affected by circumstances known or orders promulgated either before or after 1st
April which may necessitate modifications in those estimates. The original budget
estimates is then reviewed by the Ministry of Finance (Defence) and Ministry of
Defence and decision taken with regard to any special action considered necessary,
e.g. the issue of orders requiring restriction of expenditure under any particular the
issue of orders requiring restriction of expenditure under any particular head during
the reminder of the year or submission of supplementary demands for grants to the
Parliament if it is apparent the expenditure during the year is likely to exceed to grant
originally sanctioned by the Parliament.

b. Periodical Revised Estimates

This estimate is a forecast as accurate as possible of what the actual results

for the year are likely to be. All important changes tending to increase or decrease
the budget estimates as indicated by actual figures available, or by other
circumstances, which have come to notice are taken into account in the preparation
of this estimate. This estimate is reviewed by the Ministry of Defence and the

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Ministry of Finance (Defence) for taking similar action as in the case of the Periodical
Report
d. Modified Appropriation

This is a final estimate for the year which is based on the latest known
actual and the likely expenditure during the remaining period of the year. The
closeness with which this estimate should correspond in total and in detail to the
actual expenditure for the year is of paramount importance as is on the basis of the
estimate that necessary re-appropriations and/or surrenders are formally sanctioned
by the Ministry of Finance (Defence)

The Ministry of Defence jointly with the Ministry of Finance (Defence) are
responsible for the sufficiency and moderation of the Defence Services Estimates.
The responsibility of the Ministry of Defence in regard to framing the estimates is
exercised mainly through the Heads of Branches at Armed Force Headquarters or of
other organizations under the Ministry of Defence, whose duty it is to scrutinise and,
where necessary, amend them before transmission to the Ministry of Finance
(Defence).

Supplementary Grant

Supplementary grant means the Parliamentary sanction for additional funds to

supplement the original sanctioned budget when re-appropriation of funds within a
demand is not adequate of fiancé the additional amount required under certain
heads of expenditure. In certain cases, under unforeseen circumstances, some
extra amount, other than projected for the particular head, may be required during a
year which is to be paid without fail. Under such circumstances, it may be paid
covering Parliamentary sanction is to be obtained afterwards.

Estimates for Fresh Expenditure

Every application for sanction to fresh expenditure is required to be

accompanied by a a clear estimate of its financial effect. The authority with whom
the proposal originates has to frame the estimate as accurately as possible. The
financial scrutiny of these proposals if further done to secure that they are in
accordance both with general financial principles and with regulations in particular
that may be applicable, and that are not open to criticism on the ground of
extravagance.

Proposals Involving Extra Expenditure

The annual budget estimates are closed on the 31st December of the
preceding year, and only those proposals involving extra expenditure which are
sanctioned by the Government of India prior to that data are provided for therein.
Such sanctions will not, unless specially allowed have effect until the following
financial year. No provision is ordinarily made in the budget estimates of the ensuing
year for proposals which are not received in sufficient time to admit of their full
consideration by the Government of India before the 31st December. Except in
urgent cases proposals which require the sanction of the Government of India must
reach them by the 15th November.

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An application for the renewal of sanction to a temporary establishment has to

be made in time to admit of orders being passed by the authority competent to
sanction its retention before the existing sanction expires.

LEGAL STATUS OF UNION BUDGET

The Government Budget is prepared based on the data collected from various
Departments through budget estimates and consolidated fund requirements are
computed taking into consideration of all plans for the fiscal year by the Finance
Ministry. The budget thus prepared is presented in the parliament. The demands for
grants (i.e. the Govt. budget) are finally voted by the Parliament and the connected
appropriation bill is assented by the Parliament. The approved budget is signed by
the President of India and it becomes a Law. The amount of money specified in the
budget documents are legally binding during the fiscal year. Departments/Agencies
cannot spend more than specified amount unless they are able to get supplemental
or deficiency appropriation through the same legal channels during that fiscal year
for which it was designed.

General Conditions of Fund Utilisation.

The fund allotted against any of the plans of a particular head is valid only for
one particular financial year. As such no fund can be brought forward or carried
forward to the next year.

PARLIAMENTARY CONTROL OVER THE BUDGET

The fundamental rule on which the whose system of budgetary control rests is
that no item of public expenditure may be incurred unless provision exists to meet in
the sanctioned budget estimates of the year concerned. The process of budgetary
control has three stages viz.

1. Initial distribution of Budget Grants – Vote on Account.

2. Watching expenditure against allotments.
3. Reappropriations.

The ultimate responsibility for ensuring that expenditure does not exceed the
corresponding Budget allotment rests on the Heads of the Departments within whose
control the relative activities fall. In order to help them, CsDA render monthly
statements of expenditure. They also bring to the notice of higher authorities cases
in which the trend of expenditure in their opinion is abnormally heavy or unusually
low.

Budget-makers and executors both have a legislative accountability. The

Parliament exercises its authority in this area in different ways.

(I)Debate over the Demands : - As soon as the Budget is presented to the

Parliament, discussion over the demands of some Ministries commences. Important
plan and non-plan items of expenditure, projects, schemes, etc. are discussed in
detail. General discussion covers the new taxation proposals, trade policies,
industrial policy, agricultural policy. Practically, all the Macro-economic issues come

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up for review. Supplementary demands and reappropriations as also the foreign

exchange budget are reviewed in depth.

(II)Consultative Committees of the Parliament attached to the Ministries

familiarize themselves with the day-to-day functioning of the Ministry.

(III) Estimates Committee of Parliament goes into the details of plans, projects,
procedures of a Minitry and give constructive suggestions for improvement.

(IV) Public Accounts Committee :- The Comptroller and auditor General’s Reports
after his Department conducts audit is discussed in detail by the parliamentary
committee. Disciplinary and remedial actions are taken as per the PAC’s
recommendations, which are placed before the Parliament.

(V) Committee on Public Undertakings has a similar function as that of the PAC in
the area of the Central Public Sector.

Ordnance Factories Institute of Learning Ambajhari, Nagpur

Labour Accounting & Factory Accounting

BUDGETING IN ORDNANCE FACTORIES

The Ordnance Factory Budget was a art of the Army Budget from the very
beginning. Due to the changes of the Central Government policies, the Ordnance
Factory Budget was separated from Army Budget with effect from 01.04.87. With this
the full control and accountability has been entrusted solely on the OF Organisation.

FACTORY LEVEL PROJECTION

Ordnance Factories budget has two parts. One is the Expenditure side and
the other one is Receipts and Recoveries.

Budget Estimates for Expenditure

REVENUE

a. Manufacture
b. Store Purchase
c. Civil Works
d. Movement of Personnel and Store
e. Miscellaneous Exp.
f. Research & Development

CAPITAL

a. Renewal & Replacement of P&M

b. New Capital - 1. Expansion
2. Diversification
3. New Project
c. Capital Works

Budget Estimate for Receipts & Recoveries

Issues
a. To Services
b. Other Defence Deptts.
c. IFD Issues

Recoveries
a. From CT/MHA/NMD etc.
b. Sale of Surplus/Obsolete Stores
c. Sale of Waste/Scrap
d. Transfer from Stock Pile
e. Misc. Receipts.

The revenue expenditure falling under category Manufacture mostly represent

the obligatory charges. This is the unavoidable commitment depending on the
strength and composition of the organization and other factors which are governed
by the policy decisions of the Government of India. All other expenditure is falling

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Labour Accounting & Factory Accounting

under general category and susceptible to control against budget provisions by the
Executive authority under the Government of India.

Head-wise Explanation of OFB Budget

(A) RENENUE MAJOR HEAD 2079

1. MINOR HEAD 001 : DIRECTION AND ADMINISTRATION

This head is for Hqrs expenditure i.e. OFB Calcutta, OF Cell New Delhi, OEF
Hqrs Kanpur & AV Hqrs, Avadi. Under this head all category of expenditure
pertaining to Hqrs are booked.

2. MINOR HEAD 004 : RESEARCH

This head is for booking of research expenditure of approved schemes

of OFs. As per guideline issued research expenditure should be incurred
against FOH ‘01’ series work order therefore only Direct Labor and Direct
Material needs to be shown under this head. (However, as expenditure for
Direct Labor and Direct material is already is shown under the head
Manufacture and Stores, transfer punching medium is used for appropriate
cost transfer.)

3. MINOR HEAD 053 : MAINTENANCE – M&E

This head is for booking of expenditure on account of maintenance of

machinery and equipment through outside contract only.

4. MINOR HEAD 054 : MANUFACTURE

This head is for pay and allowances of all categories of employees in the
factories viz, GOs, NGOs/NIEs, IEs, DSC, trainees and other categories. These
expenditures are booked under separate code head. For OT expenditure also
separate code head have been provided. Though DAD expenditure does not come
under OF estimates yet the OT expenditure of LAO and internal audit are also being
booked under this head.

5. MINOR HEAD 105 : TRANSPORTATION

This head is for Movement of Personnel and Movement of Stores.

i) Movement of Personnel : This is for TA/DA expenditure of the factories.

Travel within India and Abroad both are being booked under this head. For foreign
travel separate sanction is required from OFB & MOD. Regarding Foreign travel
separate sanction limit is received from M of d within the overall transportation
budget.

ii) Movement of Stores : This is for transportation of material by Rail and other
than Rail. Accordingly separate allocation is given under these two category.

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Labour Accounting & Factory Accounting

Expenditure other than Rail is being booked by LAO whereas for rail expenditure is
booked centrally by CC of A(Fys), Rly section on the basis of M.C. Notes.

6. MINOR HEAD 110 : STORES

This head is for purchase of material for production and maintenance. Very
close monitoring of this head is done by analyzing the purchase budget requirement
in details to reduce the possibility of excess purchase i.e. purchase not matching the
targeted production. Different codes have been provided for based on different
source viz. Local purchase, Central purchase, Foreign purchase, Govt. Supply
(material received from Govt./Source and paid by book debit) and Transfer from
stockpile (Purchase from capital budget-stockpile).

Besides the above another category of expenditure is booked under this head
stores viz. Direct Debit. Direct Debit is the amount of installment (Principal & Interest)
paid to USSR on account of Debt Service liability and this amount when paid is
booked under this head and simultaneously passed on to army as issues.

This head is also used for –

A. booking of sale proceeds of scrap and waste, which is a recovery
B. booking credit on account of transfer from revenue to stockpile (i.e. for
booking of minus charge under Revenue head for transfer of stores available
in working stock to Capital head – Suspense : Stockpile.)
C. booking issues of Plant & Machinery by MTPF to sister factories

7. MINOR HEAD 111 : WORKS

This head is mainly for maintenance of building etc. under which the following
category of expenditure is being booked.
i) Work done through outside contract.
ii) Work done through MES.
iii) Railway siding expenditure.

8. MINOR HEAD 106 : RENEWAL & REPLACEMENT

This head is for expenditure on account of Renewal & Replacement of Plant &
Machinery. This expenditure is incurred by withdrawing fund available under the
Public Fund Account of OFs – RR Fund. Therefore, expenditure under this head has
corresponding minus expenditure under other recovery head.

9. MINOR HEAD 797 : TRANSFEER TO RR FUND

This head is for transfer of amount to Public Fund Account of OFs – RR Fund
for Renewal and Replacement of Plant & Machinery as and when required. This
amount is charged to production as overhead in the year when the fund is provided
as per laid down procedure.

10. MINOR HEAD 800 : OTHER EXPENDITURE

This head is for the following expenditure.

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Labour Accounting & Factory Accounting

i) Incidental and Miscellaneous expenditure.

ii) Consumable – Sugar, Milk, Medicine etc. supplied by ASC and trade
purchase of medicine.
iii) Electricity & Water supply.

11. MINOR HEAD 901 : ISSUES TO ARMY (INCLUDES DIRECT DEBIT)

12. MINOR HEAD 902 : ISSUES TO NAVY
13. MINOR HEAD 903 : ISSUES TO AIR FORCE
14. MINOR HEAD 904 : ISSUES TO OTHER DEFENCE DEBIT

Above four Issues budgets of Ordnance Factories are subject to availability of

funds under the purchase budget of the consignees i.e. ARMY, NAVY, AF, OTHER
DEF DEBIT) and OFB cannot exceed the funds so available in their budget, While
making Issues.

(B) REVENUE MAJOR HEAD 0079 : RECEIPT

1. MINOR HEAD 101

I) Sale of Surplus & Obsolete Stores. Booking under this category is being
made by Regional Controllers and though amount booked being reflected in all India
Compilation in time the some does not figure in CC02 due to non linking.

II) Issues to MHA

III) Issues to other CG Deptts. (other than MHA)
IV) Issues to State Govt and Union Territories (including State police force).
V) Issues to PSUs and Autonomous bodies.
VI) Issues to Civil Trade, Other non- govt. organization and Private parties.
VII) Export.

2. MINOR HEAD 800 : OTHER RECEIPTS

i) DGOF :
a) Miscellaneous Receipts.
b) Receipts from Surplus Lands, Buildings etc.

ii) Ordnance Fys :

a) Miscellaneous Receipts.
b) Rent (License Fee)
c) Electricity
d) Water
e) Conservancy
f) Receipts from estate Fund.

(C) MAJOR HEAD 4076 : DEFENCE CAPITAL OUTLAY SUB MAJOR HEAD 04 :
ORD FYS

1. MINOR HEAD 052 : MACHINERY & EQUIPMENT

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Labour Accounting & Factory Accounting

This head is for purchase of capital plant & machinery under Project and New
Capital.

2. MINOR HEAD 111 : WORKS

This is for capital civil works. Under this head expenditure is either incurred by
GMs or by MES. For MES allocation is made command-wise and they in turn
allocate the fund to respective GEs as per requirement. The works to be done
by MES requires Admin Approval of GM or OFB and therefore separate
allocation is made to GM/OFB intimating the amount of Admin Approval that
can be issued by them during the year.

3. MINOR HEAD 799 : SUSPENSE

Under this head following codes are operated :

a) Creation of Stockpile : For Purchase of material under stockpile (Fresh

purchase or replenishment) or transfer of material from working stock to
stockpile.

b) Withdrawal of Stockpile : Temporary or permanent withdrawal of Stockpile.

All the Stockpile transaction requires budget allotment as per guideline

issued time to time as well as sanction of SP/S section of OFB.

Preparation and Submission of Ordnance Factory Budget

As stated earlier, the budget estimates are projected head-wise to facilitate

easy monitoring and control by the authorities. There is a definite periodicity and
schedule for submission of the estimates. For example, the schedule for Budget
Projection for the year 2002-2003 would be as follows:

1. FORECAST ESTIMATE : 30.09.01

2. BUDGET ESTIMATE : 30.11.01
3. PERIODICAL (PRELIMINARY) REPORT : 31.01.02
4. PERIODICAL REVISED ESTIMATE : 30.09.02
5. REVISED ESTIMATE : 30.11.02
6. FINAL MODIFICATION REPORT : 28.02.03
Or MODIFIED APPROPRIATION

The manner in which the budget estimates for the year are prepared is
explained in the succeeding paras.

Manufacture (Pay & allowance) 01/805/01 to 09

The Pay and allowances of total strength of the factory is estimated category
and element-wise. The probable increase in the pay & DA during the year and any
intake of staff and workman and the wastages during that year are to taken into
consideration for projection.

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Labour Accounting & Factory Accounting

Category : GOs, NGOs, NIEs, IEs (Strength)

Head : BP, DA, HRA, CCA, Others (Total)
Others : FA, LTC, OT, CEA, RME, RTF, PLB

Provisions for Advances to the extent required is also to be catered for.

House Building Advance

Purchase of Motor Car
Purchase of Motor Conveyance
Festival Advance

Purchase Budget 01/806/01 to 14

Stores purchase is divided into Local purchase, Central purchase, Foreign

purchase, Custom Duty etc. The estimate is prepared for each head separately. The
requirement is computed as under :

(A) Requirement
1. Material Consumption
2. Disposal
3. Issues from Stock
4. Store in Hand
5. Store in Transit
6. Total

(B) Source of Input

1. Store in Hand (Opening balance from previous year)
2. Store in Transit (-do-)
3. IFD Receipts (expected during the year)
4. Own Factory Manufacture
5. Purchase During the year
6. Total

The columns(A6) and (B6) are to be equal. The Col. (B5) is computed by deducting
the total of Col. (B1 to B4) from the Col (B6). The amount thus computed (B5) is
apportioned into LP, CP,FP etc. according to the requirement anticipated for the
targets of production for the year.

(c) Civil Works 01/809/01 to 07

The Civil Work is made into two parts. One is Revenue Work and the other
one is Capital Works. Under revenue, the work is either done departmentally or by
MES. Under Capital, the work is done only by MES.

(d) Movement of Personnel & Stores 01/808/01 to 03

The estimate is prepared based on the past actual and present requirement
by assessment. Requirement of fund for movement of stores is to be made into two
parts, i.e. By Rail and Road, Separate allotment is made for both. General Managers
are allowed to make a little variation of spending.

Ordnance Factories Institute of Learning Ambajhari, Nagpur

Labour Accounting & Factory Accounting

(e) Other expenditure (I&M) 01/810/01 to 03

This includes payment of WC Act, Telephone/Telegram/TAX, Training,

Postage Stationary, Advertisement etc. This estimates are prepared according to the
past actual and future requirements anticipated.

(f) Research & Development 01/812/01 to 03

Research & Development projects are to be approved by the Ordnance

Factory Board. The approved projects are executed according to the availability of
the fund during the year. The progress of the projects are reviewed by OF on
quarterly basis and fund allotment is also made according to the outcome of review
and priority.

(g) Capital Expenditure

Plant & Machinery is procured according to the availability of fund. Proposed

purchase of P&M are to be approved by OF in advance. There are two types of
purchase of P&M. One is Renewal & Replacement (RR) and the other one is New
Capital Grant (NC). GM’s power to purchase from NC is limited to Rs. 10 Lakhs. The
estimate for both RR & NC is to made separately. Also purchase of computers are
kept separate, the estimate is also submitted separately.

The estimate for Capital Civil Work is also made separately and submitted.
The capital work is executed by MES according to the plans approved by the
authorities concerned. The fund allotment is made to the Garrison Engineer of the
area after completion of the work, the concerned project will be handed over the GM.

(h) Similar all Issues, Receipts and Recoveries are also to be estimated and
submitted to OF Board along with expenditure estimate.

(i) Provision for Advances

Along with the estimates for the main heads of accounts, the estimate for the
following advances are also prepared and submitted to OF.

House Building Advance

Purchase of Motor Car
Purchase of Motor Conveyance
Purchase of other Conveyance
Festival Advance
Other Advance etc.

The estimate for the advances mentioned above is also prepared and
submitted of OF along with other expenditure report, as mentioned above, according
to programmes given. The expenditure made against the Allotment given for such
advances are also be intimated to OFB in time. The advances thus paid is
recovered from the employees as per the prevailing rules.

Ordnance Factories Institute of Learning Ambajhari, Nagpur

Labour Accounting & Factory Accounting

NE PREVENUE BUDGET

With the separation of Ordnance Factories Budget from the Army Budget,
OFB is getting minor head wise allotments. OFB is expected to recover all the
expenditure incurred by them from issues to services and other indentors. The BE
provisions minus recoveries and receipts become Net Budget estimate for the
DGOF. This is in other words nothing but the Budgetary Supports, which should
theoretically be negative.

As a matter of good financial discipline, OFB has to ensure that at the end of
financial year, under no circumstances its Net Budge exceeds. This necessitate
OFB to allocate budget to all the factories linked to manpower requirements and
production targets and then effectively monitor the expenditure incurred vis-à-vis
allotment. Simultaneously it is also necessary that their receipts and recovery
targets also go hand-in-hand and monitored effectively. If this is done, it will imply
that the net budget support for any Unit remains as planned or within the prescribed
limits.

As regards effective monitoring of the Net Budget support, a proforma has

been devised in which the factories have to send minor head wise monthly returns to
OFB indicating pro-rata targets upto that month, bookings as per Cash Compilation
and the difference of these two figures. The position of Net Revenue Budget is
monitored by OFB Finance division and corrective action accordingly taken.

The Factory-wise Net Budget Monitoring Proforma is given on the next page.

FACTORY WISE NET BUDGET ANALYSIS

Sl Head of A/c PRORATA CCO2 DIFF

No.
1 3 4 5 6
EXPENDITURE
1 Research
2 Maintenance M&E
3 Manufacture
4 Transportation
5 Stores
6 IFD Receipts
7 Increase in Store-in-
Transit
8 Other Expenditure
9 Revenue Works
10 Ren & Repl
Expenditure
TOTAL EXPENDITUE
INCOME
11 Issues to Army
12 Issues to Navy
13 Issues to Air Force

Ordnance Factories Institute of Learning Ambajhari, Nagpur

Labour Accounting & Factory Accounting

14 Issues to ODD
15 IFD Issues
DEFENCE ISSUES
16 MHA/State/UT Police
17 CT
18 Export
NON DEFENCE ISSUES
19 Misc. Receipts
20 Surplus/Obsolete
Sales
21 Scrap Sale
22 MPF Machines
23 Stock Pile
GEN RECEIPTS

TOTAL RECEIPTS
33 NETBUDGET
SUPPORT (TOTAL
EXPENDITURE
TOTAL INCOME)

Ordnance Factories Institute of Learning Ambajhari, Nagpur

Labour Accounting & Factory Accounting

Ordnance Factories Institute of Learning Ambajhari, Nagpur

Labour Accounting & Factory Accounting

Ordnance Factories Institute of Learning Ambajhari, Nagpur