Executive Summary

Reliance Industries Limited is the largest private sector company (on all major
financial parameters) and its activities include exploration and production of oil
and gas, textiles, refining and marketing, petrochemicals (polyesters, polymers
and intermediates), textiles, financial services and insurance, power, telecom, and
infocom.
Reliance Industries Limited, Hazira manufactures petrochemicals and polymers.
The products manufactured at RIL Hazira include PP, PE, PVC, VCM, MEG,
DEG, TEG, PTA, PET, PFY, POY, etc.
The Finance & Accounts department of Reliance Industries Limited, Hazira deals
with Plant level expenses only. The various activities by the different section are
in view of manufacturing activities done. All the activities are undertaken and
executed by H.O. based on facts and figures received from Hazira. So the
different manufacturing activities like costing, material accounting, insurance
claims, various cash activities, bills reimbursement and remittances, employees
wages and salaries, bank reconciliation and other activities like budgeting and
excise and custom activities are done at Hazira.
The finance and accounts department has mainly six sections Cash & Bank
section, Insurance section, Central Accounting section, Payroll section, Project
Accounts section and Accounts Payable section. The Accounts Payable sections
main function is to process the bills of payment and after verification gives an
order for the payment of the same. The Insurance section takes care of covering
all the assets of the plant under insurance and to follow up payments of
premiums and settlement of claims.
1

The Central Accounting section takes care of costing & budgeting. The Costing
section is mainly concerned with finding out the cost per unit of the products
manufactured, controlling and reporting the costs by using techniques like
standard costing, marginal costing, and variance analysis. The section is also
responsible for budgeting of various Plants at Hazira. The Cash and Bank section
is responsible for making timely payments to the vendor and to maintain
minimum required cash balance. The Payroll section takes care of the
reimbursements to be made to the employees in accordance to their basic pay and
allowances accounted monthly.
At Reliance Industries Limited, SAP (Systems, Applications, and Products) is
used for data processing. This ERP (enterprise resource planning) is one of the
commonly used programmes by many business houses globally. Reliance
Industries Ltd. uses SAP/R3 in every branch.

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Company Profile
"Growth

has no limit at Reliance. I keep revising my vision.

Only when you can dream it, you can do it."

Dhirubhai H. Ambani
Founder Chairman Reliance Group
December 28, 1932 - July 6, 2002

The Reliance Group, founded by Dhirubhai H. Ambani (1932-2002), is India's

largest private sector enterprise, with businesses in the energy and materials
value chain. Group's annual revenues are in excess of US$ 44 billion. The flagship
company, Reliance Industries Limited, is a Fortune Global 500 company and is the
largest private sector company in India.
Backward vertical integration has been the cornerstone of the evolution and
growth of Reliance. Starting with textiles in the late seventies, Reliance pursued a
strategy of backward vertical integration - in polyester, fibre intermediates,
3

plastics, petrochemicals, petroleum refining and oil and gas exploration and
production - to be fully integrated along the materials and energy value chain.
The Group's activities span exploration and production of oil and gas, petroleum
refining and marketing, petrochemicals (polyester, fibre intermediates, plastics
and chemicals), textiles, retail and special economic zones.
Reliance enjoys global leadership in its businesses, being the largest polyester
yarn and fibre producer in the world and among the top five to ten producers in
the world in major petrochemical products.
Major Group Companies are Reliance Industries Limited (including main
subsidiary Reliance Retail Limited) and Reliance Industrial Infrastructure
Limited.

RIL is organized in 3 major business segments viz. Exploration and Production of

oil & Gas, Refining and Marketing of petroleum products, including
manufacturing & marketing of Polymer, Polyester, Polyester intermediates,
Chemicals. It has major production facilities at Hazira, Jamnagar, Patalganga,
Naroda and Vadodara, Gandhar, Nagothane (formerly IPCL sites). RIL also has
Oil & Gas exploration and production interests in India, Yemen and Oman.
1.3:

Major Business Strategy

With vertical integration of its chain products from Refinery to Textiles, RIL is
perhaps the only corporate entity in the world to be integrated in the entire value
added chain from oil production to retailing of textiles. RIL continues to be
Indias largest exporter, reflecting its global competitiveness, international quality
of its products and superior logistical capabilities. Reliance adopted the unique
concept of implementing the phase I down stream plants at Hazira with imported
raw materials (Ethylene) and intermediates (Ethylene Dichloride, EDC) to ensure
4

completion and commissioning of the plants in 24 months time. Reliance is the

first complex in the world to start operations based on imported Ethylene. British
Petroleum followed RIL in this regard. The first phase of the complex to
manufactures Ethylene oxide (EO), Mono - Ethylene Glycol (MEG). Vinyl
Chloride Monomer (VCM), poly Vinyl Chloride (PVC) and High Density
Polyethylene (HDPE) was commissioned in 1991 - 92.
Naphtha is cracked at high temperature to produce ethylene and propylene.
Benzene and toluene are extracted from the cracked products. Ethylene is
polymerized to LLDPE/HDPE in the polyethylene plant. Propylene is
polymerized to PP in the polypropylene plant. Ethylene is chlorinated to
ethylene-di-chloride, which is cracked to vinyl chloride and, in turn, polymerized
to PVC in the PVC plant. Ethylene is oxidized to ethylene oxide, which is
hydrolyzed to MEG in the Mono Ethylene Glycol plant. Paraxylene is oxidized to
produce PTA. MEG and PTA are reacted in polycondensation lines to make POY,
PSF, Polyester Fibre Fill and PET. The complex has 250 MW of captive power
generation capacity based on gas and naphtha. Hazira has its own jetties and a
single buoy mooring five km. off the coast for the large tankers to transfer the
main raw materials Naphtha and Paraxylene directly to the tank farms.

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Board Of Directors
Name of the
Directors

Category
Promoter Director

Mukesh D.Ambani
Chairman &
Managing Director

Executive
Directors

Nikhil R. Meswani
Hital R. Meswani
PMS Prasad
P.K. Kapil

Non-Executive,
Non-Independent
Director

Ramniklal H. Ambani

Independent
Directors

Mansingh L. Bhakta
Yogendra P. Trivedi
Dr. D. V. Kapur
M. P. Modi
Prof. Ashok Misra
Prof. Dipak C Jain
Dr. Raghunath A
Mashelkar

An Overview of
Reliance Industries Limited,Hazira
The 1000-acre Hazira manufacturing site is located 22 kms west of Surat City in
the State of Gujarat on the estuary of Tapi river. The site provides an easy access
for bringing raw materials through sea and lies in the center of the consumer
intensive western region. Reliance, Hazira a multi-product, fully integrated
complex make plastics, petrochemicals, fibre and fibre intermediates. In order to
protect the environment and avoid ecological disaster, conventional methods
were not employed for land filling. Instead dredgers were employed to pump out
river sand for hydraulic filling, the marshy soil with poor load bearing capacity
called for extensive piling work to be carried out. In an unprecedented
construction activity, around 18,000 piles were driven for the first phase in about
6 months time.
The Hazira complex uses advanced process control systems and the complex
operates on a Computer Integrated Manufacturing (CIM) system. Planning the
database for the business decision is governed by the vision to use the world class
ERP-SAP system uniformly across the reliance for capturing the data at source,
for availability of information online, real time to the users for data security and
for smooth data transfer interfaces. Hazira Manufacturing process is supported
by process control system by ABB, Siemens .Advance process control , real time
optimizer and IP-21 (Info plus) systems allow plant operating data access from
any where in the world.

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Financial Highlights
2009-2010

Turnover
Rs.2,00,400 Crore (US$ 44,632 Million)

Gross Profit
Rs.33,041Crore (US$ 7,359 Million)

Cash Profit
Rs.27,933 Crore (US$ 6,221 Million)

Net Profit
Rs. 16,236 Crore (US$ 3,616 Million)

Total Assets
Rs. 2,51,006 Crore (US$ 55,903 Million)

Financial Milestones
2010

Revenue crossed Rs. 200,000 crore mark (Rs. 200,400 crore, US$ 44.6 billion),
Net Profit crossed Rs. 16,000 crore mark (Rs. 16,236 crore, US$ 3.6 billion) and
Total Assets crossed Rs. 250,000 crore mark (Rs. 251,006 crore, US$ 55.9
billion), unparalleled in the Indian Private sector.

Exports crossed Rs.1,00,000 crore mark (Rs.1,10,176 crore, US$ 24.5 billion),
14.5% of India's total exports.

RIL declares Dividend of 70%. Payout of Rs.2,084 Crore, one of the highest in
the Indian Private Sector.

2009

Total Assets crossed Rs. 200,000 crore mark (Rs. 245,706 crore, US$ 48.44
billion), Net worth crossed Rs. 100,000 crore mark (Rs. 126,373 crore, US$
24.92 billion), unparalleled in the Indian Private sector.

RIL declares Dividend of 130%. Payout of Rs 1,897 Crore, one of the highest in
the Indian Private Sector.

2008

Revenue crossed Rs. 130,000 crore mark (Rs. 139,269 crore, US$ 34.7 billion),
Net Profit crossed Rs. 15,000 crore mark (Rs. 19,458 crore, US$ 4.9 billion) and
Total Assets crossed Rs. 140,000 crore mark (Rs. 149,839 crore, US$ 37.3
billion), unparalleled in the Indian Private sector.

Exports crossed Rs. 80,000 crore mark (Rs. 83,492 crore, US$ 20.8 billion),
13.4% of India's total exports.

RIL declares Dividend of 130%. Payout of Rs 1,631 Crore, highest in the Indian
Private Sector

2007

Revenue crossed Rs. 100,000 crore mark (Rs. 118,354 crore, US$ 27 billion), Net
Profit crossed Rs. 10,000 crore mark (Rs. 11,943 crore, US$ 2.75 billion) and
Total Assets crossed Rs. 100,000 crore mark (Rs. 117,353 crore, US$ 27 billion),
unparalleled in the Indian Private sector.

Exports crossed Rs. 60,000 crore mark (Rs. 66,627 crore, US$ 15 billion), 12% of
India's total exports.

RIL declares Dividend of 110%. Payout of Rs 1,440 Crore, highest in the Indian
Private Sector

2006

RIL places $300 million in US Private Placement Market. First ever Indian
company to raise money through this route.

RIL declares Dividend of 100%. Payout of Rs 1,393 Crore, Highest In Private

Sector
10

RPL a subsidary of RIL completes its US$ 1.2 billion Initial Public Offering of
equity shares with an overwhelming response across different classes of
investors. Chevron to Purchase 5 % Stake in RPL for USD 300 Million. Option
to Increase Stake to 29 %.

2005

Launches US $ 348 Million Syndicated Term Loan Facility. Aims To Replace

Existing High Cost Loans

Reliance Successfully Closes US$ 350 Million Multi Currency Term Loan

2004

Reliance signs EUR 116.2 million Export Credit Agency (ECA) backed Buyer's
Credit Facility provided by Deutsche Bank. RIL avails an ECA cover for the
first time in 22 years.

Reliance emerges as India's Greenest private sector company amongst the

private sector with an overall rank of number two in a BT - ACNielsen ORGMARG survey of shareholder perception published in Business Today's
October issue.

Reliance Industries concludes re-pricing of USD 687.50 million Syndicated

Term Loan facilities.

Reliance Group emerges as India's Largest Wealth Creator in the private

sector for the Year 2003-04

2003
11

RIL - First Indian private sector company to record net profit of over Rs 4,000
crore in one financial year.

2002

RIL - First Indian private sector company to record Net Profit of over Rs. 1,000
crores in one quarter.

Reliance among ten most creditworthy companies in Asia.

Reliance Completes Acquisition of IPCL.

2001

RPL raises USD 750 million syndicated loan - deal named capital market deal
of the year by IFR Asia.

Group revenues cross Rs. 60,000 crore (Rs. 60,160 crores), Reliance becomes
largest business group in India.

RIL and RPL become India's two largest companies in terms of all major
financial parameters.

2000

Group profits cross Rs. 2,500 crore mark, Revenues cross Rs. 20,000 crore mark
(Rs. 21,541 crores) and Total assets cross Rs. 50,000 crore (Rs. 52,094 crores).
12

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Product Flow Chart

13

Products manufactured at
Reliance Industries Limited, Hazira
14

POLYMERS, CHEMICALS, FIBRES & FIBRE INTERMEDIATES

REON

Polyvinyl Chloride (PVC)

RECLAIR

Linear Low Density Polyethylene (LLDPE)

RELENE

High Density Polyethylene (HDPE)

REPOL

Polypropylene (PP)

Purified Terephthalic Acid (PTA)

Ethylene Oxide (EO)

Mono-ethylene Glycol (MEG)

Di-ethylene Glycol

Tri-ethylene Glycol

Ethylene

Propylene

Benzene

Toluene

Xylene

Carbon Black Feed Stock (CBFS)

Vinyl Chloride Monomer (VCM)

RECRON

Recron Staple Fibre (PSF)

Recron Filament Yarn (PFY)

15

Recron Fibre Fill (PFF)

RELPET

Polyethylene Terephthalate (PET)

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Vision and Mission

16

 Vision

Create value for the nation by offering competitive goods in material and energy
value chains and infrastructure

Mission

Provide economic value to shareholders and investors on a continuous basis.

Build integrated manufacturing and service facilities to world-class standards
and to the most competitive parameters of technology, scale, quality and costs.
Access and align people skills, knowledge, creativity, funds, materials and
service providers on a globally competitive basis.
Set standards in addressing consumer interests, ecology, operating safety,
occupational health and employee welfare and community services.
Lead markets through continuous capacity creation, product range expansion
and value oriented policies.
Seek new avenues for profitability, growth and development and turn ideas into
practice.

Industry Profile
17

The scope of Petrochemical Industry is potentially huge. With the trend in the
global market shifting, India can become one of the leaders in this industry on a
global basis.

Petrochemical industry is an important part of the Indian economy because it

fulfills the need of major industries like textiles, telecoms, power, cables,

plastics

etc.

The competitors in the market are attracted to the Indian petrochemical industry
for its benefits. The per capita consumption of synthetic fibers, synthetic rubber,
plastics and polymers in India is lower than the per capita consumption
worldwide. But interestingly, the growth of the petrochemical industry in India in
recent times was around 15%, whereas the growth in the petrochemical industry
globally was only 4%. In the future, there is a huge scope for the Indian
petrochemical

industry

in

the

global

market

for

petrochemicals

and

petrochemical based products. This would make way for the entry of new
companies in the Indian market.

The industry is divided into three basic petrochemicals such as Olefins (Ethane,
Propane), Aromatic compounds (such as benzene, toluene) intermediate
petrochemicals, end products (polymers), synthetic fibers and synthetic rubber.
As the general trend in the global arena of the petrochemical market has shifted
to the Middle-East and Asia from the West, India stands a good chance in
providing a lucrative market to the world.

In the present scenario the scope of petrochemical industry is very good as the
government regulations are aligned with the industry and is playing an
18

important part. The regulations have opened the market that is full of scope for
the rapid growth of the industry and in turn, the growth of the economy. The
supply and demand situations and the pricing views in the industry are also
among the factors for growth. With fierce competition in this sector, there is every
chance that superb quality products will be produced in order to stay ahead of
competitors.

The encouragement for investment has been another growth factor for the
petrochemical industry. The capacity of different product lies in the production,
segmentation, and consumption trend of its production and so the economies of
scale play a very important role in the profit making mechanism of this industry,
thereby determining the scope of each of the competitors in the industry.

The major Indian companies in this sector are:

Reliance Industries Ltd.

Gas Authority of India Ltd.

Indian Petrochemicals Corporation Ltd.

Grasim Industries Ltd.

Indo Rama Synthetics Ltd.

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19

Finance and Accounts Department

F&A
Department

Accounts
Payable
Section

Cash &
Bank
Section

Insurance
Section

Payroll
Section

20

Projects
Accounts
Section

Costing &
Budgeting
Section

Accounts Payable Section

Accounts Payable section deals with:

Making timely payments and correct distribution of cash to vendors.

Payments of bills related to administrative activity and projects undertaken.

Payment of bills related to purchase of materials and services rendered by

contractors.

Objective:

The objective of the Accounts Payable Section is to make the payments of various
bills strictly as per terms and conditions mentioned in the contract in order to
maintain the image and strong negotiation power of the organization for availing
goods and services at the most competitive price to meet the global
competitiveness and thereby fulfilling all the statutory compliances.

21

Functions of Accounts Payable Section:

1. Service entry prepared by the plant:
(a) Bills are received by respective plant technician / engineer for the
preparation of service entry.
(b) Concerned technician / engineer checks the bills and measurement
Sheet with record maintained by them.
(c) Technician

engineer

validates

the

quantity

claimed

by

the

contractor.
(d) After completion of checking, technician / engineer prepares service
GRN for that particular job against PO / WO / ARC.
(e) Technician / Engineer prepares the service entry for the services
rendered by contractors.
(f) After service entry preparation, it is checked by the sectional head of the
respective plant.
(g) Finally, service entry along with the bills are sent Finance & Accounts
department for further proceedings.
2. Bills Scrolling:
Scrolling Invoice is the transaction that creates SAP records of the receipt of
the vendor invoice. Invoice Scrolling is the first step in the processing of an
invoice and must be completed before any further processing or any payment
can be made.
In general terms, person who scrolls the invoice of the vendors is the
gatekeeper of the accounts payable section in finance department. Scrolling is
used to maintain records of all invoices received and the objective is to track
the bill and ensure the status of the bill. Payment period and credit period
starts from the scroll date. An invoice should be scrolled immediately upon
22

receipt or the earliest possible instance if it is not possible to scroll the invoice
immediately.

Cash and Bank Section

Cash & Bank section deals with:

Timely and correct distribution of cash / cheques for various purposes.

Proper accounting of cash transaction.

Maintenance of minimum possible cash on hand.

Objective:

The main objective of this section is to balance the cash to meet all obligations in
right time. A large cash reserve may be wasteful since this fund may be better
employed at any places. Its main function is to look after the small transaction.

23

Cash section:

This section generally deals with cash transaction. It involves the activities
relating to day-to-day cash transaction and bank activities. The Imprest Money
is provided to the HOD (Head Of the Department) for any unexpected
emergency. This amount varies from plant to plant. The maximum amount is
Rs.10, 000. The main function of this area is as follows:

Timely and Correction of cash / cheques for various purposes.

Proper accounting of cash transaction.

Maintenance of minimum possible cash on hand.

Withdrawal of Cash from Banks as per their requirements.

24

Functions of Cash Section:

Imprest Payment: Cash Section provides certain amount as Imprest money

to various plants at the starting of the year. This amount is given to the plant
based on their requirement like day-to-day expenses, are granted an advance
on the basis of request duly approved by the competent authority.

Advances: In RIL, the cash section gives some advance payment to the
employees for certain purpose like medical advance, tour advance, etc. If the
employee is going outside for training or for the work that is related to the
company, then company pays the amount for certain advances. After that the
employee gives the bills of his expenses and the cash section head will
approve the bill and will make payment to that individual.

Reimbursement: When the plant or employee gets some advances from the
cash section then after needed some extra money, this time the cash section
reimburses the money and accepts the expenses.

Other Payments: Cash section is also paying some other amount like GEB
bills, Gas bill, Octroi, Tax, Miscellaneous expenses. This payment is paid there
on allotted date and time.

25

Bank Section:

Company is having bank accounts with the following:

Bank of Baroda, Mora Branch.

Bank of Baroda, Bhagatalao Branch.

ICICI Bank.

HDFC Bank.

As Hazira site is not making any sale of goods, so it does not make any source of
income also. Whenever any payment requirement arises, at that time it demands
the payment from the Central Banking Department located at Mumbai and the
Central Banking Department will send the amount required to the Hazira Bank
sections bank through the telegraphic transfer whenever it will initiate to the HO
(Head-Office) regarding the cash requirements of the Hazira site.

26

Functions of Bank Section:

Statutory Payment: Certain statutory payments are also being met by the cash
section such as excise payment is done on 5 th of every month and gas bill is
paid on 2nd of every month. Sales tax, Excise payment, Octroi is being dealt
with the cash section and they also pay other miscellaneous expenses.

Other Payments: The bank section is also providing the payment to the
contractors and suppliers of the company. They are being paid the cheques to
the contractors and suppliers only when physically bills are being verified by
the Accounts Payable section. If any discrepancies have been found, then
payment will not been done and it will be blocked for payment until it is
verified.

Receipts: Receipts are made for the sale of scrap in the form of DD / Pay
Order / Bankers cheque and these are deposited in the bank daily.

Printed Vouchers: After receiving the vouchers, it is being checked that they
are in the serial order. If there is any discontinuity or discrepancy in the
vouchers then the clarification has to be taken from the concerned
department. After checking, the cheques are being given to the person to
whose name the cheques has been printed.
27

Bank Reconciliation Statement (BRS): In case of the BRS, the bank pass book
balance and the bank section has verified the companys bank balance in the
system at the end of each day. And if there is any mistake on part of bank or
company, then correction is being carried out by the bank section, Hazira site.

Correspondence with the Bank: Continuous correspondences with the bank

are maintained to know the balances, for any stop payment interest rate etc.
this is necessary because it will tell us how much money should be demanded
from the Central Banking Department and they are doing the fund planning.

Reporting of Interest Loss on Idle Fund: They are keeping the report
regarding the idle fund and making the planning and calculating the
opportunity loss on idle fund.

Payment of salary to employee: The banks section is also making the

payment to the employees at the first day of every month to their respective
accounts as per the payroll section intimation.

28

Insurance Section
Insurance section deals with:

Adequate protection of property.

Proper loss assessment and hence recovery of the claim from the insurer.

Arranging survey visits for the surveyor for survey and inspection.

Providing insurance services and facilities relating to the employees.

Objective:

The insurance section of the Finance & Accounts Dept. has to safeguard its
property against various types of losses by taking various policies. The
philosophy of the company is also to prevent losses by getting adequate cover at
optimum premium for the whole complex. The premium is fixed operation-wise.
Various plants are involved in various types of production activities. The
premium is charged as per risks involved and as per the risk coverage.

Insurance is a contract between the insurer (Insurance Company) and the insured
(policy-holder); whereby in consideration of a payment of the premium by the
insured to the insurer, the insurer agrees to pay the financial loss suffered by the
29

insured occurred as a result of some peril covered under the policy subject to its
terms, conditions, warranties & exclusions.

There are three basic elements to be considered which are as under.

Subject matters of insurance (e.g. property, like building, plant and machinery,
stocks, motor vehicle, etc.) should be in physical existence at the time of taking
insurance.

The peril (risk), which may cause accidental loss or damage, should be
covered by the policy (e.g. fire, explosion, burglary, riot, etc.)

There should be an actual financial loss to the insured, which may result from
the operation of the peril covered by the policy.

Any Insurance Policy incorporates the following.

1. Name and address of the insured
2. Description of the subject matter
3. Period of Insurance
4. Amount of Insurance (Sum insured)
5. Risks covered
6. Exclusions
7. Premium
30

8. Conditions
9. Warranties

Functions of Insurance Section:

Risk management study: Risk management forms an important part as the

function of the Insurance section dealing with inspection as well as
comparative analysis of risk versus the peril attached.

Adequate protection of property at optimum cost: The property owned by

the company getting insured is covered under the various policies followed by
the company and optimum cover is obtained at the optimum cost.

Policy selection: This enables to avail the opinion of experts regarding the
selection of coverage. This helps the insurance section in selecting the best
policy available to them. Insurance section sends all the required information
to the senior management at Hazira and also to the Head Office.

Monitoring timely renewals: As the policies are yearly taken; the function of
the Insurance cell is to renew the policies at the time of their expiry for further
risk coverage.

31

Inventory data comparison: The insurance cell has to maintain the level of
inventory of stocks for their risk coverage.

Project as well as other coverages: All risks pertaining to the projects are
covered under the policies taken by the company. Also other policies of
employee welfare, vehicle insurance covers etc. are also taken.

Recovery of claims from Insurer: Insurance section deals with the measures
regarding recovery of claims for the losses and damages.

Payroll Section
The first and foremost thing necessary for processing a salary slip is Attendance.
There are many punching machines all over the site. When an employee enters
into the office premises, his first job is to punch his identity card in the punching
machine. The punching machine records the in and out time of any employee
while swiping off the identity card. According to this time, salary slips will be
processed. If any employee does over-time for shut down purpose, he gets extra
amount for the work done which is added in the salary slips. If any employee is
absent, then his pay will be cut for the respective days. But, if any employee is on
leave, then his pay will not be cut provided his leave balance is not absolutely
zero. If his leave balance comes to zero, then again his pay will be cut. Leave
balance consists of Privilege Leave (PL), Sick Leave (SL), Optional Leave (OL),
and Casual Leave (CL). In over-time cases, the extra amount is based on the extra
hours of work done on a single day. Example: If hourly wage rate of an employee
is Rs.100 and if he works 4 hours extra during shut down, then his daily wage
rate is Rs.400. If he works during the whole month, then his over-time will be
Rs.4800. This amount (Rs.4800) will be added extra in the salary.
32

On attendance, an employee is eligible for different types of leave i.e. Privilege

Leave (PL), Sick Leave (SL), Optional Leave (OL), and Casual Leave (CL). There
are 3126 regular employees and 104 trade apprentice.

Functions of Payroll Section:

Receiving of Inputs: The preparation of payroll states with the receipt of

input from various departments. These inputs are received from the personnel
and administration department, time-office and co-operative society. The
personnel department provides information of the employees concerning
status change report, queries report, recruitment of new employees, FDA
payment list and reimbursement claims. The time officer gives details
regarding attendance, overtime, back wages, shift allowance, late coming early
going and other information. The administration department gives an account
of various allowances and schemes such as conveyance / car repair allowance,
telephone, electricity recovery, OYCS, OYSS. The co-operative society provides
information pertaining to scheme conveyance, bank loans, cable TV
connection, school transport, society loan, share capital, LPG recovery, etc.
Other than the above-mentioned inputs, employees provide information
related to investment, bank account number, additional deduction of I.T,
furniture and kit loan bill, electricity bills, etc. to the cash section.
33

Checking against eligibility: Once information is received, they are checked

against eligibility before approval. The criteria for eligibility are mentioned in
the companys policies, circulars and notes. If the inputs received are not
eligible, the concerned employee and the P&A department is informed about
it. If the inputs fulfill the eligibility criteria, they are further processed for
settlement. If required these inputs are matched with the payroll history of
the employees, stored in database files.

Consolidation: The inputs, which are found eligible, are then entered into the
system, which contains the entire relevant information bout the employees.
Once the statement has been entered into the system, they are checked again
to make sure that there are no errors. They are checked against the inputs
received and eligibility criteria for each input. Checking the input is an
important step in the preparation of payroll because any mistakes while
entering the data into the system will result in the miscalculation in the
employees pay. Thus, checking data entry and rectifying the mistakes of any
type, forms an important step in the preparation of the pay slip.

Processing: The reconciled statements are then processed. This step involves
matching of the bank statement with pay and reimbursement register
preparation of pay slip and the plant wise journal. In case of adjustment of
excess advance taken by an employee, negative pay slip is prepared. Other
functions carried out during processing include the preparation of salary
comparison statement, employee master chain report, loan master chain
report, etc. While processing claims and reimbursement some of them are
approved and sent back to the concerned employee and administration
department. The processed information is stored in files or system for future
use.
34

Reporting: The processed information is used to generate various reports.

These reports are sent to concerned department, employees, outside agencies,
etc. The pay register, reimbursement register, provident fund register and
provident fund non-subscribe lists are prepared and information of these
registers are sent to the administration department and employees. Bank
statement along with soft copy is sent to the concerned bank. Similarly, LIC
statements are sent to the Life Insurance Corporation. Professional statements
are sent to the Government and income tax statements are sent to the Income
Tax department. Pay slips are prepared and distributed to all the employees.

Project Accounts Section

Project Accounts section deals with:

Making timely payments to vendors / contractors for the purchase of raw

material or services rendered by contractors.

Payments of bills related to projects undertaken by RIL. It may be establishing

a plant inside the premises or any contract undertaken by outsider.

Making payments for the goods imported from abroad and the payments
regarding the statutory obligations in time.

Objective:

The objective of management of project accounts section is to make timely

payments of bills to vendors / contractors (purchase of materials / services
35

rendered by contractors) strictly as per the terms and conditions agreed upon
with the vendors while at the time of negotiation. This is done to sustain the
image of the organization for the purpose of availing goods and services at the
competitive prices to meet the global competitiveness. Organization has to fulfill
all the statutory compliances eg. TDS Deduction, Excise duty, etc.

Functions of Project Accounts:

Scanning and DMS of bills: Scanning is the first and foremost step in project
accounts section. Today is the tradition of paperless office. This is the reason
why all the bills are scanned. Scanning is done so as to keep the record of the
bills. The full form of DMS is Document Management System. All the
details of scanned bills are entered in SAP. The name DMS itself specifies
managing the documents or bills.

Scrolling the bills:

Scrolling Invoice is the transaction that creates SAP

records of the receipt of the vendor invoice. Invoice Scrolling is the first step in
the processing of an invoice and must be completed before any further
processing or any payment can be made. In general terms, person who scrolls
the invoice of the vendors is the gatekeeper of the accounts payable section in
finance department. Scrolling is used to maintain records of all invoices
received and the objective is to track the bill and ensure the status of the bill.
Payment period and credit period starts from the scroll date. An invoice
should be scrolled immediately upon receipt or the earliest possible instance if
it is not possible to scroll the invoice immediately.
36

Costing and Budgeting Section

Costing Section:
Cost accounting provides the information for the both management and financial
accounting. It measures both financial and non-financial reports relating to the
cost of acquiring or consuming the resources by the organization. Cost
accounting includes both financial and management accounting where
information cost is collected or analyzed.

Objective:

Routine internal reporting for the decision of the top management.

Non-routine internal reporting for the purpose of decision of the managers.

For the purpose of external reporting.

Functions of Costing Section:

37

Application of the effective control tools.

Ensuring effective working of the costing procedures.

Costing Method:

In RIL, Hazira site, costing section also influences the F&A Department. In
costing section mainly two methods are applied for tread transaction:
1. Process order accounting.
2. Cost center accounting.

These methods procedure is discussed as below:

1. Process order accounting:

Process order accounting is prepared for the each type of the product and the
product grade also. This cost is related to different plants for various products
like raw-material, utilities, overhead, etc. All this expenditure is captured at the
costing section through products value and quantity / quality wise. So, it will
give clear idea regarding the production cost of the product and plant capacity to
produce and the effectiveness is also verifiable from the process order.

38

Process order accounting is mainly prepared when the plant is receiving the
inputs. Mainly the plant is getting the inputs like raw-material, utilities by the
tank. This process order will take into account only the direct cost related to the
production. This will give us the idea regarding how much unit of production
has been transferred from one plant to another plant. When the goods are
transferred from one plant to another plant, then it is taken into account. The
particular product value is derived after taking into account the following costs
that are incurred:

Standard Rate: Standard cost is taken for the goods which are produced by the
plant itself and not by the outside of the site premises and it will provide the
base for the comparison of the actual cost with the standard cost of the
product and the production also.

Moving Average: Moving average method is one of the methods for the cost
allocation. In this method the cost is being apportioned on the basis of the
average cost of the material received by the different plants respectively.

Planned Rate: Planned Rate is consisting of the utility and the overheads of
the plant production. Planned rate is taken in advance and identifies the
production capacity. Planned Rate is consisting of mainly the overheads and
the utility costs. Plant costs are based on zero-based budget and the plant
decides the specific consumption norms.

2. Cost Center Accounting:

The purposes of preparing cost center accounting are:

Planning the organization future and estimating its current position.

39

Manage business strategy during the current period.

Monitoring organizational competitiveness after closing the settlement period.

Cost center accounting is done both at the end of the month and at the
beginning of the month.

Planned overhead includes the direct overhead, indirect overhead and the
depreciation overhead. Planned overhead rate is used for the purpose to
determine the overhead rate per unit of the production and the indirect rate of
the production. Respective rates for per unit of production are found out. All the
indirect costs, which are not charged in the purchase order, are charged in the
cost center accounting. Example: Stores and spares, employee cost, maintenance
cost is taken into account in the cost center accounting.
Classification of various costs:

The cost element is put into different groups according to the nature of the
expenses. And the report is prepared on the basis of the cost element details
which are generated by the internal reporting. The cost element particularly
determines the type of the cost and it will also determine the cost apportionment
and the cost incurred for that purpose. The costs are of two types:
1. Primary cost.
2. Secondary cost.

Explanations
1. Primary cost: Primary costs are the cost which represents the consumption
of the items and it is maintained on the general ledger master records for the
recording of the expenses.

40

2. Secondary cost: Secondary costs are used for the internal cost allocation.
And the cost is related to the product process cost also.

Cost center:
Cost centers are important areas in the company, which determines cost to the
company, and it will determine the cost and the influence of the cost. Cost center
has allotted one quote for the particular plant and under proper cost center
heading; the cost is to be recorded. This report is mainly useful for the purpose of
the knowing that all the cost has been apportioned properly and the value in the
type of the product. This report is generated month wise and the costing section
carries out continuous monitoring.

For the determination of the production cost of the particular product, it requires
the need of the cost centers. Cost center gives all the details for particular plant
site and also includes various activities such as method machine process. It acts
as the separate division of the organization for the purpose of finding out the
cost. This is divided on the basis of where the cost affects more. The different cost
center are given the specific codes for the purpose of easily identification of the
41

cost and the cost allocation and the cost apportionment to different plants on
which the cost has incurred proportionately.

Budgeting Section:

The act of preparing budgets is known as budgeting. In RIL, budgets are given in
advance at the starting of the year. Budgeted ratios are given by technical
department. Technical department gives budgeted ratios actual ratios are given
by the plant based on their performance. If any deviation occurs, then it is known
as variance.

BUDGET-ACTUAL=DEVIATION
Any variance should be reported to higher authorities with a reasonable cause.
Every month MPR (Monthly Performance Review) takes place, wherein
presentations are prepared for every plant in which all variances are highlighted.

Objective:

Routine internal reporting for the decision of the top management.

Non-routine internal reporting for the purpose of decision of the managers.
For the purpose of external reporting.
42

Following types of budget are prepared at Ril, Hazira:

1. Revenue Budget: The activity of budget preparation involves collection

estimates of expenditure from all cost centers and compiling the same to
present to the top management for approval. Budget control part involves the
activities like monitoring the budget versus actual budget throughout the year
with suitable reports to management, emphasizing the stand of each cost
center.

Stores, spares and consumables budget: Due to the constant operation of

the equipment and the consequent wear and tear many parts of the
equipment of the plant needs change on a routine basis or as and when it
is needed. But it will not be so difficult to determine the machinery parts
which are to be changed at periodical times. The real problem arises in
determining the parts that are to be changed as per the need. This does not
follow any set of patterns and needs a closer look into the age and the
operating condition of that equipment coupled with the total maintenance
plant estimated during the current year. The expenses that go into the
budget are the cost of stores, spares and consumables that are used in a
proper maintenance and up keeping of the plant. Stores, spares and
43

consumable budgets are the fixed budgets and the budgeting is done on
the basis of zero-based budgeting and for that every month the budgeted
values and the actual ones are compared and the meeting is held every mo
nth and if there are any increase in expenses then the officer in charge will
have to give justification regarding the increase or decrease in the
budgeted and actual figures. In stores, spares and consumables budget,
the

four

bifurcations

are

done

namely

mechanical,

electrical,

instrumentation and civil all the figures regarding the stores, spares and
consumables are collected and then are summed up and put into one table
named stores, spares and consumables budget which consists of plants
name, budget amount of 2005-2006, production of 2006-2007 an actual
amount and budgeted amount are compared and variance is derived.

Salaries

and

wages

budget:

The

salaries

and

other

employees

compensation budget depends on effective deployment of the existing

labor force coupled with the improvements that are being carried out in
the plant which has direct bearing on the number of employees. The labor
cost is the perfect fixed cost which will not fluctuate with the increase or
decrease in the production. For the purpose of formulation of employees
compensation budget, the number of employees are determined on the
basis of total position in the organization and also the schedule of the
manpower requirements at various levels once the number of employees
have been found out, appropriate cost of labor is worked out taking into
the existing levels in different grades with the suitable adjustments
towards increment, promotion, increase in DA / COLA. While formulating
the salary budget, it should be ensured that the perfect control is affected

44

on the number of manpower as well as overtime cost that has been

estimated.

Repairs and maintenance budget: Repairs and maintenance budget

expenses are one of the major expenses incurred at the Hazira site. Repairs
and maintenance budget covers a broad area because all the plants,
machinery needs often proper maintenance and for that, information can
be from the engineers of the respective plant like repairs and maintenance
for civil, mechanical, instrument, electrical and others. The expenditure on
activities of repairs and maintenance are determined taking into account
the equipment, shutdown schedules and also the routine activities of
maintenance. All the repairs and maintenance items are different GL
accounts. A detailed justification of incurring of such expenditure has also
to be placed before the budget committee. Repairs and maintenance
budget also depends on the shutdowns to be done in the plants for the
purpose of maintenance which is necessary too. Repairs and maintenance
expenses are arrived from the engineers of the respective fields such as
instrumentation, civil, mechanical and electrical. All the expenses
regarding the repairs and maintenance are taken first and then budget is
prepared by the F&A department. Pro-rata is also found out and every
month meeting is held regarding achieving the budgeted figures and for
the increase in the expenses the respective CES is held responsible for
giving the justification.

Administration expense budget: There are several functions of the

companies operation which are considered in the nature of general
administration. These general administration expenses are incurred either
45

directly like expenses on telephone, fax, rent, etc. or expenses like incurred
through contract, like hiring of cars, house keeping, etc. Some of the
expenses of administrative nature are incurred at plant level or
departmental level.

Process of preparing Revenue Budget:

The preparation of revenue budget starts by the month of January. To start with
the finance and accounting department issues a circular to all the plants
regarding the budget for the upcoming year. The plants are required to furnish
the details to the finance and accounting department. They also have to provide
the amount of expenditure and the justification for same is to be given. In Ril
(Hazira) zero based budgeting is being followed and zero is given the each
activity done. The focus is given more to present and future. On the receipt of
estimated budget figures from the plants; the next step involves the comparison
of the proposed amount with the last years budget and actual expenses. Once all
the necessary information has been received all the supporting documents for the
budget are consolidated and forwarded to the finance and accounting
department for monitoring and reviewing.

46

Next procedure consist of meeting that is held with the executive director where
both plants and budget committee remains present t o examine the proposed
budget wherein if found increase proper justification for the same has to be
provided on the spot.

2. Capital Budget: Projects of capital nature involves huge amount of

investment. Therefore, a long term planning is of particular importance,
before undertaking any such project. For, the preparation of capital budget, a
detailed and critical analysis of each and every figuring in the Capex (Capital
Expenditure) budget is to be made. Unlike revenue budget, the expenditure
under the capital budget may be extending well beyond the budget period, as
some projects take long time for their completion. In such cases, the
expenditure requirement has to be broken into financial year wise, specifying
the starting date and estimated date of completion. This budget represents the
expenditure on all fixed assets during the budget period. It includes items
such as new buildings, machinery, land and intangible items like patents, etc.

Special Features: The capital expenditure budget has certain characteristic

features which distinguish it from other functional budgets. These are:

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Capital expenditure budget deals with items not directly related to profit
and loss account. Expenses related to capital expenditure such as
depreciation, repairs and maintenance, etc. are, however, correlated to this
budget and they are included in overhead budgets.

Capital expenditure is frequently planned a number of year in advance,

perhaps five to ten years, in which case it is broken down into convenient
periods like years or months. As compared to this, other functional
budgets are normally prepared for a shorter period, say, one year.

Capital expenditure budget involves large amount of expenditure which

needs top management approval. The capital expenditure budget,
therefore, subject to strict management control.

The Head Office, based on the above classification, broadly assigns the capex
reference number to major project (expense above Rs.100 crore) with reference
to the division. Here, division means the various plants that are accounted
separately.

The capex reference number for major proposals may for example be KA 01,
four digit code. The first two digits that are in alphabets, indicates the division
names and the last two digits that are in numeric form indicates the serial
number of the proposal under that division. In case of Minor Projects
(expense between Rs.1 crore to Rs.100 crore), the head office assigns single
code for all such proposals, this is for example KA 00

48

Capex procedure in sap:

CAPEX procurement includes procurement of material as well as services for

minor projects (like de-bottle necking/ expansion/ up gradation/ small
additions to asset). CAPEX procurement does not cover MAJOR PROJECTS.

User sends a proposal for Capex procurement to the management for

approval. Preparation and sending proposal will be outside the system.

After getting approval from management , capex code should be obtained

from local finance( site finance to co-ordinate with HO for getting the same.)

Each site will have a asset under construction (AUC) created. Example- for

Hazira AUC in SAP will be 3000003-0 in fixed asset module.

Whenever a capex proposal is approved a sub-AUC will be created under
AUC 3000003-0 for HZ.

For each capex an internal order will be created in costing module under
internal order category Z710 for Hazira. Z720 for PG, Z730 for Mumbai
andZ700 for Jamnagar. The internal order will have a settlement rule setting
the expenses to the sub-AUC relating to the capex. FOR EASY reference the
internal order will be named with capex code.

Each capex will have a separate internal order for the purpose of monitoring
budget vs commitment vs actual.

There will be proactive monitoring of each capex on the basis of procurement

budget through the budget route for internal order where the procurement
budget for each capex will be given.

The total budget of each capex will be compared with the actual through the
planning route in internal order. (The total budget will include apart from
49

procurement budget other items like value of materials already lying in stock
etc.). The total budget will be broken up into two categories like materials for
capex, for this purpose two G.L accounts are created. 7100700-stores and
spares consumed minor projects for materials and 7147100 repair and
maintenance minor projects for services.

For the above purpose each capex should contain overall budget split into
materials and service, and also procurement budget. Accounts department

will enter the budget in the internal order.

Each internal order is attached to a sub AUC in fixed asset for the purpose of
setting all the expenses collected.

All capex items will be codified in SAP. The codification process of all capex
items will follow the same route of revenue. However in case of services,
services of recurring nature only will be codified and other services could be
defined in the form of text.

Each site will have a separate funds centre allotted for the purpose of capex,
wherein the total budget will be entered. Each internal order that is created
will be assigned to this funds centre. The fund center created for Hazira is
41000.

Creation of purchase requisition will follow the same route as of revenue but
with account assignment category as Z. At every item level in the PR, the
system will prompt the user to input the internal order reference no (capex
order no) in the order field. The order can be selected by giving controlling
area as RIL and order category Z710. The G/L account default automatically
based on the account assignment category. For uncodified services, the G/L
account needs to be defined.

50

The system will check for the budget mentioned in the internal order for the
specific capex at the time of saving material/service PR. If the budget exceeds,
the systems will give the error message.

Release of PR will be attracting the same release strategy as of normal PR for

material/services.
A separate purchasing gr. If needed, will be defined for location for capex
procurement.

The internal order reference & account assignment details will get defaulted
from PR to PO. Balance procedure for making PO will follow the normal
route and will attract the usual release strategy.

Excise invoice capture it will follow the procedure followed for capital goods
(invoice will be captured against PO only).

Upon receipt of material, as soon as the GRN is prepared in stores, since the
account assignment is Z , the material will get issued to that capex directly.
No reservation is required from the user for that material.

For materials for which purchase requisition was not made in SAP and is
lying in stores.

As and when the user department wants the material, they can raise the
reservation (MB21) with movement type 261, mentioning the internal order
reference no and giving fund center as 41000. (Again here the cost center field
is to be left blank).

The stores would issue the material to the user department w.r.t reservation.

The above procedure is applicable for materials purchased for common

inventory and to be drawn for capex.

51

The normal procedure for bill passing will be followed in the case of capex
orders also.

At the period end the internal orders will be settled to the sub AUC.

When the capex is completed the sub AUC will capitalized in fixed asset
module.

52

3. Production Budget: Depending upon the review of production capacities

and the improvements that have made in the plants, the budgeting
department arrives at the estimated production numbers. The determination
of production budget is affected by the consumption of chemicals and
catalysts, raw-materials, utilities, etc. that goes into consumption for the
required product volume. For Hazira manufacturing unit, the production
budget is prepared for each plant separately by setting both production
purposes. The Hazira unit has a centralized power and utilities department
supplying the required utilities to the production units.

The production budget is an estimate of production for the budget period. It is

first drawn up in quantities of each product and when remaining budgets have
been compiled and cost of production is calculated, then the quantities of
production cost is translated into money terms, what in effect becomes a
production cost budget. The production budget is the initial step in budgeting
manufacturing operations. In addition to production budget, there are three other
budgets relating to manufacturing activities of a company. These are rawmaterials budget, Labour budget, and production overhead budget. The principle
considerations involved in budgeting production are:

Sales Budget: Where sales are the principle budget factor, the production
budget will be based on the volume of sales forecast by the sales budget.

Inventory Policy: The management decision regarding quantities needed in

stock at all times to meet customer requirements is an important factor. In
deciding on the inventory policy, factors like storage facilities, length of the

53

production period, perish ability of product, risk of price changes, etc. have to
be given due consideration.

Production Capacity: The production capacity of each department should be

worked out and budget figures should be within these limits. However, when
production capacity falls short of sales requirements, the following
alternatives may be considered:
(1) Purchase of additional plant and machinery.
(2) Introduction of additional shift.
(3) Introduction of overtime working.
(4) Hiring machinery.
(5) Sub-contracting production of components.

Management Policy: Production policy of the management plays an

important role in budgeting production. For example: management may
decide to buy a particular component part from outside instead of
manufacturing it. This will influence production budget.

54

Process of preparing Production budget:

The preparation of production budget starts in the month of December with the
issue of a circular by the planning & coordination department. According to the
circular, all plants have to furnish their details of their production budgets.
Production plan is the base for preparation of other budgets. Specific norms are
fixed for each and every raw-material, chemical catalyst utilities, packing
materials, etc. These norms get fixed on the basis of collaborations, chemistry,
internal factor norms of last year and the current year are compared and one with
the lowest one is finalized. The last four year figures of norms are taken into
account and average of the four is considered as the best achieved norms. For the
preparation of the production budget meeting with the marketing people is very
important after the production gets completed and it is assumed that whatever is
the production is the sales. Based on the production budget we can know byproducts, waste generation, raw material consumption, sale of by-products is
shown as the other sales, chemical catalyst, packing materials and power and
utilities.

Budgeted amount can be derived by multiplying norms with production. In the

same way we can derive at budgeted utility by multiplying the utility norms with
the production.

Once the production budget at the plant level is made then it is sent to P&C
department for further scrutiny thereafter the budget is compiled and is sent for
55

technical review by the head of CTS and the plant. If it is found satisfactory after
the technical review it is sent back to the plant for changes. Once the necessary
changes are being made, it is again reviewed and then sent to the site president
for approval. If it is approved by the president, the copy of the budget is then sent
to the concerned plant, the F&A department and the head office for further
analysis and then final production plan is prepared.

Plant production summary is prepared and variances are found out by

comparisons of actual and budgeted one and if the variances found are in adverse
condition or negative proper justification regarding the same is to be given. After
the preparation of plant production summary contribution, variance analysis is
done. Deducting the variable cost from sales can derive contribution. Annual
production plan is prepared on the basis of total available hours during the year,
plant shutdown hours which is again based on the calculation of planned
shutdown hours. Plant operating hours which can be prepared on the basis of
Monthly operating hours.

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Zero-based Budgeting:
Zero based budgeting is a technique of planning and decision making which
reverses the working process of traditional budgeting. In traditional incremental
budgeting, departmental managers justify only increases over the previous year
budget and what has been already spent on automatically sanctioned. No
reference is made to the previous level of expenditure. By contrast, in zero based
budgeting, every department function is reviewed comprehensively and all
expenditure must be approved, rather than only increases. Zero based budgeting
requires the budget request be justified in complete detail by each division
manager starting from the zero base. The zero base are indifferent to whether the
total budget is increasing or decreasing.

The term zero based budgeting is sometimes used in personal finance to

describe the practice of budgeting every dollar of income received, and then
adjusting some part of the budget downward for every other parts that needs to
be adjusted upwards. It would be more technically correct to refer to this practice
as active balanced budgeting.

57

Advantages:
1)
2)
3)
4)
5)
6)

Efficient allocation of resources, as it is based on needs and benefits.

Drives managers to find cost effective ways to improve operations.
Detects inflated budgets.
Municipal planning departments are exempt from this budgeting practice.
Useful for service departments where the output is difficult to identify.
Increases staff motivation by providing greater initiative and responsibility

in decision making.
7) Increases communication and coordination within the organization.
8) Identifies and eliminates wasteful and obsolete operations.
9) Identifies opportunities for outsourcing.
10) Forces cost centers to identify their mission and their relationship to
overall goals.

Disadvantages:
1) Difficult to define decision units and decision packages, as it is time
consuming and exhaustive.
2) Forced to justify every detail related to expenditure. The R & D department
is threatened whereas the production department benefits.
3) Necessary to train managers. Zero based budgeting must be clearly
understood by managers at various levels to be successfully implemented.
Difficult to administer and communicate the budgeting because more
managers are involved in the process.
4) In a large organization, the volume of forms may be so large that no one
person could read it all. Compressing the information down to a usable size
might remove critically important details.
58

5) Honestly of the managers must be reliable and uniform. Any manager that
exaggerates skews the results.

Sales Budget:

The sales budget is an estimate of future sales, often broken down into both
units and dollar. It is used to create company sales goals.

As RIL (Hazira manufacturing division) has no marketing division, hence no

sales budget is being prepared.

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Fixed and Flexible Budget:

Fixed
This budget is prepared only where sales, costs and expenditure can be
forecast with greatest accuracy. Under this system, budgets framed for
different for different departments on the basis of past experience, taking a
definite activity as a norm or standard. For instance, if it is possible to say with
certainly that sales would be of the order of one lakh units, then sales budget,
production budget etc. will be formulated on the basis of one lakh units of
sales. No thought is given to what shall be the estimate of revenue and
expenditure if sales are more or less than one lakh unit.

Flexible
In contrast to a fixed budget, a flexible budget is one which is designed to
change in relation to the level of activity attained. The underlying principle of
flexible budget is that a budget is that a budget is of little use unless cost and
revenue are related to the actual volume of production. Flexible budgeting has
been developed with the objective of changing the budget figures to
correspond with the actual output achieved. Thus a budget might be prepared
for various levels of activity, say 70%, 80%, 90% and 100% capacity utilization.
then whatever the level of output actually reached, it can be compared with an
appropriate level.

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Classification of budgets according to time factor:

In terms of time factor, budgets are broadly of two types

Short term budget

Long term budget
1. Short term budget- short term budget covers a period of one month,
three months, six months or at the most one year. As said earlier,
normally all companies rely on annual budgets, but in those businesses
where long term forecasting is difficulty, quarterly or half yearly budgets
are formulated. Also changes are introduced in it to adjust it to change in
circumstances every month. Some companies make provision for
preparing weekly and even daily budgets also.
2. Long term budgets- it is describe that management also prepares long
term budgets for making planning fruitful. Of course, it is not possible to
determine and present definite figures for minute details. Figures
presented in the long term budget are concerning maximum and
minimum activities only. Mostly, the figures of sales and production are
aggregated giving a macro view of the whole business unit they are not
stated product wise. Such a long term budget of sales is essential to
prepare the progress path of company.
Long term planning is imperative for capital expenditure also. Though
long term plans are always flexible yet it is necessary to plan capital
expenditure to make it clear what amount of capital expenditure would
be required, how and when to mobilize the resources needed etc. it

61

includes the cost of machinery and other assets but those of replacement
due to both wear and tear and obsolescence.

Budgetary Control:
Budgetary control is a process that covers making of a business budget,
comparison of the actual performance with the budgeted one and detecting
errors and mistakes commited so that an attempt may be made to rectify them
in future.

Advantages:
(1) Planning- budget is a plan of future activities. As it gives an opportunity to
make estimates of future forces and visualize the possible contingencies, it
enhances the efficacy of management.
(2) Coordination- as a comprehensive master budget is preapared on the basis
of departmental budget, it ensures coordination and makes all departments
to cooperate in attaining the targets fixed by the budget.
(3) Control- budget targets set a standard against which actual performance is
evaluated. Thereby it reveals the degree of success achieved in the direction
of targets. If necessary corrective measures can be devised. Thus it makes it
possible to exercise control over each aspect of operation and also over the
activities of each official.
(4) Decentralization- budget facilitates decentralization of business activity and
the distribution of responsibility among the officials. The business unit gets
divided into different departments. Each of these departments shoulders the
responsibility to prepare and implement the budget of its own. For the
purpose, authority is delegated to the hands of department.
(5) Efficiency- before budget is prepared all factors affecting the business
operation are studied in detail. Consequently, the management come to
62

know in advance the possible deficiencies on one hand and the scope of
removal on the other hand. This ultimately enhances the efficiency.
(6) Cooperation- as executives and HODs have to meet often to discuss the
provisions of budget, they can understand on anothers problems.
Consequently, the scope of conflicts is reduced and that of mutual
cooperation is increased.
(7) Efficient use of resources- the budget ensures optimum utilization of
available resources. Efforts of all officers and employees are directed towards
the same goal. Hence, physical and human resources can be utilized to the
fullest extent and the aim of maximum profit can be achieved.
(8) Management by exception- once a detailed programme is framed, authority
and responsibility are delegated to the departmental and sectional heads.
Top management is therefore relieved of this burden to a large extent. They
can spare their time and energy to tackle only those issues where
performance falls short of targets. Thus management is required to devote
their time and attention to exceptional cases only.

Limitations:
(1) Success depends on estimates- budget plan is based on estimates. The
success of budget programme depends on the accuracy of estimates
pertaining to different operations of the enterprise. Hence budget figures
must be arrived after carefully consideration of all relevant factors and facts.
(2) Rigidity- it is necessary to adopt budget programmes to changing
conditions in and out of enterprise. Different techniques should be used to
prepare budget programmes so as to change them whenever necessary. Thus
a budget programme should be dynamic. In the initial period, not much can
be expected from the budget programme due to various reasons like holiday
etc. therefore some people are of the opinion that the time interval of budget

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should be so fixed that the number of hours of work during this period is
same, for all budget periods.

Essentials of Effective Budgeting:

A budgetary control system can prove successfully only when certain
conditions and attitude exist, absence of which will negate to a large extent
the value of a budget system in any business. Such conditions and attitudes,
which are essential for effective budgeting, are as follows:

SUPPORT OF TOP MANAGEMENT- if the budget system is to

be successful, it must be fully supported by every member of management
and the impetus and direction must come from the very top management.
No control system can be effective unless the organization is convinced that

the top management considers the system to be important.

PARTICIPATION BY RESPONSIBLE EXECUTIVES- Those
entrusted with the performance of the budgets should participate in the

process of setting the budget programmes.

RESONABLE GOALS- the budget figures should be realistic and
represent reasonably attainable goals. The responsible executives should

agree that the budget goals are reasonable and attainable.

CLEARLY DEFINED ORGANISATION- In order to derive
maximum benefits from the budget system, well defined responsibility
centers should be built up within the organization. The controllable costs for

each responsibility centers should be separately shown.

CONTINOUS BUDGET EDUCATION- The best way to ensure
the active interest of the responsible supervisors is continuous budget
education in respect of objectives, potentials and techniques of budgeting.
This may be accomplished through written manuals, meeting, etc. whereby
preparation of budgets, actual results achieved etc., may be discussed.
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CONSTANT VIGILANCE- Reports comparing budget and actual

results should be promptly prepared and special attention focused on

significant expectation- figures that are significantly different from those
expected.

MAXIMUM PROFITS- The ultimate object of realizing the

maximum, profit should always kept uppermost.

COST OF THE SYSTEM- the budget system should not cost more
than it is worth. Since, it is not practicable to calculate exactly what a budget
system is worth, it only implies a caution against adding expensive

refinements their value clearly justifies them.

INTEGRATION WITH STANDARD COSTING SYSTEMWhere standard costing system is also used, it should be completely
integrated with the budget programme, in respect of both budget
preparation and variance analysis.

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RESEARCH METHODOLOGY
Objective of study:

To get an insight of the procedure followed by the corporate sectors in

preparing budget.

To know how the top management is able to assure proper control over the
expenditures by effectively utilizing the available resources.

To know how financial planning is carried out ril (Hazira manufacturing

division).

To know the steps taken by the top management to control the deviations
arising between the actual result and the budgeted result.

To know the level of co-ordination maintained between various departments

in preparing the departmental budgets.

Benefits of the study:

It helped me to gain practical knowledge used in preparation of budget.

The study helped me to understand the nature of variance analysis (the

difference arising between the budgeted value and the actual value)

It helped me to gain knowledge about the tool (MPR) used by the top
management for controlling, decision-making, corrective and preventive
actions.

Last but not least the study helped me to understand the efficacy of
management.

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Research Design:
The research design used for the study is an exploratory one as data have been
gathered through observation and communicating with the employees of
finance and accounts department.

Research Environment:

The research environment used for this project is based on company the project
report has been successfully completed by continuously visiting the company.

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ANALYSIS
Variance Analysis:
In budgeting, a variance is the difference between a budgeted, planned or
standard amount and the actual amount incurred/sold. Variances can be
computed for both costs and revenues.
The concept of variance is intrinsically connected with planned and actual
results and effects of the difference between those two on the performance of the
entity or company.
In variance analysis a point is reached where incremental information is not
worth its incremental cost. This point indicates the limit of variance analysis and
the point is determined by judgment in the light of individuals circumstances.
Variance analysis must be devised to suit the conditions prevailing within a
particular enterprise. Analysis of variances must be followed by intelligent and
factual interpretation.

Types of variancesVariances can be divided according to their effect or nature of the underlying
amounts.
1. When effect of variances is concerned, their are two types of variances;

When actual results are better than expected results expected result given
variance is described as favorable variance is described as favorable variance.
In common use favorable variance is denoted by the letter F- usually in
parentheses (F).
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When actual results are worse than expected results given variance is
described as adverse variance, or unfavourable variance. In common use
adverse variance is denoted by the letter A or the letter U usually in
parentheses.

2. The second typology (according to the nature of the underlying amount) is

determined by the needs of users of the variance information and may include
eg. Variable cost variances that consist of variance, direct labor variance and
variable production overhead variances, fixed production overhead variances
and sales variance.
Variance Analysis is a continuos process for the following reasons :1. Labour rates, salary levels etc., changes due to union negotiations, policy
decisions or changes in composition of the work force.
2. Selling prices change.
3. In a multi-product company, product mix changes and different lines have
different margins; the overall profit position will change.
4. Improvement in systems can bring about reduction in costs.
5. Change in level of efforts of operators, supervisors, management and
electrical staff can effect the existing cost levels.
6. Investment in new capital equipment nd scrapping of old equipment/
processes/ methods can affect the operting cost levels (i.e. direct labour
cost and direct material cost). These decisions which are frequently taken
in organizations, can affect overhead items such as depreciation charges
and insurance premium.
7. The prices of bought out material may vary.
8. Changes in product design may change cost inputs.
9. Policy decisions of various kinds, for eg. Chanes in organizational
structure, may affect cost levels.
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10. The amount of idle time may change due to hold-ups, strikes lockouts and
power failure.

FINDINGS
From this study, I came to find that Zero-based budgeting is being followed here
for each activity done at the plant. Past figures are not used as the starting point.
The budgeting process starts from scratch with the proposed activities for the
year. At RIL Hazira, as it is a manufacturing division mainly two types of budget
are prepared i.e. revenue budget and production budget. Capital budget and cash
budget are not prepared here as the head office, Mumbai, prepares both. The
requirement for cash and capital is sent to the head office, Mumbai from where it
is executed.

The preparation of budget usually starts in the month of January. The function of
budget committee is to monitor and review the budget figures prepared by the
respective plants. For preparing budgets various technologies are used such as
cost centre- for collecting the cost incurred by the plants, fund centre- to collect
actual data for monitoring the budget, profit centre-defined for each plant to
monitor profitability. Each cost centres are mapped to profit centre, and
maintenance

order-

to

collect

the

maintenance

cost.

Each

plant/department/services are given cost centre code. In each plant based on the
nature of plant, several cost centres are defined. Normally for each plant cost
centres are defined for following discipline.

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CONCLUSIONS
Budgeting is a financial survival tool for today and tomorrow. Thus, it is only
adequate that every company and every individual should have a budget. Even
though budget has connotation attached to it, it is the right tool for a financially
sound life as a financially stable life means a stable personal life.
Budgeting at Reliance Industries Limited is very sophisticated and is done on
SAP program on computers. Here we find that the budgeting procedures
followed are quite different from the bookish knowledge. The SAP program, too,
is custom-made for Reliance.
Budget control part involves the activities like monitoring the budget v/s actual
throughout the year with suitable reports to management, emphasizing the stand
of each cost center/responsibility center. Mainly two types of budget are carried
out i.e. revenue budget and production budget. For the preparation of the capital
budget, a detailed and critical analysis of each and every item figuring in the
CAPEX (Capital Expenditure) budget is to be made. Revenue budget is mainly
prepared in order to know the cost of stores, spares and consumables that is
bifurcated into repairs and maintenance for mechanical, electrical, civil and
instrumental. A close look is given to the operating condition of the equipment
along with the total maintainance of the plant estimated during the current year.
Production budget is also done in order to know the cost of production incurred
for producing the product. The cost of raw material and the utilities incurred for
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producing etc. the actual figure is compared with the budgeted figure and
variance arising is examined for which proper justification has to be provided to
the ED by the incharge officer.The conclusion I could think is too stringent a
budget can de-motivate you to actually follow it. If you still cannot avoid your
expenditure then the only other way is to increase your income.

RECOMMENDATIONS
As every thing is executed in a simple, proper, manner and through SAP no
recommendation is required but still I would like to recommended certain things.

The level of coordination between plants and the budget committee should be
enhanced

Comparison of actual figures with budgeted figures needs to be done

regularly to see whether or not you are on the target.

The variance analysis shows the trends developing in financial performance

about which you should be aware. It gives you the opportunity to take action
to correct problems. For e.g. if the variance statement shows that the
expenditure on stationary for each month is too much. It can be controlled by

(1) Keeping at tight control over the stationary

(2) Recognize that you have under budgeted on stationary and either shift
money from somewhere else in the budget to stationary, or try to raise
or generate more money cover the anticipated short fall.

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SAP A brief Knowledge

What is SAP?
Sap the company was founded in Germany in 1972 by five ex-IBM engineers. SAP
stands for Systeme, Andwendungen, Produkte in der Datenverarbeitung which
translated to English means System, Applictions , Products in datd processing.
Being incorporated in Germany, the full name of the parent company is SAP AG.
It is located in Walldorf, Germany, which is close to the beautiful town of
Heidelberg. SAP has subsidies in over 50 countries around the world from
Argentina to Venezuela. The original five founders have been so successful that
they have multiplied many times over such that SAP AG is now the third largest
software maker in the world, with over 17,500 customers (including more than
half of the worlds 500 top companies).

SAP employees over 47,598 people

worldwide today, and had revenues of $7.34 billion and net income of $581
million in FY-01. SAP is listed in Germany (where it is one of the 30 stocks which
make up the DAX) and in the Ney York Stock Exchange.

Back in 1979 SAP released SAP R/2 (which runs on mainframes) into the German
market. As SAP R/2 was the first integrated, enterprise wide package and was an
immediate success. Towards the end of the 80s , client-server architecture became
popular and SAP responded with a release of SAP R/3 in 1992. this turned how

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to be a killer application for SAP, especially in the North-American region into

which SAP expanded in 1988.

SAP R/3 is delivered to a customer with selected standard process turned on, and
many other optional processes and features turned off. At the heart of SAP R/3
are about 10,000 tables, which controls the way the processes are executed.
Configuration is the process of adjusting the settings of these tables to get SAP to
run the way you wanted to. Functionality included is truly enterprise wide
including: Financial Accounting ( e.g. general ledger, accounts receivable etc.)
management accounting (e.g. cost centres, profitability analysis etc.) sales,
distribution, manufacturing, production planning, purchasing, human resources,
payroll etc.

SAP at Reliance Industries limited

Reliance uses SAP R/3

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BIBLOGRAPHY
http://ril.com/html/aboutus/aboutus.html
http://ril.com/html/aboutus/financial_milestones.html
http://www.sap.com/about/company/index.epx

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