APPENDIX III A NOTES

PREPARED BY

D XAVIER GNANARAJ AFA/WII/PER

Transfer price should be subsidized out of the profits made from sale of products of a workshop to a non railway customer

Q
Why overheads (on cost) in a railway production unit very heavy/ are not railways being priced out in competitive export tenders on account of this? If export tenders are freed from the burden of proforma on cost and township overhead what will be the implication?

A
Besides direct expenditure on labour and materials incurred on a job, in production units, there are cer­tain expenditure which can not be directly charged to jobs but included in the cost of production on certain equitable basis. These indirect expenditure are term­ed in production units as overheads. Para 1317 W. The overheads in a production unit are classified on commercial pattern into four categories to ensure proper control and equit­able distribution of indirect expenses on cost of pro­duction. These are as under: —
(i) Factory overhead
(ii) Administrative overhead
(iii) Township overhead
(iv) Stores overhead
Separate standing work orders designed for collec­tion of overhead expenditure in respect of each of the above. For facility of collection, analysis and control of overheads falling under the above­, separate expense numbers are allotted. The vouchers containing a charge to overhead expenses should bear the appropriate allocation as under:
S.W.O.No. Overhead Expense No. Shop/Department.

(i) Factory Overhead.—This should generally comprise of:
(a) All indirect expenses of production shops.
(b) All indirect expenses of production-cum-service shops.
(c) Expenses of Apprentices attached to main shops.
(d) Expenses of Dy. CME(W)/Work Manager's office including Planning And Progress, Preplan­ning, Estimating etc. offices.
(e) Expenses of Time Keeping Organization.
(f) Expenses of works canteens including meal sheds.
(g) Depreciation of Building, Plant and Machinery of shops and Departments mentioned above.
(h) Electric charges consumed by departments and shops mentioned above.
(i) Credit for return of materials, interest and profit earned for works done for outsiders etc.
para 1318 W

(ii)Administrative Overheads.—These include:
(a) Expenses of General Managers office and other general administrative offices.
(b) Electric charges concerned by the various offices included in (a) above.
(c) Credits on account of return of materials, diet charges etc.
para 1319 W

(iii)Township Overheads.—These comprise of:
(a) Expenses of civil engineering deptts.
(b) Expenses of water works, sanitation, horticul­ture etc.
(c) Electricity consumed by the above departments and township.
(d) Depreciation of Buildings, Plant and Equip­ments etc. of above Departments and Township.
(e) Credit for recovery of house rent, electricity and water charges from staff and outsiders and re­turn of materials etc. by the Departments men­tioned above. Para 1320 W

(iv)Stores Overheads.—These comprise of—
(a) Cost of stores department in headquarter or elsewhere.
(b) Depreciation of buildings and equipments of the various stores offices/Departments.
(c) Inland handling and freight charges not allocat­ed to stores directly.
(d) Clearance from Stock Adjustment Account.
(e) Cost of pattern supplied by the Administration to suppliers as per agreement.
(f) Cost of replacement and rectification of defective and deficient materials supplied by the stores departments and not recoverable from Firms.
(g) Credit for return of materials allocable to stores Departments and for incidental, freight and depart­mental charges realised on sales. Para 1321.W

Allocation and Apportionment.—Overhead expenses are allocated to departments or cost centres responsible for the expense as far as practicable. Such of the expenses, which cannot be conveniently allocat­ed to the responsible or chargeable Cost Centres in the first instance, are allocated to incurring Departments for apportionment to the departments/Cost Centres in proportion to services rendered. Para 1322 W

The factory, Administrative and Township overheads are levied on production jobs on 'Direct Wages' (ex­cluding Incentive Bonus). The percentages of Factory overhead are worked out each for Administrative and Township overheads. A single percentage rate is also worked out for stores overheads for levy on 'direct stores'.

Method of Working out Percentages for Over­heads.—The overhead percentages for a financial year are worked out on the basis of indirect expendi­ture provided through the original Budget estimates of labour, material and other expenses are first analysed by the various Departments.
While expenses provided for the departments other than shops are wholly in­direct, the provisions made for shops comprise both direct and indirect charges. The break up of the in­direct expenses under various shops is furnished by the Production office on the basis of past actuals, latest trends and anticipated changes.
Item-wise provisions of indirect expenses are then tabulated in a statement wherein expenses of the departments falling under di­fferent overheads are grouped. The percentage of ex­penses of service shops and departments etc.,to the beneficiary departments will then be worked out on the total indirect expenses of shops and departments avail­able in the statement mentioned above.
The aggre­gates of indirect expenses after including results of ap­portionment as mentioned above will represent the Factory overheads for different production shops Ad­ministrative and Township overheads for the workshop as a whole. Para 1323 W

These are related to the corresponding estimated 'direct labour' or direct stores, as the case may be and percentage, rates worked out on the fol­lowing formulas: —

(i) Factory overhead (FOH) =Total FOH for the shop/ Total direct labour of the shop x 100
(ii) Administrative overhead (AOH) % = Total AOH / Total direct labour on the entire workshop x 100
(iii) Township overhead (TOH)% = Total TOH / Total direct labour on the entire workshop x 100
(iv) Stores overhead (SOH) % = Total SOH / Total direct stores x 100

Review of Overheads.— The original budget estimates are later reviewed and revised through August Review. Revised Estimates and Final modifica­tion. The overhead percentages are worked out each time revised estimates are submitted on the basis of revised figures and percentage rates revised, whenever necessary. para 1324 W

The disadvantage of the PUs is that the producer and consumer are the one and the same i.e. the Indian railways. The unit price/ transfer price is adopted by dividing the total cost involved in the PU divided by the number of physical outturn. It is a simple average costing. These overheads are otherwise cannot be charged elsewhere. The only allocation that is followed in the Pus is the demand No 16 Creation of assets. The maintenance demands ie demand no. 3 to demand no.12 are not operable in the Pus.
However, railway board have considered the hardship of the Pus in global tenders and have issued circulars.
As a result, the production units are unable to participate in the global tenders. Railway Board have considered the constraints and have issued notification under the subject delegation of powers to GM for making their product competitive in international market.
Accordingly,
1. the profit margin can be reduced up to 3 %. In case the profit is to be reduced below 3 % it should be done under exceptional circumstance with the approval of railway board.
2. proforma charges can be reduced up to 2 %
3. variable overheads should be charged fully
4. fixed over heads can be reduced up to 5 %
5. Warranty charges should be levied at the rate of 2 % of manufacturing cost. The warranty of purchase items will be borne by suppliers as per IRS conditions
6. contingencies and unforeseen circumstances should be charged at the rate of 1 %
7. Development of design for changes from the standard rolling stock as per customer requirement will be done by concerned Production Units in consultation with RDSO wherever necessary. RITES/IRCON will pay developmental; charge for the same terms mutually agreed upon between RITES/IRCON and Production Units
8. the benefit of MODVAT & duty draw back should be passed on to RITES/IRCON while framing the quote
9. in case of special fittings, equipments are required as per customer’s demand, the price be increased based on price differential from IR’s standard equipment.
10.Mobilization advance of 10 % should be take3n from RITES/IRCON prior to taking the work in hand by Production Units.
11.The above pricing will be subject to the following conditions : a. The pricing will not have any linkage with the transfer price adopted for the railway book adjustment b. no additional infrastructure would be created for export c. the requirement of manpower if any be regulated strictly as per extant rules and policies.
12.the Production Units will follow the standard format for calculating the export price of rolling sock as per annexure A
PRICING OF ROLLING STOCK FOR EXPORT ANNEXURE A

1. Material Cost =
2. Store Overhead = % 1
3. Modvat Benefit & =
Duty Draw Back =
4. Direct Labour Cost = ( Man Hours X Avg Hourly Reate
5. Variable Overheads = Variable Components Of Foh, Aoh
& Toh To Be Charged Fully As % Of
Item No 4
6. Fixed Overheads = 5 % Of Fixed Component Of Foh, Aoh
& Toh To Be Charged Fully As % Of
Item No 4
7. Cost Of Addl Jigs & =
Fixtures If Any
8. Manufacturing Cost = (1+2+4+5+6+7+) – (3)
9. Proforma Charges = Minimum 2 % Of Item No 8
10.Total Manufacturing = 8+9
Cost
11.Profit = Minimum 3 % Of Item No 10
12.Contingencies &
Unforeseen Circumstances= 1 % Of Item No 10
13.Warranty @ 2 % = 2 % Of Item No 10
14.Development Cost =
Including Manpower
Where Capacity Is Not
Surplus
15.Price* =
* price is Ex-Works excluding Duties and Taxes

The question of Transfer price should be subsidized out of the profits made from sale of products of a workshop to a non railway customer is to be answered in affirmative. The huge investment in terms of machinery and infrastructure in Pus are done on behalf of the entire Indian railways and naturally whatever profit is earned from non railway customers by way of selling the rolling stock should be use to subsidize the transfer price to home railways.