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Budgetary Control of National Fertilizers Limited, Bathinda

NFL

Contents to be discussed:Fertilizer IndustryIntroduction to NFLClassification of NFL ProductsBathinda Unit of NFLResearch MethodologyIntroduction to Budgetary StudyBudgetary Control System at NFLData Analysis & InterpretationFindingsRecommendationsConclusion

Fertilizer IndustryFertilizer industry in India is meeting all the requirements of

agricultural industry since the time of its inception in 1906. The first plant for fertilizers manufacture was set up in the same year in Ranipet, Chennai.

Then established the first two large-sized fertilizer plants:1. Fertilizer & Chemicals Tranvancore of India Ltd. (FACT) in Cochin, Kerala 2. Fertilizers Corporation of India (FCI) in Sindri, Bihar.

At present, India has more than 57 large sized plants of fertilizers, which includes Public sector Industries & Private Sector Industries,

Apart from it, there are other 64 small and medium scale Indian manufacturers producing fertilizers.

India has become third largest country with a total capacity of 11.07 million tons of N in year 2000-2001.

Natural gas has been the preferred feedstock for the manufacture of urea over other feed stocks viz. naphtha and FO/LSHS:

1. Firstly, because it is clean and efficient source of energy and 2. Secondly, it is considerably cheaper and more cost effective in terms of

manufacturing cost of urea

Introduction to NFL

Mission of NFL“NFL’s mission is to be a market leader in fertilizers & a significant player in all its other business, reputed for customer satisfaction, reasonable reward to shareholders, ethics, professionalism & concern for ecology and the community.”Registered on 23 August, 1974Authorized capital Rs. 500.00 CroresPaid up Capital Rs. 490.58 CroresCapacity* 14.86 Lakh MT NitrogenNFL was incorporated on 23rd August, 1974 with two nitrogenous manufacturing Units at Bathinda(Punjab) and Panipat(Haryana)On the reorganization of Fertilizer Corporation of India Limited

(FCI) - NFL group of Companies, the Nangal Unit of FCI came under the NFL fold on 1st April,1978.

Later on, a gas based fertilizer plant was entrusted to NFL. It has come up at Vijaipur, Madhya Pradesh, which started production in July 1988.

Units & Offices

NFL has four operating units and one Central Marketing Office with Zonal Offices at Chandigarh, Bhopal, Lucknow and New Delhi. It has its

Registered Office at New Delhi & Corporate Office at NOIDA (U.P.)

Plants

Vijaipur Plant

Panipat Plant

Bathinda Plant

Nangal Expansion Plant

NFL’s Core CompetenceNFL, is the second largest producer of Nitrogenous Fertilizers in the

Country with 16.8% share in domestic production of Urea achieved in the country during 2008-09.

The Company's strength lies in its brand loyal customers, its harmonious commitments on human resources, its efficient operations, Industrial Relations (IR), goodwill it has generated over by the work culture, fulfilling its social commitments.

Classification of NFL ProductsProducts

Main Products

Kisan Urea

Kisan Bio-fertilizers

Industrial Products

Sulphur

Liquid Nitrogen

Liquid Oxygen

Carbon Slurry/ Carbon Pallets

Carbon Dioxide Gas

Argon Gas

Methanol

Sodium Nitrate

Sodium

Uravarak Videsh Limited (UVL)

NFL

M/s KRIBHCO & RCF

Uravarak

Videsh

Limited

(UVL)

NFL in collaboration with M/s KRIBHCO & RCF has formed a joint venture company (JVC) named as Uravarak Videsh Limited (UVL) to explore investment opportunities abroad and within country in Nitrogenous, Phosphatic & Potassic sectors and to render consultancy services for setting up Projects in India & Abroad.

A gas based Urea plant at Barauni in Bihar has been entrusted to the above Joint venture Company.

Awards to NFL

NFL was given the ‘Mini Ratna Category-I’ status by the Govt. of India in July, 1988 based on the Company’s overall performance during the preceding years.

NFL Vijaipur Unit, during 1998-99, received ISO 14001 Certification in addition to ISO 9002 Certification already obtained by the Unit. NFL, thus, is the First Company in Public and Cooperative Sector in the Fertilizer Industry to have both these Certifications.

NFL has been selected by a panel of judges for Economic Times- Harvard Business School Association of India Corporate Performance Award for 1994, among 213 Public Sector Companies in the country.

International Greenland Society, Hyderabad awarded NFL”Best Environmental and Ecological Implementation Award” for 1995-96.

BATHINDA Unit of NFL

NFL, BathindaNational Fertilizers Limited was incorporated on 23rd August

1974 and its plant at Bathinda started its commercial Production on 01.10.1979. Toyo Engineering Corporation was prime Engineering Contractors for the plant. M/s Engineers India Ltd.,(EIL) did the detail engineering and supervised the Erection and Commissioning of the plant.

NFL Bathinda

TEC EIL

Bathinda unit is Producing Urea whose Installed capacity is 1550 MT per day i.e. 5,11,500 MT Urea per annum. The unit is producing Urea at more than 100% capacity utilization.

The following factors were considered in view by Govt. of India while selecting site at Bathinda:

Availability of landSteady power supply in the vicinity of project Availability of good quality water from sirhind canalBathinda town being at conjunction of Punjab, Haryane &

Rajasthan & all states having potential for fertilizer consumption.

Installed CapacityNH3 (Ammonia) 900 MT/day of NH3NH3(Annual) 297000 MT Urea 1550 MT/day of UreaUrea(Annual) 511500 MT

Awards to NFL Bathinda UnitNational Safety Award to the Unit from the Ministry of Labour,

Government of India for Meritorious performance in Industrial Safety during 1989.

Bathinda Unit received “Prime Minister’s Shram Award” and “Vishwakarma Rashtriya Puraskar” during 1994-95 under various suggestion schemes. The unit also received “Punjab Safety Krit Shiromani Award” and “Krit Veer Awards” from the State Government. The unit also received “Udyog Excellence Gold Medal and a Citation” from Industrial Economic Forum, New Delhi.

“Jawahar Lal Nehru Memorial National Awards” constituted by the International Greenland Society, Hyderabad for Pollution Control and Energy Conservation won by the Unit.

The Unit won 1st Prize in: Lowest Accident Frequency Rate Maximum Reduction in Accident Frequency Rate and Longest Accident Free period During 2001-02, Bathinda Unit was awarded National Safety Award First

Prize for Largest ‘Accident Free Period’ in Fertilizer and Chemical Industry relevant for 1999.

Research Methodology

Collection of Data:In order to understand the present system of budgetary control, Secondary Data from Review of Literature and various departments of the company have been collected.Secondary Data:Secondary data is the data derived from some other source. Its not the original data for the purpose of solving the problem at hand. It has been collected by the Review of Literature.Tools of Analysis:Close analysis and graphical presentation was used as a tool of analyzing the data.

Scope of the Study

The study is conducted only at “NFL, Bathinda” Punjab for six weeks duration. The study of budget is purely based on secondary data and all the information is available within the company itself in the form of records, which is based on the data collection for the year 2009-10. Hence, the scope of the study is limited up to the availability of official records and information provided by the employees.

Objectives of the Study

1. To know about the need for Budgetary Control System in the company

2. To be conversant with the Budgetary Control System and various types of planning and control measures adopted by the company

3. To be familiar with the nature, types and purpose of budget to be submitted by the various departments and get knowledge about them in a practical aspect.

4. To develop the understanding about responsibility as to why and by whom it is made

5. To know about the different measures and ways to make budgetary control a successful instrument for planning and control purpose

Sources of information

Office Records Internet NFL Library Personal Interviews Newspaper Clippings Pamphlets

Limitations of the Study

1. Due to policies of company, only screened information is provided by the accounting department.

2. Information already compiled by the company is the basis of the study and not the information from the raw/ primary data.

3. Policies of company & Govt. are frequently changing.4. Although the staff of NFL Bathinda was highly co-operative &

devoted enough to spend considerable time on me but because of their busy schedules, I was unable to gain complete knowledge. Further more I was allotted a limited time period for study.

Introduction to Budgetary Study

Budget A budget may be defined as a formal expression of the expected

income and expenditure for a definite future period.Budgetary Control

Budgetary Control is a system whereby the budgets are used as a means of planning and controlling costs.

Budgeting lays down as to what is to be attained and how it is to be attained

while control ensures that the objectives are realized and actual results do not deviate from the planned course more than necessary.

The targets set up under the system are such that they can be directly compared with the actual performances, and the differences, if any, can be traced to an individual who is responsible for the same. This building up of a sense of responsibility in accounting is the main feature of budgetary control.

Types of Budgets• Short- Term

Budgets• Long- Term

Budgets

• Basic• Current

• Functional• Master

• Fixed• Flexible

Time Period

Condition

Function

Activity Levels

Functional Budgets

SalesSelling & Distribution Cost

Production Cost

Purchases

Labour Cost

Administration Cost

Capital Expendi

ture

R & D Cost

BudgetCash

Budget

Objectives of Budgetary ControlTo plan the policy of a business for the coming period for

achievement of the firm’s objectives and its translation into monetary and quantitative terms

To determine the responsibility of each department and executive so that they are made accountable for definite and precise results

To coordinate the activities of a business so that each is a part of an integral total

To provide for continuous comparison of actual and budgeted performance in terms of results achieved and costs incurred so that cause for any inefficiency is immediately detected and removed

To control and direct each function so that best possible results may be obtained

To provide for the revision of budgets for future in the light of experience gained

Process of Budgetary Control

The exercise of Budgetary Control involves the following steps:The establishment of budgets for each section or department of

the organizationThe measurement of actual performancesThe continuous comparison of actual performances with the

budgeted performances so as to determine the deviations or variances and

The ascertainment of reasons for such variance and taking suitable actions to remedy the defects in order to achieve the objective under the original policy or to provide a basis for its revision

Advantages of Budgetary Control SystemHelps in PlanningEncourages Cost ConsciousnessLeads to Economy in OperationsPromotes Cooperation and CoordinationEncourages Safe Delegation and Responsibility Helps in Effective Cost ControlGives Motivation to WorkersServes as a media of communicationEncourages Management by Exception

Limitations of Budgetary Control System

Use of Estimated FiguresExpensive SystemExtensive DecentralizationOpposition by StaffIt is simply a tool of ManagementLack of Flexibility

Budgetary Control in NFLThe exercise of budget formulation is done taking into account 1. policy of the company regarding manufacturing, marketing,

maintenance of plant and machinery and 2. allied objectives of the companyWhile preparing the budget, it is not only the company’s policy which

has been considered but 3. Government policies are also taken into account. In an industry like NFL Govt. policy plays an important role as price

mechanism, quality and distribution are governed under the Fertilizer Control Order and Essential Commodities Act (ECA).

Budgeting is not merely a mathematical or statistical exercise but a management exercise. It results from the coordinated efforts & involvement of a large number of people. Success of such a system will largely depend upon the quality and ability of the individuals who operate the system.

Contd.Some factors which should be looked into in this regard are as

follows:Those who would be made responsible to achieve the budget

should be fully associated with the process of setting the budgets and no budgets should be imposed from the top.

Individual should be made responsible for the costs they can control.

While real favorable variances are always to be commended, adverse variances should not invariably be viewed as failures of the individual’s concerned but as stepping stones towards future successes.

Considerations for Budget PreparationThe exercise of budgetary control is carried out in the company since its inception. While preparing the Budget, the executives departments ensure the following:1. The budget estimates are prepared on realistic basis.2. The objectives of the company have been kept in view while

drawing the budget estimates.3. It is ensured that the budget estimates are prepared taking

each division as the cost-centre.4. The forward escalation/de-escalation in prices is also hept in

mind while preparing the budget estimates.Keeping in view the above factors, budget estimates for the next year and revised budget estimates with reference to original budget estimates for the current year are prepared.

Budgets prepared at NFL, BathindaBroadly, three types of Budgets are prepared1. Revenue Budget2. Working Capital Budget3. Capital Budget

I. Revenue Budget:The control of revenue budget is the most important area for any organization so as to maintain the profitability as per the budgeted expenditure. If utmost care is taken at the time of formulating the budget, the company can achieve its desired goals of optimizing the profit. To optimize the profit and minimize the expenditure, the control of expenditure is basic necessity. The expenditure under Revenue Budget is divided as under:Variable Cost/ExpenditureFixed Cost/ Expenditure

1.Variable Cost/Expenditure Input Materials Production and Sales Budget Freight and Handling Charges

2.Fixed Cost/ Expenditure Salaries and Wages, Bonus and other benefits to Employees Administrative Overhead Factory Overhead Repairs and Maintenance Expenditure

II. Working Capital Budget

1. Inventory2. Sundry Debtors

Sundry Debtors consist of two parts namely Subsidy to be received from Govt. of India Consumers’ price to be realized by Marketing Department of NFLNFL has no control over subsidy to be received from Govt. of India. If funds are available, reimbursement of subsidy claim is made within 45 days.So far realization of consumer’s price – it depends upon policy of the Company during busy and off season.

3. Loans and Advances4. Cash and Bank Balances

III. Capital BudgetProcess of Formation:1. First, the information regarding requirement of capital

schemes is asked by the Budget Section of Finance Department from each department.

2. Then, the capital schemes/items are forwarded to Budget Section.

3. After receipt of schemes/items from all departments, the same are compiled.

4. The list of all schemes duly recommended for inclusion by CGM is prepared by Budget Section.

5. After that, Administrative approval is obtained from Ministry of Fertilizers and Chemical department of fertilizers.

6. While examining and approving the schemes, schemes are either dropped, provisions get reduced

7. Schemes duly approved by the C and MD of the Company are conveyed to unit.

Data Analysis & Interpretation

Net Profit, NFL Bathinda

Year Net Profit (Rs./Lakhs)

2002-03 17028.36

2003-04 2594.67

2004-05 3619.67

2005-06 2693.08

2006-07 1421.53

2007-08 815.68

2008-09 10492.88

2009-10 9001.29

2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-100

2000

4000

6000

8000

10000

12000

14000

16000

18000

Net Profit (Rs./Lakhs)

Net Profit (Rs./Lakhs)

Analysis of Budget 2009-10Month Total Income Total Cost Net Profit/Loss

April 8866.90 8545.80 321.10May 9843.42 9367.72 475.70June 9517.92 9093.76 424.16July 9843.43 9367.72 475.71August 9843.43 9367.72 475.71September 8866.90 8545.81 321.09October 9843.43 9367.72 475.71November 9517.92 9093.76 424.16December 9843.43 9367.72 475.71January 9843.43 9367.72 475.71February 8866.90 8545.81 321.09March 3658.75 4170.23 -511.48Total 108355.86 104201.49 4154.37

Total income/Total cost in 2009-10

April

MayJun

eJul

y

Augu

st

Septe

mber

Octobe

r

Novem

ber

Decem

ber

Janua

ry

Febr

uary

March

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

Total Income Total Cost

Net Profit/Loss in 2009-10

-600

-400

-200

0

200

400

600

321.1

475.7424.16

475.71 475.71

321.09

475.71424.16

475.71 475.71

321.09

-511.479999999999

Net Profit/Loss

Interpretation

The Total Income/Total Cost graph shows Total Income and Total Sales in different months in Budget 2009-10. It shows that income was more than sales in all the months except in March where Total Cost is more than Total Income by -511.48, which results in Net Loss of this amount as is shown in the second Graph of Net Profit/Loss. It shows that Net Profit was sufficiently good in all the months except in March 2010. Besides this for the months of April, September & February Net Profit was somewhat less than other months.

Findings, Conclusion & Recommendations

FindingsThe exercise of budgetary control is carried out in the company since

its inception.Budgeting exercise is essential because it compels the management to

put its policy and objectives into action to take place in future.Budget estimates are prepared on realistic basis considering objectives

of the company.While preparing the budget, not only the company’s policy but

Government policies are also taken into account.The Budgets maintained by the company are mainly:

Revenue Budget Working Capital Budget Capital Budget

The control of Revenue Budget is very important to maintain the profitability as per the budgeted expenditure.

The budgetary control is exercised by Budget Section of Finance and Accounts Department.

ABC Analysis is mainly used as the Material Control Technique, measuring the cost significance of each item of material.

SWOT ANALYSISSTRENGTHS: Profit making and reputed firm.More than 29 years experience in the fertilizer industry.Capable and highly disciplined staffProducing high quality products comparable with the

international standards. As awarded by ISO 9001.Technical and operating efficiency comparable with other firms.Availability of cheap and skilled labour.A number of Awards and Recognitions.

WEAKNESSES: Problem on timely availability of imported and indigenous raw

material.Facing some infrastructure problems.

Contd.OPPORTUNITIES: Good demand for neam coated ureaScope for growth in biofertilizers.Locational advantage as the production unit is located in the

main consumption area. THREATS: Slow growth in urea consumption during last 7-8 years due to

increasing interest of farmers towards imported fertilizers.Increasing input costs of feedstock i.e. FUEL

OIL/SHS/NAPTHA/NS.Single nutrient product baseGlobalised competitive scenario in industrial products.

Recommendations

1. Bio-fertilizer gives the ever best performance and to increase the profit -production of bio-fertilizer should be increased.

2. Company must have to make the product available to the farmer when he is in need of the product.

3. NFL has to more concentrate on the Kisan Melas instead of other modes of advertising.

4. The fixed overheads like salaries and wages, repairs and maintenance, interest charges etc. should be kept in control and should not exceed the budgeted overheads.

5. Effective control should be kept on the power and fuel consumption also.

6. Gas based plants are more energy efficient as compared to the plants based on the feed stock. It is recommended to transfer the fuel based plants to gas based plants. It will increase the efficiency and production and will reduce cost.

Contd.

7. The revamping project should be adopted because the increase in the prices of FO/LSHS increased the production cost.

8. NFL must have to spent good amount on R and D so that innovative products can be launched to stay ahead from its competitors

9. The farmers are illiterates or less educated so NFL has to spent more on educating them about the new products and their use.

10. The firm should try to improve its sales by marketing at large scale and doing its advertising and sale promotional operations in other states except than northern states of India and should face the competition.

11. The process of setting the budget should be fully associated with the persons responsible to achieve the budget and no budgets should be imposed from the top.

ConclusionFinally, it may be concluded that Budgeting is a management

exercise which is very essential for achieving the set objectives. The System for budgetary control is applied in NFL in each field of activities. The Control of Revenue budget is the most important area for the company to maintain the profitability as per the budgeted expenditure. It includes various variable and Fixed costs. Revenue Budget for 2009-10 shows net profit of Rs. 4154.32 lakhs. Whole of this Budgetary Control is exercised by Budget Section of Finance and Accounts department.

Also, the revamping process is a good step in the development of the company as it will decrease the per unit cost of urea and will also decrease the subsidy given by the government. The decrease in the profit by 12 cr. is due to the high input feedstock which will be decreased by the revamping process. Thus, NFL has controlled internal cost up to a great extent.

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