(A Government of India enterprise)
PROJECT REPORT ON
STORE ACCOUNTING WITH RESPECT TO N.H.P.C
Submitted to Panjab University, Chandigarh
in partial fulfillment for the Award of the degree of
(Master in Business Administration commerce & IT)
Roll No. –7605
Session –April, 2013
MASTER TARA SINGH MEMORIAL COLLEGE
FOR WOMEN, LUDHIANA
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Finance is the life blood and nerve centre of business just as circulation of blood is
essential for maintaining human life, without adequate finance a business can’t run
smoothly. Application of Management of Principles in all branches whether Production,
Personnel, Finance, Marketing etc results in more efficient and effective utilization of
Now days the theory without practice is of little use. No doubt, theory provides the
fundamental stone for the Guidance of practice. Therefore a strong cooperation of
theory and practice is very essential to make a management student perfect.
As the project suggests that project report is all about knowing what is Store
management and its efficiency, its importance and its uses. The project report also
includes the type of financing NHPC has used recently in appraising its new project of
800MW generation at Parbati river at PARBATI PROJECT STAGE-2.The confidence of
an individual is boosted as one successfully completes the responsibilities shouldered
on him. The theoretical concepts only help us to gain Knowledge. However an
administrative skill, the pre-requirement for the completion of a success story comes
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The successful completion of any task would be incomplete without
mentioning the people who have made it possible. So it`s with the gratitude that I
acknowledge the help, which crowned my efforts with success.
I would like to express my sincere thanks to the management of NHPC
who gave me the opportunity to work and study in such an esteemed
It is a matter of pride for me to acknowledge my profound gratitude to my
respected principal MRS.PARVEEN KAUR CHAWLA, who always facilitates me in
gaining practical knowledge.
MS.PRIYA AHUJA & MRS.MEENAKSHI BAJAJ for her valuable Cooperation
Last but not the least, I would like to thank all who supported me in this
study by way of sparing their precious time, providing relevant information and
sharing experience, I needed, without which the project would have been
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TABLE OF CONTENT
1 INTRODUCTION TO THE TOPIC: STORE ACCOUNTING
2 COMPANY PROFILE
Hydro scenario in India
Overview of organization
Vision of organization
Mission of organization
Objectives of the organization
Capital structure of NHPC
3 INTRODUCTION ABOUT PARBATI PROJECT II
Parbati project2 :Profile
4 PROJECT REPORT ON STORE ACCOUNTING W.R.T. PHEP-2
Inventory management system
Procedure of store accounting
Interpretation and Analysis
5 FINDINGS AND LIMITATIONS
CONCLUSION AND RECOMMENDATIONS
7 BIBLIOGRAPHY /REFERENCE
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INTRODuCTION TO ThE TOPIC:
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A Store is virtual money that can be encashed. However, this money needs to be
properly counted or accounted for. STOCK ACCOUNTING is thus a systematic way of
assessing the money value of the items lying in stores as also the items under
transaction through stores.
Transactions, in terms of receipts and issues are a regular feature in any stores and
therefore Stock accounting process, in most of the cases, concentrates only on the
stock in hand, lying in Stores.
The most popular methods of accounting are, FIFO i.e. First In First Out and
LIFO, Last In First Out.
FIFO and LIFO Methods as accounting techniques are used in managing
inventory (Stock lying in Stores for future use) and financial matters involving the
amount of money a company has tied up within inventory of produced goods, raw
materials, parts, components, or feed stocks. These methods are used to manage
assumptions of cost flows related to inventory, stock repurchases (if purchased at
different prices), and various other accounting purposes.
FIFO standing for first-in, first-out, implies that the oldest inventory items are
recorded as sold first but do not necessarily mean that the exact oldest physical object
has been tracked and sold.
LIFO stands for last-in, first-out, meaning that the most recently produced items
are recorded as sold first. Since the 1970s, some U.S. companies shifted towards the
use of LIFO, which reduces their income taxes in times of inflation, but with International
Financial Reporting Standards banning the use of LIFO, more companies have gone
back to FIFO. LIFO is only used in Japan and the U.S.
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Store is a function of materials management in an organization. Hence it is generally
found that stores function reports to the materials manager.
But in some situations stores function reports to the production function.
Function of store
Interaction & coordination
Inventory in a company includes stock of raw materials, work-in-progress,
finished & semi-finished products, spare components and by-products, etc
Inventory control is an important feature of cost accounting system
Methods of stock valuation
Weight average cost (WAVCO)
Specific identification/unit cost method
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Public company(BSE: 533098,NSE: NHPC)
G.Sai Prasad (Chairman & MD)
Electricity generation; energy trading(transmission and distribution)
Rs. 719 cr (31.7.2013)
Rs. 5,306.64 crore (march 2013)
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National Hydroelectric Power Corporation (NHPC) was established in 1975.
NHPC is a schedule “A” Enterprise of the Government of India. With an authorized
capital of Rs 15000 Crore and an investment base of about Rs 25400 Crores, NHPC is
ranked as a premier organization in the country for development of Hydropower.
Accredited with ISO-9001:2000 & ISO 14001:2004 certificates for its quality
system and environment concerns, NHPC is a multi-disciplinary organization and has
acquired sufficient expertise and state-of-the-art technology for investigation , planning,
designing, and executing both small and large size hydro power projects. It has the
strength of highly qualified and experienced professionals in design and engineering,
geo-technical engineering, construction planning and construction management for
building hydroelectric projects. The technical and engineering proficiency and
experience of NHPC places it in a leading position in the field of hydropower
development in India and neighboring countries.
The Saga of NHPC is replete with many challenges. To begin with NHPC took
over three most difficult and almost abandoned projects in geological Weak Himalayan
Ranges. These Projects were the 180 MW Baira Siul in Himachal Pradesh, 105 MW
Loktak Project in Manipur and the 345 MW Salal stage-I in Jammu & Kashmir. The
successful commissioning of these projects in most difficult areas and their operation is
a testimony to NHPC’s success.
With the commissioning of 180 MW Baira Siul project in 1981, NHPC started
earning profit since 1982, the first year turnover was Rs 24 Crores and its Net Profit was
Rs 8 Crores. Since then the net profit of the corporation increases year after year. Net
profit of the corporation was Rs 2090.5 Crores during the year 2009-10 as against
2166.67 Crores during 2010-11. NHPC is planning to take projects in neighboring
countries like Nepal and Bhutan. NHPC has been conferred “MINI RATNA” status by
the Govt. of India.
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hYDRO sCENERIO IN INDIA
India is blessed with immense amount of hydro-electric potential and ranks 5th in terms
of exploitable hydro-potential on global scenario. As per assessment made by CEA
(Central Electricity Authority) is endowed with economically exploitable hydro-power
potential to the tune of 148700 MW of installed capacity. The basin wise assessed
potential is as underBasin/Rivers
Probable Installed Capacity (MW)
Central Indian River system
Western Flowing Rivers of southern India
Eastern Flowing Rivers of southern India
In addition, 56 number of pumped storage projects have also been identified with
probable installed capacity of 94000 MW. In addition to this, hydro-potential from small,
mini & micro schemes has been estimated as 6782 MW from 1512 sites. Thus, in
totality India is endowed with hydro-potential of about 250000 MW. However,
exploitation of hydro-potential has not been up to the desired level due to various
constraints confronting the sector.
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hOW IT WORKs
So just how do we get electricity from water?
Actually, hydroelectric and coal-fired power plants produce electricity in a similar way.
In both cases a power source is used to turn a propeller-like piece called a turbine,
which then turns a metal shaft in an electric generator, which is the motor that
produces electricity. A coal-fired power plant uses steam to turn the turbine blades;
whereas a hydroelectric plant uses falling water to turn the turbine. The results are the
Take a look at the diagram of a hydroelectric power plant to see the details:
The theory is to build a dam on a large river that has a large drop in elevation.
The dam stores lots of water behind it in the reservoir at FRL ( full reservoir level)and a
live storage of 1.98 Mcum . Near the bottom of the dam wall there is the water intake
.Gravity causes it to fall through the penstock inside the dam. At the end of the
penstock there is a turbine propeller, which is turned by the moving water. The surge
shaft (restrict the surges within the height of shaft) from the turbine goes up into the
generator, which produces the power. Power lines are connected to the generator that
carry electricity to your home and mine. The water continues past the propeller through
the tail race tunnel (TRT) into the river past the dam. By the way, it is not a good idea
to be playing in the water right below a dam when water is released.
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The diagram of a hydroelectric generator given below shows how generator
"A hydraulic turbine converts the energy of flowing water into mechanical energy. A
hydroelectric generator converts this mechanical energy into electricity. The operation of
a generator is based on the principles discovered by Faraday. He found that when a
magnet is moved past a conductor, it causes electricity to flow. In a large generator,
electromagnets are made by circulating direct current through loops of wire wound
around stacks of magnetic steel laminations. These are called field poles, and are
mounted on the perimeter of the rotor. The rotor is attached to the turbine shaft, and
rotates at a fixed speed. When the rotor turns, it causes the field poles (the
electromagnets) to move past the conductors mounted in the stator. This, in turn,
causes electricity to flow and a voltage to develop at the generator output terminals."
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OVERVIEW OF ORGANIZATION
INTRODuCTION ABOuT NhPC
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NHPC has become the largest organization for hydropower development in India, with
capabilities to undertake all the activities from conceptualization to commissioning in
relation to setting up of hydro projects. Its capability includes complete spectrum of
hydro Power from concept to commissioning. Besides providing consultation services in
field of hydro-power, NHPC is also planning to take up Wind and Tidal power projects in
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A world class diversified & transnational organization for sustainable development of
Hydro power and water resources with strong environment conscience.
To achieve international standards of excellence in all aspects of hydro power and
To execute and operate projects in a cost effective, environment friendly and socioeconomically responsive manner
To foster competent trained and multi-disciplinary human capital
To continually develop state-of-the-art technologies thru innovative R&D and adopt
To adopt the best practices of corporate governance and institutionalize value based
management for a strong corporate identity.
To maximize creation of wealth through generation of internal funds and effective
management of resources.
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Organizational & professional Pride
Mutual Respect and Trust
Innovation and Speed
Total Quality for Excellence
Development of vast hydro potential at faster pace and optimum cost elimination, time
and cost over-run.
Completion of all ongoing projects within stipulated time frame.
Ensure maximum utilization of installed capacity and help in better system stability.
Generation of sufficient internal resources for expansion and setting up new projects.
Corporate development along with simultaneous human resource development.
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CAPITAL STRUCTURE: FINANCIAL
Rs. 1,50,000 Million(31.03.2013)
Value of Assets
Rs.35,718.06 cr. App. (31.03.2013)
Paid Up Capital
Rs. 12,300.74 crore (31.03.2013)
14 Nos. (5295 MW)
Projects Under Construction
10 Nos. (4502 MW)
Projects Awaiting Clearances
12 Nos. (9651 MW)
Projects Under Survey and Investigation Stage
7 Nos. (2485 MW)
Joint Venture Projects
7 Nos. (5206 MW)
Projects on Turnkey Basis
5 Nos. (89.35 MW)
In 2012-march ‘13
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The Bulk Power Consumers of NHPC Limited in North India are the power utility
belonging to the states of Haryana, Punjab, Himachal Pradesh, Uttar Pradesh,
Uttarkhand, Rajasthan, Delhi and J&K and Union Territory of Chandigarh. These states
are being supplied power from Baira Siul, Salal-I & II, Tanakpur, Chamera-I, ChameraII, Uri, Dhauliganga & Dulhasti Power Stations. In the Eastern Region, Rangit and
Teesta-V, Power Stations are supplying energy to the states of West Bengal, Sikkim,
Bihar, Jharkhand, Gridoo and Damodar Valley Corporation. In the North-Eastern
Region, Loktak Power Station is supplying energy to the states of Assam, Manipur,
Meghalaya, Tripura, Nagaland, Arunachal Pradesh and Mizoram
Since commencing of commercial generation in 1982, the Energy sales and
revenues of the corporation have grown significantly. The Energy sales from all
operating projects of the Corporation during the last 25 years has risen from Rs. 228.60
Million in the year 1982-83 to Rs. 50491 Million in the year 2012-2013.
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STRENgTHS and opportunities in the
Abundant coal reserves (enough to last 200 years)
Vast hydroelectric potential (150,000 MW).
Large pool of highly skilled technical personnel.
Impressive power development in absolute terms (comparable in size to those of
Germany and UK).
Expertise in integrated and coordinated planning.
Emergence of strong and globally comparable central utilities
Wide outreach of state utilities.
Enabling framework for private investors.
Well laid out mechanisms for dispute resolution.
Political consensus on reforms.
Potentially, one of the largest power markets in the world.
POWER FOR ALL BY 2013
The Government of India has an ambitious mission of POWER FOR ALL BY 2013. This
mission would require that our installed generation capacity should be at least 200,000
MW by 2013 from the present level of 144,564.97 MW. Power requirement will double
by 2020 to 400,000MW.
Sufficient power to achieve GDP growth rate of 8%
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Optimum power cost
Commercial viability of power industry
Strengths: 1. Good corporate Image.
2. Complete range of product for transmission & distribution.
3. Established brand name with executive oriented program.
4. Strong & wide networks of manpower across India.
5. Considered to be having technology & design ability.
Weakness: 1. The procurement process in the companies is cumbersome and subject to auditing.
2. Low exposure to the needs & dynamics of distribution business.
3. Role clarity on the requirement of being an equipment supplier or a solution provider.
As there are very few supplier of equipment manufacturing plant.
Opportunities: 1. Huge Investment leading to greater demand of goods and services.
2. Demand leading to Industry operating at full & over capacity.
3. Better Price realization.
4. Early birds to learn faster and thus achieve repeat orders. Policy to bid from ultra mega power
5. Vertical integration for supply chain management of coal by acquiring coal blogs.
Threats: 1. Purchases preference may be extended to distribution sector.
2. Increase in no. of small contractors leading to price war.
3. Emergence of competitors in the market like Schneider, Reliance, Tata etc.
4. Change in government policies for open trade or stock trading or energy trading.
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5. Reduce the time lag.
The State of Himachal Pradesh is blessed with abundant water resources in its
five major rivers i.e. Chenab, Ravi, Beas, Satluj and Yamuna, which emanate from the
western Himalayas and flow through the State. These snow fed rivers and their
tributaries carry copious discharge all the year round and flow with sleep bed-slopes,
which can be exploited for power generation. The expeditious harnessing of this vast
and economically viable hydro-electric potential, estimated to be more than 20,000 MW,
is the only answer to the prevailing chronic and ever-growing power shortage in the
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In India, since independence, concerted efforts have been made to increase the
availability of power to various segments of Indian society. The hydropower
development in India has not taken place in a systematic manner since year 1950 till
date with more advantage to thermal / nuclear Station during the last 50 years, which
resulted in improper hydro-thermal mix of power generation.
As on date NHPC Limited has become the largest organization for hydropower
development in India, with capabilities to undertake all the activities from
conceptualization to commissioning in relation to setting up of hydro projects. NHPC
Limited is also planning to take Wind and Tidal wave projects in the country.
NHPC Limited presently has an installation base of 5295 MW from 14
hydropower stations on ownership basis including projects taken up in Joint Venture.
Considering the impediments faced during execution of these projects such as
unfavorable geological conditions, difficult law and order problems, inaccessible and
remote locations, the achievement so far is commendable. The generation performance
of these stations has been outstanding.
NHPC Limited is presently engaged in the construction of 10 projects aggregating
to a total installed capacity of 4502 MW. Given the renewed thrust on development of
hydro power in the country, NHPC Limited has drawn up a massive plan to add over
10,000 MW of hydropower capacity by the end of XII plan (year 2017).
PARBATI STAgE- II H.E. PROJECT
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Parbati Hydroelectric Project is a cascade development to be developed in 3 stages
with an aggregate generating capacity of 2070 MW. Stage-I is storage type of scheme
and situated in the mainly snow bound area having installed capacity as 750 MW.
Parbati Project Stage-II is a run of the river scheme and shall have installed capacity of
800MW. Parbati Project Stage-III development is downstream of Stage-II and shall have
installed capacity of 520 MW. Parbati Stage-II comprising of 83.7m high Concrete
Gravity Dam and 31.525 km long HRT shall be utilizing a gross head of 862 m. To
enhance the generating capacity of the Project 5 small streams shall also be trapped.
The project is of special importance as the longest reach of 9 km shall be excavated
with the use of TBM and 2 Nos inclined Pressure Shafts each about 1.546 km long is
also excavated with TBM. The total quantum of underground works involving tunneling
shall be about 57 km.
HYDEL DEVELOPMENT OF PARBATI PROJECTS
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The Beas valley in Himachal Pradesh has a vast potential for water resources
development and only a small part has been tapped during the past five decades of
planned development. Parbati River, Hurla nallah and Sainj River are major tributaries
of Beas River in Kullu valley. Parbati River is the northernmost left bank tributary of river
Beas in Kullu District of Himachal Pradesh. The river Parbati is a glacial and snow fed
river and it originates from Mantalai Lake from snow peaks at an elevation of 6300 m
and traverses in northerly direction and flows down as a small stream in a narrow valley.
After traversing 7 km from its origin it joins the Beas River at Bhuntar. The river in
general can be termed as a very fast flowing and ferocious one. The river valley is
located in high mountain ranges, which rises to more than 1,000 m on both the banks
over most of its stretch. The stream Dibi ka nallah and Tosh nallah, which join the river
Parbati, are the major tributaries of Parbati River. The total catchment area of Parbati
River at Pulga Dam site is 1155 sq km. This catchment has a large number of small and
big glaciers. Over 84% of the catchment of Parbati Stage II project i.e. about 971 sq km
is permanently snow covered. Further 45% of the catchment area is above an altitude of
5000 m above Mean Sea Level. The entire river catchment is located in the Himalayan
mountain ranges. The catchment area is sparsely populated because of snowing
condition, steeply sloping mountain ranges, remote location and inaccessibility.
The Parbati Hydroelectric Project (Stage-II) is a run-of-the-river scheme proposed to
harness hydro potential of lower reaches of the River Parbati. The proposed scheme is
'inter basin transfer' type. It is proposed to divert the river near Village Pulga in Parbati
valley & water shall be carried through a tunnel across Garsa valley to Sainj valley
where the Power House shall be located at village Suind. Thus, a gross head of 862 m
between Pulga and Suind will be utilized for generating 800 MW power. Diverting the
discharge of various nallas falling along the HRT alignment has further augmented the
diverted discharge of the river Parbati. An 83.7m high, 110 m long, concrete gravity dam
is proposed near village Pulga across Parbati River to divert 145 cumec of water. The
reservoir will have a gross storage capacity as 6.83 Mcum. This diurnal storage will be
sufficient to run power station at full capacity for 4 hours in a day even during lean flow
period. The spillway section consisting of three bays is designed to pass a maximum
probable flood of 1850 cumec.
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PARBATI PROJECT-II (A PROFILE)
NEAREST RAIL HEAD
PARBATI HYDROELECTRIC PROJECT (STAGE -II)
KIRATPUR (190 KM FROM SAINJ, POWER HOUSE
BHUNTER (35 KM FROM SAINJ, POWER HOUSE
PARBATI (A TRIBUTARY OF RIVER BEAS)
& DIVERSION DAM ON RIVER PARBATI AT PULGA
VILLAGE AND POWREHOUSE ON RIVER SAINJ
RIGHT BANK OF SUIND VILLAGE.
4 X 200 (800 MW)
3108.66 MILLION UNITS
DATE OF CCEA APPROVAL
OF SEPTEMBER 2014
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Four Catchments of the project are:
Maximum observed discharge
2. Jigrai Nallah
Catchment Area at Diversion site
3. Hurla Nallah
Catchment Area at Diversion site
4. Jiwa Nallah
Catchment Area at Diversion site
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The proposed surface power house is located on the right bank of River Sainj near
Village Sainj at about 200 m downstream of the confluence of River Sainj and Jiwa
Nallah. The power house shall have an installed capacity of 800 MW with four
generating units of 200 MW each. Short Tail Race Channels shall discharge the water
from Power House to river Sainj.
The estimated cost for construction of Project is worked out to be Rs. 5607.66 crores at
August 2000 price level.
The Project is planned to be operated as a peaking power station. A: 800 MW installed
capacity the Project will generate 3108.66 million units of Power in 90% dependable
year. The construction of the Project will bring social & economic development in the
region. Other facilities like infrastructure. Education Medical and employment will get
boost with the execution of the Project.
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Section I.1 Benefit to Himachal Pradesh
On completion, the project will provide 12% free power to the tune of
369.32 Million Units which will generate revenue of Rs. 140 crores per y
ear to Himachal Pradesh (at NHPC sale price). Construction of the project
will bring social & economic development in the region. Facilities like
infrastructure, education, medical and employment will get boost.
Revenue to HP Government due to construction of project
up to October 2004
Rs. 589.75 Lakhs.
Rs. 638.92 Lakhs.
A Kendriya Vidyalaya up to class XI is functional at Sainj, which is open to
local wards at nominal fees. Out of 202 students about 170 are local
children. Needy ones are being provided school uniform and requisite
stationary by NHPC Ladies Welfare Association.
A project Hospital at Sainj is functional for the welfare of employees and
their families, which also caters to the medical needs for the local
population. Hospital/dispensaries are also functional at Bhuntar, Garsa and
Nagwain to provide immediate medical assistance. NHPC Ladies Welfare
Association with the help of Project resources keeps on organizing free
medical camps at remote locations for the benefits of needy and local
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Construction of the project has created scope for indirect employment by
way of business establishments. More than 150 new business
establishments have come up in Manikaran Valley, more than 150 in Garsa
Valley, more than 150 in Sainj Valley after the start of the project. Apart
from this a shopping complex has been constructed in Sainj Township.
Vehicles Taken on Hire Basis
Light Vehicles/Tractors belonging to locals are bin hired by NHPC as well as by
our major contactors.
11 Nos. (HRTC Buses)
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Contract Given to Local Contractors
Details of work contract/work order given to various contractors of H.P. by Parbati
Total No. of works awarded
Power House Complex
Wild life protection
NHPC and GHNP (Great Himalayan National Park) have pooled their efforts
aimed at conservation of wildlife and environment in and around the GHNP comprising
754 sq. km. While executing the construction work of prestigious Parbati Hydroelectric
Project Stage-II emphasis has been made to conserve and preserve the rare wild life,
flora and fauna. Parbati Project Stage-II is committed to spend Rs. 35.40 crore for
habitat improvement and conservation of endangered species like Jujurana (Western
Western Tragopan male is one of the world's most spectacular birds: black on
the head, a deep crimson on face and mantle and orange on breast, the black belly and
dark wings are spangled with star-like white specks. The female is dull brown. They
occur in dense forest with undergrowth of bamboo or shrubs from 2000-3500 m, solitary
in spring, but in family groups in fall: often seen in trees where they may eat leaf buds.
Males can be heard calling in spring and in October. Within the Park, the maximum
numbers of sightings have been in the forests of Basu, Shilt, Nada, and Chordwar in
In the villages close to GHNP, the local name of Western Tragopan is Jujurana
(Juju means bird and rana means king) i.e. the king of the birds. There is a local legend
that this pheasant was created by the "Lord" and all the birds in the universe donated a
feather each to give it color and unparalleled beauty.
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National Hydroelectric Power Corporation Limited (NHPC)
units, which are engaged in operation of generating electricity or are under construction
stage. Various types of stores inventory need to be maintained to ensure smooth
running of these power stations and construction of the units. The purchase and stores
accounting procedures shall be subject to NHPC’s policy for procurement of stores,
delegation of powers and administrative instructions issued in this regard from time to
time. The stores inventory includes inventory for construction (like steel, cement, etc.)
as well as for operation purposes.
oBJectiVeS of StUdY
To relate our theoretical knowledge about stores management with the actual
procedures being adopted in industries regarding their stores management.
To study & analyze the stores management procedures of an under construction
project of NHPC i.e. of Parbati Project-II.
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The subject of my research is to study the stores procedure being used by Parbati
project-II of NHPC. The data being collected is of following types: Primary Data
Primary data has been collected by personally interviewing the employees of stores
Department of Parbati Project-II. These interviews were of unstructured form. Few
questions asked are as:
Secondary data of both published & unpublished form has been collected from following
NHPC’s manual on stores procedures.
News magazine of NHPC.
NHPC’s website “www.nhpcindia.com .”
Intranet Facility in PHEP-II.
Methods of stock valuation (Parbati stage 2)
1. First in first out (FIFO)
This method assumes that the first stock to be received is the first to be sold
The cost of materials used is based on the oldest prices
The closing stock is valued at the most recent prices
2. Weighted average cost
This method assumes that the cost of materials used and closing stock are
valued at the weighted average cost
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inVentorY MAnAGeMent SYSteM
NHPC may adopt various inventory management techniques for efficient and effective
inventory management as per their requirements. The generally used inventory
management techniques include the following:
• ABC Analysis
• VED Analysis
• FSN Analysis
• Stock levels
• Economic Order Quantity
A BRIEF WRITE UP ON INVENTORY MANAGEMENT SYSTEM
Efficient store keeping requires sufficient control over all items of stores. ABC
analysis is a basic analytical management tool, which enables top management
to place more effort where the result will be the greatest. The first step in the
inventory control process is classification of different types of inventories to
determine the type and degree of control required for each.
The ABC system is widely used classification technique to identify various items
of inventory for purposes of inventory control. This technique is based on the
assumption that the organisation should not exercise same degree of control on
all items of inventory. The organization shall keep more rigorous control on items
that are most costly and/ or slow turning / expensive while items that are less
expensive should be given less control effort.
ABC analysis is carried out by grouping items on the basis of their annual cost
• ‘A’ group items are those, which have highest value of volume usage, generally
constituting around 70% of the value but around 15% of the number of items
• ’B’ with intermediate values and generally constituting around 20% of the value but
around 30% of the number of items
• ‘C’ group with the least value generally constituting around 10% of the value but
around 55% of the number of items
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This grouping helps to identify items that enhance inventory performances when
Appropriate inventory management techniques are then used to manage items
according to their priority levels. Thus close attention is paid towards managing
‘A’ group inventories as they contribute significantly to high performance levels,
followed by ’B’ and ‘C’ group inventories. The ultimate goal of ABC analysis is to
closely supervise the items according to their share in the inventory investment.
This helps to reduce time and minimise efforts towards managing those items
which though are not properly taken care of, do not show noticeable effect on
Thus we can achieve effective inventory control by closely monitoring `A' class
items - watch waste, obsolescence and surplus. Review monthly. Whereas `B'
class items can be brought under routine follow up and `C' class should be kept
in good surplus to avoid frequent attention and production loss due to stock outs.
While exercising control over stores, items of category A should be given the
maximum attention. Their levels of stock should be strictly controlled. In case of
items of category B, ordinary stores routine should be observed but rules
regarding levels of stock may not be so strictly adhered to as for the items in
category A. Items of category C do not require continues monitoring.
Under VED technique, items are classified into Vital, Essential and Desirable on the
basis of criticality of the item as perceived by the user department. Here the importance
to an item of material is given based on its criticality to the business rather than the
investment/ volume of consumption.
The benefits of fixation of stock levels include the following:
• It helps in avoiding unnecessary blocking up of funds in inventories
• Reduces likely losses on account of deterioration and obsolescence of materials, etc.
• Reduction in storage cost
• Better management of inventory
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REORDER LEVEL (ROL)
ROL is the level of inventory at which an order for procurement should be placed for
replenishing the current stock. The ROL should be decided taking into account the
• Consumption in per unit of period (say consumption per week).
• Lead time (say in number of weeks) i.e. anticipated time lag between the order issuing/
indenting date and date of receipt of material.
• In order to take care of likely variations/ contingencies in the usage and lead time, the
maximum likely consumption and delivery period are considered.
For this purpose the past consumption and lead time pattern should be analyzed
ROL = Lead time (in no. of weeks) * Consumption (per week)
The maximum level specifies the maximum inventory that should be in hand at point of
time. This is worked based on the following formula:
Maximum level =
ROL + Reorder quantity (-) (Minimum consumption per period * Minimum reorder
Minimum level of inventory shall be maintained in hand at all times so that operations
are not stopped/ effected on account of non- availability of inventory.
The following parameters should be taken into consideration for fixing minimum level:
• Consumption value (ABC classification)
• Criticality (VED classification and also availability of substitutes)
• Reliability of suppliers. This is measured based on:
- Quality (Number of rejections)
- Variability in lead time of delivery
- Responsiveness (ability to dispatch material quickly in case of emergency orders)
Minimum level =
ROL (-) Average rate of consumption * Average time required to obtain delivery of fresh
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ECONOMIC ORDER QUANTITY
EOQ is essentially a technique/ formula that determine the point at which combination
of order costs and inventory carrying costs are the least. The result is most cost
effective quantity to order.
Expressed in units, this is the forecasted annual/periodical usage.
This is the sum of the fixed costs that are incurred each time an item is ordered.
These costs are not associated with the quantity ordered but primarily with physical
activities required to process the order. These would include the costs relating to:
processing of the purchase order and/or requisition,
any approval steps,
processing of the receipt,
Invoice processing and vendor payment.
It should be noted that these are costs associated with the frequency of the orders and
not the quantities ordered
18 Carrying cost is the cost associated with having inventory on hand. It is primarily
made up of the costs associated with the inventory investment and storage costs. For
the purpose of the EOQ calculation, if any cost does not change based the quantity of
inventory on hand, it should not be included in carrying cost. In the EOQ formula,
carrying cost per unit is used. The primary components of carrying costs are as under:
• Storage Costs
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The values for Order cost and Carrying cost should be evaluated at least once in a year
taking into account any changes in interest rates, storage costs and operational costs.
Basic formulas for EOQ
Q= quantity ordered (units)
D= annual demand (units per year)
C= carrying cost for one unit in inventory for one year (Rs. per unit per year)
S= order cost (for buying) in (Rs. per order)
TSC= total stocking costs (Rs. per year)
EOQ= economic order quantity (the quantity that minimizes TSC
Annual carrying cost =Average Inventory*C = (Q/2)*C
Annual Ordering Cost=orders per year*S= (D/Q)*S
TSC= carrying cost plus order cost == (Q/2)*C + (D/Q)*S
EOQ = √ 2DS/C and for the EOQ the minimum TSC=√ 2DSC = C*EOQ
Example for the Basic Model
D=annual demand (units per year) = 10,000
C=carrying cost for one unit in inventory for one year (Rs. per unit per year)=Rs. 4
S= order cost=Rs. 50
Then, EOQ = √ 2DS/C = √ 2*10,000*50/4 = 500 units per order
And TSC= =√ 2DSC =√ 2*10,000*50*4 =Rs. 2,000 per year
FSN analysis is a tool used for bringing out the list of slow moving/ non-moving material.
This report is based on the ratio of movement, which is arrived at based on the total
issues during the period of a particular item to its stock in hand. FSN analyses facilitate
categorization of items into Fast, Slow-moving and Non-moving.
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DURABILITY OF STOCK
Stock depends upon various factors some stock is for one year and another for more
than one year for example Cement cannot be stored for more than one year and steel
and bricks can be stored for more than one year .The information about the stock was
not provided so we can tell this much only about the stock.
The accounting guidelines that NHPC follows for stores accounting are
Receipts from suppliers
All receipts shall be valued in the month in which the material is received and
accepted as per the GRN (goods receipt note) based on the bills received and
In case the bills have not been received/ processed, the receipts shall be
provisionally valued at the Purchase Order rates. Adjustments, if any, to the
provisional value shall be done at the time of actual bill passing in the month in
which the bill is passed. The material value, on account for such adjustments,
shall be affected for the future issues.
The purchases shall be valued at the landed cost i.e. basic price, excise duty,
sale tax, freight and other incidental expenses.
In case of imports, the cost of material shall include the following:
Custom duty, in case a GRN contains several items with different custom
duty rates, the custom duty amount for each individual item shall be absorbed
at the applicable rates.
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Port charges, landing charges and clearing agent's commission.
Local transport charges.
Other incidental expenses and local taxes, if any.
In case there is any amount payable by NHPC for freight and other incidental
expenses, it shall initially be debited to ‘Freight and incidental expenses on
inventory (foreign/ indigenous)’ on insurance of such expenses. This account
shall be adjusted in the manner given below:-
The balance in the ‘Freight and incidental expenses on inventory
(foreign/indigenous)’ account is to be reviewed periodically and the
nominal balance that may remain unadjusted at the year-end shall be
charged off to the P&L account. Necessary provision shall be created at
the year-end for any pending bills.
The following types of expenses shall be charged to the natural heads of
expenditure and shall not be included / loaded to the material purchase cost:
Costs of running of departmental trucks (i.e. of NHPC) used for bringing
the bought out material to stores from the suppliers site /intermediary
transit location, keeping in view the materiality concept and simplicity in
Stores holding expenses / storage costs.
Receipts from other units
All receipts from other units shall be valued in the month in which the material is
The stores transferred from other units shall be valued at the rate intimated in
the Inter Unit Advice (IUA) by the transferor unit.
The Store Transfer Note (In) (STN (IN)) contains the provisional/ final value of
the material transferred and the materials shall be valued on the basis of the STN
(IN) in the month material is received. The difference, if any, in the above
provisional value and the inter unit advice shall be adjusted in the store value in
the month in which inter unit advice from the sending unit is accounted for.
The cost of transport from the transferor store to the transferee store shall be
charged off to revenue expenditure.
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Returns out of material issued
The material returned to stores shall be valued at the original issue rate.
In case of return of material to stores after its use and such material being reusable (such as CGI Sheets, Steel, Timber etc.), the same shall be valued at a
price assessed by the concerned Engineer in consultation with the Purchase
Department and kept at a separate location from the good stores. However the
return price shall not exceed the current issue price of fresh material items as per
the PSL. The credit for such returns shall be given to the concerned account
head which was debited at the time of issue of material.
Physical Verification and Reconciliations
The balances as per the various party wise ledgers shall be reconciled with the
control account in the General ledger on a monthly basis.
The quantity balances as per the stock record of the Stores Department and
Price Ledger shall be reconciled periodically to ensure their accuracy.
The physical verification of materials in stores shall be carried out at least once in
a year. The physical verification of material at site shall be carried out half-yearly
intervals. The obsolete and unserviceable items should also be identified during
the physical verification.
Material at Site Account
As per NHPC systems for works, a numerical or quantity account called the
“Material at Site Account” of receipts, issues and balances have to be maintained
for all stores received in the consuming division, even through their value has
been debited to final Heads of Accounts; with a view to controlling the balances
efficiently until the stores are disposed off finally either by consumption or works
or otherwise. This Account is to be kept by the concerned Consuming Division.
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The treatment of the unconsumed material at site shall be as follows: In respect of material issued for Operation and Maintenance purposes, the
expense Head shall be credited for the unconsumed material in hand at the
end of the year. The value of the unconsumed material at site shall be valued
at the prevailing PSL rate at the end of the year.
In respect of material issued for capital purposes, no accounting entry is required to be
passed at the end of the year.
Procurement order/ Contract is a backbone of any commercial activity. The Finance
plays an important role in the procurement/ contracts. The role of Finance in NHPC is a
staff function. It has the concurrence power and as such the Finance has to critically
examine every proposal coming up for concurrence. The Finance Executive examining
the proposals for various types of contracts for procurement should be fully conversant
with the latest developments in the statutes, market conditions (both National and
International), policies/ programs/ planning/ objectives and delegation of power of the
TYPES/ CONDITIONS OF CONTRACT
Now days, various types of contracts are entered into by NHPC through National
Competitive Building (NCB) as well as through International Competitive Bidding (ICB).
In order to have uniformity in the Contracts being entered in to by different Projects of
the Corporation, “Standard General Conditions of Contract (GCC)” for Civil Contract,
Supply Contract, as well as Supply cum Erection Contract have already been approved
by the Competent Authority and circulated. Any change in the standard clauses of the
General conditions, which become necessary due to the site conditions, past
experience, or due to other reasons are incorporated in the “Special Conditions of the
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Relevant Contract (SCC)” and got approved from the Competent Authority. These
General Conditions of Contract can however be used only in case of National
Competitive Bidding (NCB).
The procurement process is initiated based on the periodic procurement plan and
/ or purchase requisition in case of non- availability of any item in stores.
All proposals for procurement are prepared in the form of estimates, by the
indenting department before any expenditure or liability is incurred thereon. The
basic prerequisites to be fulfilled before starting the process for finalizing a
purchase order are:
• Administrative approval
• Expenditure sanction
• Technical sanction
• Appropriation or re-appropriation of funds
Pre-qualification of Bidders
Tendering process starts only after the Competent Authority has approved the
PR. Normally the tenders are invited through Open Tender, Limited Tenders or
Single Tender. However, sometimes considering the estimated value/ nature/
technical requirement of the procurement, pre-qualification of the bidders are
resorted to whereby the capability of the probable bidder (both technical and
financial) is ascertained before one is allowed to bid for a particular procurement
tender. Pre-qualification of bidders is normally done to ensure selection of
resourceful, technically competent, and financially sound prospective bidders
with proven past performance for participation in the bidding process.
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The criteria of financial capability of the applicant are fixed taking into account the
completion period of the proposed work, requirement of the monthly cash flow for
the work, etc. Keeping these facts in view the minimum qualifying criteria for the
following are generally considered:
• Average annual turnover of the applicant
• Net worth of the company
• Profitability of the applicant
• Working capital of the company: The cash credit facility enjoyed by the applicant
from any bank or Financial Institution can be considered.
Once the bidders are selected on the basis of the PQ, tenders are invited only
from those pre-qualified bidders.
Vetting of tender documents
Before the Competent Authority approves the tender documents, it is sent to
Finance Department for vetting/ checking. The tender documents should also be
sent to Law Division wherever a legal opinion is involved or if there are changes
from the typical format of the tender documents issued by NHPC.
Generally, different types of contracts are executed depending on the nature of
the work to be executed. Examination of tender documents in Finance will
depend on the type of contract proposed therein.
While examining the tender documents, the finance should keep the following in
• Guidelines, policies, circulars issued from time to time by NHPC or
• Relevant tax laws, EXIM policy of the GOI, taxation laws of the state in
which the work is to be executed, price preference/ purchase
preference policy of GOI, FEMA, etc.
Any change in the approved terms and conditions should be examined critically
to see whether the proposed change is in the overall interest of NHPC.
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ISSUE OF TENDER DOCUMENT
Once the Competent Authority approves the tender documents, the tender is
notified through Notice Inviting Tender (NIT) giving wide publicity either through
press advertisements or through other means depending on the estimated cost,
type of tender like open tender/ limited tender/ single tender, etc. as per the
policy of the corporation.
The procurement department receives the request/application for the tender
documents from vendor (in response to the NIT). The tender fee is received in
form of cheque/ demand draft (DD) only, as per guidelines issues by NHPC from
time to time.
The procurement department forwards a summary of tender documents along
with the cheque/ DD to the finance department for necessary accounting and action
Tender opening will be done by a Tender Opening Committee (TOC) constituted
by a Competent Authority in which one member is from Finance. The authorized
representatives of the bidders are also invited to be present at the Tender
Opening, if they wish so.
Generally the bidders are asked to furnish EMD in a separate envelope which
shall be opened first. Techno-commercial/ price bids of only those bidders who
have submitted the requisite amount of EMD shall be opened and considered for
A spot report of the tender opening, indicating there in the following, shall be
prepared and signed by all the members of TOC:
• Number of tenders received.
• Name of the bidders.
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• Number of tenders received late and not considered.
• Amount of EMD/ bid security
• Rates of taxes and duties quoted by the bidder.
• Amount/ rate of discount, if any, offered by the bidder.
EVALUATION OF TENDERS
The evaluation of the Tenders is done by the duly approved Tender Evaluation
Committee (TEC). This evaluation is normally done in two stages. The first stage is
techno-commercial evaluation vide which the responsiveness to the technical
specifications laid down in the tender and the commercial terms and conditions are
The TEC at this stage obtains clarification and confirmations from the bidders if any
required. After the deliberations on the tender along with the clarifications by the bidders
the TEC recommends the bidders whose Price Bids are to be opened. The
recommendations of the TEC and the date of the opening of Price Bid is got approved
by the Competent Authority and the same is intimated to the bidders to enable their
representative to be present at the Price Bid Opening if they wish so.
Checking/ vetting of comparative statements
While checking the comparative statements in finance the following aspects have to be
1. The rates taken in the comparative statement are mentioned in the original price
2. Wherever there is a variation between rates quoted in words as well as in figures,
the rates mentioned in words are taken for comparison.
3. If there is a variation between the rate of any individual item and the total amount
(i.e. quantity multiplied by rates) the unit rate is taken for comparison purpose
and accordingly the total will be corrected.
4. All arithmetical calculations are checked for accuracy.
After checking the comparative statement in Finance, the Finance Executive, should
record a certificate under his signature.
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The TEC then scrutinizes the comparative statement and after obtaining the approval of
the Competent Authority negotiates with the first lowest bidder if required. The
recommendations of the TEC are then put up to the Competent Authority (Board in the
case of Major Contracts) for approval and subsequently process for issue for letter of
Vetting of letter of award
Vetting of letter of award to be issued to the successful tenderer (First lowest tenderer)
after approval of Competent Authority, is to be done in the Finance. The Finance will
• The particulars regarding quantity, quality and rates are clearly brought out.
• The particulars of the contracts providing payment terms, taxes and duties, price
variation clauses, performance guarantee, liquidated damages, delivery/
construction schedule, place of delivery, dispatch instruction, name of consignee,
penalty for delay, etc.
• No undue liability is imposed on NHPC due to omission of a necessary clause or
insertion of an unauthorized clause or by faulty wording of any conditions
• All the changes agreed to at the time of pre award discussion between the
supplier and the TEC and approved by the Competent Authority have been
incorporated suitably in the final agreement
Finance executive has to ensure that at every stage of tendering, approval of the
Competent Authority has been obtained.
PROCESSING OF PSL (PRICE STORE LEDGER)
This process deals with the procedure for valuation of material and Processing of Price
Store Ledger (PSL) by NHPC.
The following documents are used to record transactions in the PSL:
• Goods received note (GRN) for receipt of material from suppliers
• Material Return Note (MRN) for return of material with the unit
• Store Transfer Note- IN (STN-IN) for receipt of material from other units
• Material Issue Note (MIN) for issue of material to the indenting department within
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Store Transfer Note-OUT (STN-OUT) for issue of material to other units
Store Adjustment Note (SAN) for making any adjustment in the stores.
PROCEDURE OF STORES ACCOUNTING
MR (material requisition)
Yes-MIN (material Issue
No-NAC (non availability
PR (purchase requisition)
P&C division (procurement and contract division)
Tendering (lowest bid)
P&C division – issues SO (supply order)
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Supplier – supply to store
Store division GRS (goods receipt sheet)
To Store payment control A/c
End user MR (material requisition)
Store Division- yes (MIN)
Fixed asset ………… Dr.
Store Payment…… Dr.
To sundry creditors A/c
Sundry creditor …..Dr.
To bank A/c
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(` in Crore)
As at 31st
As at 31st
(Valuation as per Accounting Policy No. 7)
i) Stores and spares
Stores in transit/ pending inspection
ii) Loose tools
iii) Scrap inventory
iv) Material issued to contractors/ fabricators
Amount used during the year
Amount reversed during the year
v) Less: Provision for obsolete store & spares *1
Provisions for obsolete store & spares *1
Addition during the year
Adjustment during the year
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INTERPRETATION & ANALYSIS
Valuation as per accounting•
As we have seen in table the inventories of PHEP 2 is increasing year by
year which tends to growth.
The decrease in Scrap inventory shows that in 2012 there is efficient
utilization of inventory as compared to 2011.
The figure of provision for obsolete store shows 4.05 crore difference ,
which reveals profitable ratio.
Materials are procured by tendering process. In certain emergency situations of
shortage of materials, a committee is formed to perform market survey &
purchase the required materials through local purchase.
Materials to be bought are either inspected at the supplier’s place or after
receiving at the stores of corporation.
Issue of materials from stores is based upon the indent requisition & availability
of materials in stores.
Rate of materials issued by the stores is determined by “Weighted average
method” in N.H.P.C.
NHPC has bought a customized MMS (Materials Management System) package
from TCS for Rs. 14 lakhs to maintain the stores records & to connect this
system with other sites & Projects also.
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But due to non-availability of basic infrastructure this system is not functioning
In NHPC no specific method of inventory management is being employed.
Orders of requisition are based upon the approximate consumption of materials
& the past experience of the department.
Hydro‐power projects typically require a long gestation period thus posing a risk
of delay in execution.
Over all position of company is good but there is need to more improvement.
Parbati Project Stage-II is committed to spend Rs. 35.40 crore for habitat
improvement and conservation of endangered species like Jujurana (Western
Tragopan) in GHNP(Great Himalayans National Park )
Theoretical as well as practical knowledge is being adopted in PHEP-2 regarding
their stores management.
Inadequate power generation capacity;
Lack of optimum utilization of the existing generation capacity;
Inadequate inter-regional transmission links;
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Inadequate and ageing sub-transmission & distribution network leading to power
cuts and local failures/faults;
Large scale theft and skewed tariff structure;
Slow pace of rural electrification;
Inefficient use of electricity by the end consumer.
Lack of grid discipline
NHPC Limited has several units, which are engaged in operation of generating
electricity or are under construction stage. Various types of stores inventory need to be
maintained to ensure smooth running of these power stations and construction of the
units under construction. The purchase and stores accounting procedures shall be
subject to NHPC’s policy for procurement of stores, delegation of powers and
administrative instructions issued in this regard from time to time. The stores inventory
includes inventory for construction (like steel, cement, etc.) as well as for operation
purposes. NHPC uses all the procedure and guidelines for the stores management
discussed in the report.
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Procurement of materials is based upon the requisitions being asked to each
department which in turn are based upon the past experiences and approximate
consumption of materials by the corporation.
This implies that there is no inventory method being employed by NHPC. No
re-order level is being determined so it sometimes may lead to shortages of materials at
worksites which lead to wastage of many valuable working hours and financial
Manual of N.H.P.C.
Hand book of N.H.P.C.
Magazines of N.H.P.C.
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Website of Parbati-II
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