Page 59 - DMGT302_FUNDAMENTALS_OF_PROJECT_MANAGEMENT

Fundamentals of Project Management

Notes allowances must be shown here. Likewise, expenses on Indian technicians who require training
abroad must also be included here.

Miscellaneous Fixed Assets

Fixed assets and machinery which are not part of the direct manufacturing process may be
referred to as miscellaneous fixed assets. They include items like furniture, office machinery and
equipment, tools, vehicles, railway siding, diesel generating sets, transformers, boilers, piping
systems, laboratory equipment, workshop equipment, effluent treatment plants, firefighting
equipment, and so on. Expenses incurred for the procurement or use of patents, licences, trade
marks, copyrights, etc. and deposits made with the electricity board may also be included here.
Preliminary and Capital Issue Expenses

Expenses incurred for identifying the project, conducting the market survey, preparing the
feasibility report, drafting the memorandum and articles of association, and incorporating the
company are, referred to as preliminary expenses.

Expenses borne in connection with the raising of capital from the public are referred to as capital
issue expenses. The major components of capital issue expenses are: underwriting commission,
brokerage, fees to managers and registrars, printing and postage expenses, advertising and
publicity expenses, listing fees, and stamp duty.

Pre-operative Expenses

Expenses of the following types incurred till the commencement of commercial production are
referred to as pre-operative expenses: (i) establishment expenses, (ii) rent, rates, and taxes,
(iii) travelling expenses, (iv) interest and commitment charges on-borrowings, (v) insurance
charges, (vi) mortgage expenses, (vii) interest on deferred payments, (viii) start-up expenses,
and (ix) miscellaneous expenses.

Pre-operative expenses are directly related to the project implementation schedule. So, delays in
project implementation, which are fairly common, tend to push up these expenses. Appreciative
of this, financial institutions allow for some delay (20 to 25 per cent) in the project implementation
schedule and accordingly permit a cushion in the estimate for pre operative expenses.
Pre operative expenses incurred up to the point of time the plant and machinery are set up may
be capitalized by apportioning them to fixed assets on some acceptable basis. Pre-operative
expenses incurred from the point of time the plant and machinery are set up are treated as
revenue expenditure. The firm may, however, treat them as deferred revenue expenditure and
write them off over a period of time.

Provision for Contingencies

A provision for contingencies is made to provide for certain unforeseen expenses and price
increases over and above the normal inflation rate which is already incorporated in the cost
estimates.
To estimate the provision for contingencies the following procedure may be followed: (i) Divide
the project cost items into two categories, viz., ‘firm’ cost items and ‘non-firm’ cost items (firm
cost items are those which have already been acquired or for which definite arrangements have
been made). (ii) Set the provision for contingencies at 5 to 10 per cent of the estimated cost of
non-firm cost items. Alternatively, make a provision of 10 per cent for all items (including the
margin money for working capital) if the implementation period is one year or less. For every
additional one year, make an additional provision of 5 per cent.

54 LOVELY PROFESSIONAL UNIVERSITY