How to Control Cost of Manufacturing Concern

8/6/2019 How to Control Cost of Manufacturing Concern

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Institute of Management Sciences, Lahore

Final Project

COST AND MANAGEMENT ACCOUNTING

HOW TO CONTROL COST

Of

ANY MANUFACTURING CONCERN

Submitted by:Wasay Khalid 102

Khurram Majid Ehsan 103407

Arslan Khan 102420

Muhammad Imran 103412

Naveed Iqbal 103

Submitted to:

Prof. Syed Zia-ul-Hassan Shamsi

Introduction:


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Now-a-days managements are facing problems of survival because of

acute competition. Only those organizations can meet the competition

effectively and have a hold on the market which is in a position to keep their

cost minimum. For this purpose every company is implementing cost

accounting principles to minimize cost as much as possible. In the following

discussion main key elements of cost control are discussed that can be

implemented so that a manufacturing concern can achieve cost control in its

entire business.

Cost Accounting:

Cost is a forgoing measured in monetary terms incurred and potentially

to be incurred to achieve a specific objective. In business, cost is usually a

monetaryvaluation of effort, material, resources, time and utilities consumed,

risksincurred, and opportunity forgone in production and delivery of a good or

service. Cost control, also known as cost management or cost containment, is a

broad set of cost accounting methods and management techniques with the

common goal of improving business cost-efficiency by reducing costs, or at

least restricting their rate of growth. Businesses use cost control methods to

monitor, evaluate, and ultimately enhance the efficiency of specific areas, such

as departments, divisions, or product lines, within their operations. The basic

objective of accounting is to provide information which is useful for persons

inside the organization (i.e. owners, management and employees) and for

persons or groups outside the organization (i.e. investors, creditors,

government, consumers etc.). The needs of the majority of the users of

accounting information can be satisfied by financial accounting. Financial

statements are concerned with the past whereas the managements maininterest lies not in past but in future. It is mainly concerned with planning and

controlling, preparation of various budgets, such as sales budget, production

budget, cash budget, capital expenditure budget, etc. is an important part of

planning and preparing various budget is an important aspect of Cost

Accountancy. Controlling is the function of seeing that programmers laid down
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in various budgets are being actually achieved i.e. actual performance is

compared with the budgeted performance, enabling the managements to

exercise control in case of weak performance.

Important Cost Systems used for cost allocation and Control

Job-order cost system

It is often called process cost system is used to assign costs to manufactured

products for the purposes of controlling costs and costing products. A job-order

cost system accumulates costs of material, labor, and manufacturing overhead
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expenseby specific orders, jobs, batches, or lots. Job-order cost systems are

widely used in construction, furniture, aircraft, printing, and similar industries

where the costs of a specific job depend on the particular order specification.

Process costing:

Is an accounting methodology that traces and accumulates direct costs, and

allocates indirect costs of a manufacturing process. Costs are assigned to

products, usually in a large batch, which might include an entire month's

production. Eventually, costs have to be allocated to individual units of

product. It assigns average costs to each unit, and is the opposite extreme of

Job costing which attempts to measure individual costs of production of each

unit. Process costing is usually a significant chapter.
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It is used by companies whomanufacture products through continuous-flow

systems or on a mass-production basis. Industries that use process cost

systems include chemicals, petroleum products, textiles, cement, glass,

mining, and many others. In a process cost system, costs for a department or

process are accumulated. Per-unit costs are obtained by dividing the total

departmental costs by the quantity produced during a given period in the

department or process.


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A ctivity Based Costing

Using activity based costing (ABC) information to support organizational

strategy improve operations and manage cost is called activity based

management or ABM. Activity-based costing (ABC) is a special costing model

that identifies activities in an organization and assigns the cost of each activity

with resources to all products and services according to the actual

consumption by each. This model assigns more indirect costs (overhead) into

direct costs compared to conventional costing models. With ABC, an

organization can soundly estimate the cost elements of entire products and

services. That may prepare decisions on either identify and eliminate those

products and services that are unprofitable and lower the prices of those that

are overpriced (product and service portfolio aim) or identify and eliminate

production or service processes that are ineffective and allocate processing

concepts the lead to the very same product at a better yield (process re-

engineering aim).

In a business organization, the ABC methodology assigns an organization's

resource costs through activities to the products and services provided to its

customers. ABC is generally used as a tool for understanding product and

customer cost and profitability based on the production or performing

processes. As such, ABC has predominantly been used to support strategic

decisions such as pricing, outsourcing, identification and measurement of

process improvement initiatives.
http://en.wikipedia.org/wiki/Indirect_costshttp://en.wikipedia.org/wiki/Overhead_(business)http://en.wikipedia.org/wiki/Direct_costshttp://en.wikipedia.org/wiki/Costhttp://en.wikipedia.org/wiki/Product_(business)http://en.wikipedia.org/wiki/Service_(economics)http://en.wikipedia.org/wiki/Indirect_costshttp://en.wikipedia.org/wiki/Overhead_(business)http://en.wikipedia.org/wiki/Direct_costshttp://en.wikipedia.org/wiki/Costhttp://en.wikipedia.org/wiki/Product_(business)http://en.wikipedia.org/wiki/Service_(economics)


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Budgeting:

A budget is a list of all planned expenses and revenues. It is a plan for saving

and spending. A budget is an important concept in microeconomics, which

uses a budget line to illustrate the trade-offs between two or more goods. In

other terms, a budget is an organizational plan stated in monetary terms.

In summary, the purpose of budgeting is to:

1. Provide a forecast of revenues and expenditures, that is, construct a

model of how our business might perform financially if certain strategies,

events and plans are carried out.

2. Enable the actual financial operation of the business to be measured

against the forecast.

The budget of a company is often compiled annually, but may not be. A

finished budget, usually requiring considerable effort, is a plan for the short-

term future, typically one year, while traditionally the Finance department

compiles the company's budget, modern software allows hundreds or even

thousands of people in various departments (operations, human resources, IT,etc.) to list their expected revenues and expenses in the final budget.

If the actual figures delivered through the budget period come close to the

budget, this suggests that the managers understand their business and have

been successfully driving it in the intended direction. On the other hand, if the

figures diverge wildly from the budget, this sends an 'out of control' signal,

and the share price could suffer as a result.


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Budget Types :

Sales budget:

The sales budget is an estimate of future sales, often broken down into both

units and dollars. It is used to create company sales goals.

Production budget:

Product oriented companies create a production budget which estimates the

number of units that must be manufactured to meet the sales goals. The

production budget also estimates the various costs involved withmanufacturing those units, including labor and material.

Cash Flow/Cash budget:

The cash flow budget is a prediction of future cash receipts and expenditures

for a particular time period. It usually covers a period in the short term future.

The cash flow budget helps the business determine when income will be

sufficient to cover expenses and when the company will need to seek outsidefinancing.

Marketing budget:

The marketing budget is an estimate of the funds needed for promotion,

advertising, and public relations in order to market the product or service.

Project budget:

The project budget is a prediction of the costs associated with a particular

company project. These costs include labor, materials, and other related

expenses. The project budget is often broken down into specific tasks, with

task budgets assigned to each.


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Revenue budget:

The Revenue Budget consists of revenue receipts of government and theexpenditure met from these revenues. Tax revenues are made up of taxes and

other duties that the government levies.

Expenditure budget:

A budget type which include of spending data items.

Cost Control

Now-a-days managements are facing problems of survival because of acute

competition. Only those organizations can meet the competition effectively

and have a hold on the market which is in a position to keep their cost

minimum. Cost control can be defined as: The regulation by executive action

of the cost of operating an undertaking particularly where such action is guided

by cost accounting. The terms regulation and executive action indicates

conscious attempt of regulating the cost on the basis of predetermined ideas

about what cost should be. It is only when costs are predetermined i.e. a

system of standard costing is in operation, that cost control measures can give

their best. Thus, cost control aims at reducing inefficiencies and wastages and

setting up predetermined costs and in achieving them. Cost control is

executed through setting standards or norms or targets and comparing actual

performance therewith with a view to ascertaining derivatives from set targets

or norms or standards and taking corrective action to ensure that futureperformances conforms to the set standards or norms or targets. For an

effective system of cost control, the firm should have a definite plan of

organization. Authority and responsibility of each executive should be clearly

defined. Targets for performance of work as well as the cost to be incurred for

the purpose should be laid down for each area of responsibility so that


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responsibility may be fixed for the deviation of actual cost from the

predetermined cost.

Cost Control Application a complex business requires frequent information

about operations in order to plan for the future, to control present activities,

and to evaluate the past performance of managers, employees, and related

business segments. To be successful, management guides the activities of its

people in the operations of the business according to pre-established goals and

objectives. Management's guidance takes two forms of control: (1) the

management and supervision of behavior, and (2) the evaluation of

performance. Behavioral management deals with the attitudes and actions of

employees. While employee behavior ultimately impacts on success,behavioral management involves certain issues and assumptions not

applicable to accounting's control function. On the other hand, performance

evaluation measures outcomes of employee's actions by comparing the actual

results of business outcomes to predetermined standards of success. In this

way management identifies the strengths it needs to maximize, and the

weaknesses it seeks to rectify. This process of evaluation and remedy is called

cost control.

Cost control is a continuous process that begins with the proposed annual

budget. The budget helps: (1) to organize and coordinate production, and the

selling, distribution, service, and administrative functions; and (2) to take

maximum advantage of available opportunities. As the fiscal year progresses,

management compares actual results with those projected in the budget and

incorporates into the new plan the lessons learned from its evaluation of

current operations.

Control refers to management's effort to influence the actions of individuals

who are responsible for performing tasks, incurring costs, and generating

revenues. Management is a two-phased process: planning refers to the way

that management plans and wants people to perform, while controlrefers to


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the procedures employed to determine whether actual performance complies

with these plans. Through the budget process and accounting control,

management establishes overall company objectives, defines the centers of

responsibility, and determines specific objectives for each responsibility center,

and designs procedures and standards for reporting and evaluation.

A budget segments the business into its components or centers where the

responsible party initiates and controls action. Responsibility Centers

represent applicable organizational units, functions, departments, and

divisions. Generally a single individual heads the responsibility center

exercising substantial, if not complete, control over the activities of people or

processes within the center and controlling the results of their activity. Cost

Centers are accountable only for expenses, that is, they do not generate

revenue. Examples include accounting departments, human resources

departments, and similar areas of the business that provide internal services.

Profit centers accept responsibility for both revenue and expenses. For

example, a product line or an autonomous business unit might be considered

profit centers. If the profit center has its own assets, it may also be considered

an investment center, for which returns on investment can be determined. The

use of responsibility centers allows management to design control reports to

pinpoint accountability, thus aiding in profit planning.

A budget also sets standards to indicate the level of activity expected from

each responsible person or decision unit and the amount of resources that a

responsible party should use in achieving that level of activity. A budget

establishes the responsibility center, delegates the concomitant

responsibilities, and determines the decision points within an organization.

The planning process provides for two types of control mechanisms:

1. Feed forward: providing a basis for control at the point of action (the

decision point); and

2. Feedback: providing a basis for measuring the effectiveness of control

after implementation.


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Management's role is to feed forwarda futuristic vision of where the company

is going and how it is to get there, and to make clear decisions coordinating

and directing employee activities. Management also oversees the development

of procedures to collect, record, and evaluate feedback.

Techniques and Ways for Controlling Costs

The first step in the cost control management is to find out the cost centers

and arrive at a conclusion in how much percentage they differ or vary from the

standards of the industry. It is also important to study how the close

competitors of your company manage to control their costs and in turn,

maximize their profits. Before discussing about the cost control methods or the

cost control techniques, it is very important to carry out a very proper cost

analysis. The costs incurred by all the departments of the company should be

considered so that, you can chalk out some smart cost control strategies to

overcome these financial problems. It is very important to find out the exact

and relevant reasons for why the costs of the company are more than the

standards adhered to by the industry.

The most important of all the cost control techniques is to appoint a small team

of highly qualified and experienced people well versed in the financial

management team to manage the daily finances of the company in a very

professional and systematic manner. The finance team should take correct

decisions in favor of the company and opt for less expensive materials and

resources for the company without compromising on their quality. You should

be very clear about the number of employees you require for a particularproject. There are many companies who find it difficult to earn decent profits

as their employee count is way beyond the necessity. You can also consider

the idea of recruiting employees on contract basis to cut down your costs.

While deciding how much salary to pay to a particular employee, you need to

be very careful. You should decide the salary strictly on the basis of overall
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performance. Instead of giving awards to the employees in the form of

frequent salary hikes, you should give out bonuses to eligible employees.

Following practices recommended in cost method of accounting may benefit

your company.

The cost control software can be helpful in doing the work in comparatively

less time and with more accuracy. In the times of recession, many firms resort

to cost control techniques such as reducing the extra facilities to the

employees such as the recreational facilities. The cost control techniques might

also include cutting down the expenditure incurred on traveling by air and

luxury hotel accommodations in order to harness the cash flow. As a part of the

cost cutting measure, few firms may postpone or cancel their plans of

acquiring new companies, investing in new businesses and buying new

machinery or systems. The cost control techniques should be utilized to save

cash and bring back the financial strength of the company.

The cost control techniques used by different organizations are different and

are largely dependent on their business model and strength of their balance

sheet. The better the implementation of these techniques, the better would be

the future of the concerned organizations.

Cost Control Methods

Business managers throughout the world fight a never ending battle against

rising costs. Cost control methods are constantly being derived, developed,

deployed and discarded, in order to reduce the cost of all operations

Any business or corporation has to encounter difficulties, which are practical,

financial as well as technical. The ones that survive these difficulties live to tell

their stories of success. The following are some simple successful cost control

methods.
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Review and Modify Business Model:

There is a great, economically and commercially successful business model

that is used to lay down the foundations of any company. The business model

must be however subject to small and big changes. It means as a manger, you

should subject the business model to changes according to your competitors

actions and markets status. By the term change, I also mean that you should

be upgrading and improving all possible business operations. You need to

come up with new process and procedures to reduce costs.

Daily Updates:

One of the best ways to start controlling costs it to have daily updates of

production, all possible long and short term expenditures. Divide all these

expenditures, even the ones such cost of machinery or insurance, and sales, by

the number of working days. This will give you a concrete figure of the total

amount that has been spent. Similarly after sales of your goods or services,

you may also divide the total amount of sales by the number of working days.

This will give you a micro figure about the daily expenditure and sales. It will

definitely help you to zero down on all possible cost problems that you incur.

Uniformity:

Cost control management is all about deriving the best outputs in a least cost.

Hence, set up a highly efficient and specialized stores department which will

oversee all purchases. You may also take a risk and make long term

agreements regarding the quality and quantity of materials that are being

supplied to your manufacturing process. This uniformity will ensure a timely,

cheap and assured supply of raw materials.

Time Planning:

Time is money! Well divide the amount of wages that you give out with the

number of work hours per month. Explain to the employees per hour


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expenditures that you incur, and hence the necessity for time management.

You may also install good cost control systems, in order to help your

employees to manage their work hours well. Cost control software will also

work wonders in the finance and accounts department.

To know more about cost control methods, you may also read on:

Cost Method of Accounting

Cost Control Management

In order to have a set of good cost control methods at your disposal, you need

to think creatively and effectively. You will also need to think about all the

dimensions of expenditures such as time dimension, long and short term

expenditures, per capita wage expenditure, etc. You can also consider all

macro and micro costs. For example, the cost of running one team in

comparison to the cost of all teams, or the cost of running one team compared

to the revenue generated by the same team.

Cost Control Strategies

Every organization should have a few cost control strategies in place. If the

overall cost of working is controlled, then it is obvious that the overall earnings

for the company are increased.

Cost control strategies are a part of financial management. However, as a

concept, you don't need to be a finance brainier to understand it. Hence, here I

am, a non-finance background entrepreneur, explaining to you about cost

control strategies. I am not going to get into the detailed explanation of how

these strategies work in synchrony with the economy. I am simply going to

help my fellow entrepreneurs to control their cost, and the students, to

understand the concept.
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Cost Control Strategies: Cost Control Definition

As per the business dictionary, cost control can be defined as, "Application of

(1) investigative procedures to detect variance of actual costs from budgeted

costs,

(2) diagnostic procedures to ascertain the cause(s) of variance, and

(3) corrective procedures to effect realignment between actual and budgeted

costs."

In simple terms, cost control is a procedure to see if the company is spending

more or less than its budgeted amount. If yes, then to know the reason behind

the increase or decrease of expenditure. Further, it works at finding a way to

make the actual cost and the budgeted cost meet. Cost control management

also takes care of the same arena of work.

Cost Control Strategies: Cost Control Methods

Now that we have seen the basic definition of cost control, how will we go

about doing it. Such as, one can keep an eye over the numbers, but how can

one go about controlling them? Here are a few cost control techniques and

measures that one can use to keep the cost in control.

Do not have a very big team over looking the finances

Why do most companies have small finance teams? Because, the smaller the

finance team, the lesser the disparities and misunderstandings. Make sure that

all the checks are approved by one authority. This will help keep the expenses

in control. Read more on glossary of accounting terms and definitions.

Be frugal

Frugality is often required. One needs to be wary of spending more than

required. Make sure that you choose the least expensive option at all times.
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Make sure that when traveling, modesty is maintained.

Control salaries and overheads

Keep a tight reign over salaries and overheads. Review the monthly overhead

expense in comparison with the budget. Promise bonuses rather than salary

hikes. Hire part-time personnel during summers and interns during internship

seasons.

Be creative

Find different and less expensive ways to get certain jobs done. Get the

suppliers involved in the cost cutting strategy. You can opt to team up with

another friendly company in order to avail economy of scale. Sell excess

supplies to smaller firms. This will help at reducing dumpster cost. Make use of

cost control software to ensure more work in lesser time and man power. Read

more on cost method of accounting.

All these methods can help reduce the cost and maintain a higher profit

margin. However, there are a lot of indirect costs that also need to be kept in

check. Mostly, miscellaneous expenses are ignored. However, if the

management chooses to keep this miscellaneous expenditure in control as

well, the over all difference on the cost will be much more. This is where I sign

off!! Hope this article helped you understand the basics of cost control

strategies.

Conclusion:

In the light of above discussion it can be ascertained that only by controlling

cost any manufacturing concern can achieve high profitability and market

share. By implementing the above mentioned tools and techniques a

manufacturing concern can be able to control and minimize its cost to achieve

maximum gain and profit.
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How to Control Cost of Manufacturing Concern

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