Cost Red. Final

8/14/2019 Cost Red. Final

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COST ACCOUNTING

PROJECT

ON

COST REDUCTION

Submitted by :ABHINAV SHARMA 08/BBS/7142

SHREYA SHARMA 08/BBS/7134

TEJASVI AGARW AL 08/BBS/7143B.B.S. III semester

To :MS. AANCHAL GUPTA

Department of Business Studies

DEEN DAYAL UPADHYAYA COLLEGE


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UNIVERSITY OF DELHI

DECLARATION

This term paper is entirely based on the secondary data collected by us fromvarious sources.

This is hereby declared that this term paper is not a part of any partial / wholefulfillment of any other paper / course/ program offered by any other college /institute/ university than specified.

____________________Abhinav Sharma

08/BBS/7142DATE : _______________

Countersigned Shreya Sharma08/BBS/7134

(Ms. Aanchal Gupta) __________________ Tejasvi Agarwal

08/BBS/7143


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ACKNOWLEDGEMENT

We feel very grateful and wish to thank all those who have helped us in givinga productive shape to our ideas in the form of this project.

Firstly, our deepest gratitude to our teacher, Ms. Aanchal Gupta, Departmentof Business Studies, DDUC, for her invaluable support and guidance. Ourheartfelt thanks to all the authors of the various articles referred to by us aswell as to all those people who shared their valuable time and knowledge withus.

This project would not be complete without thanking our institution Deen

Dayal Upadhyaya College for giving us an opportunity to have an enrichingexperience in terms of this project.


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TABLE OF CONTENTS

S.No. Topic1 MEANING2 SPECIAL FEATURES3 COST CONTROL VERSUS COST REDUCTION4 ORGANIZATION FOR COST REDUCTION5 COST REDUCTION PROGRAMME6 FIELDS COVERED BY COST REDUCTION

PROGRAMME7 COST REDUCTION TECHNIQUES8 REDUCTION IN VARIETY OF PRODUCTS9 VALUE ANALYSIS

10 IMPORTANCE OF VALUE ANALYSIS IN COSTREDUCTION

11 CASE STUDY


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MEANING

Cost Reduction can be defined as the achievement of real and permanent reduction in the unit costof goods produced or services rendered without impairing their quality or functional suitability.The above definition brings out the following as the essential features of cost reduction:

i. Reduction should be real :

Cost reduction involves genuine savings in cost of production or providing services. Thiscan be achieved either through research or by eliminating wasteful expenditure. Costreduction obtained as a result of lower material prices, price agreements, reduction ingovernment duties or taxes or windfall is not to be taken as real and hence it cannot betermed as cost reduction

ii. Reduction should be permanent :

Cost reduction involves permanent reduction in the costs. Temporary reduction in cost isnot taken as permanent reduction

iii. Quality or utility to be maintained :

Cost reduction should not affect the quality or the utility of the goods or services. In other words, goods and services should continue to be suitable for the intended use even after cost reduction.

SPECIAL FEATURES :

1. Unit cost required to be reduced by reducing the expenditure with respect to the givenvolume of output.

2. Unit cost is attempted to be reduced by increasing production i.e. production per unit of input (e.g. material, labour hour, per employee). It implies enhancement in the rate of yieldor output, expenditure remaining the same.


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COST CONTROL VERSUS COST REDUCTION

Controlling the costs, already pre-determined on the basis of assumption of reasonable level of efficiency taking the past, present and future into account, is the main focus of the cost control.The actuals are tried to be bought within the ambit of targets. Cost accounting is primarilyconcerned with controlling the cost so that losses and wastages are eliminated or at leastminimized to the extent possible. While cost reduction is entirely a matter which goes much

beyond cost control and hence it is not synonymous with cost control at all, now cost accountingaims at cost reduction also, besides cost control. Cost reduction is a process which actually startsfrom where cost control ends. Management has to ponder over in terms of bringing down costs tolevels lower than the targeted ones so as to face fierce competition and exist in this highlycompetitive business environment. How, without sacrificing quality or compromising with theutility of the products and services the cost can be permanently cut down, is the real objective of cost reduction. Thus, new ways and means are required to be desired, researches are to be carriedout and management has to be innovative.

The main distinctions between cost control and cost reduction are discussed below:

Basis Cost Control Cost Reduction1. Objective Cost Control aims at

maintaining the cost inaccordance with theestablished targets or

standards.

Cost reduction is directed toexplore the possibilities of improving the targets or standards themselves. It

challenges all standards andmakes continuous efforts to better them

2. Approach Cost control locks dynamismsince it aims to attain lowest

possible costs under existingcircumstances

Cost reduction is a continuous process and recognizes noconditions are permanent. Itinvolves a continuous processof analysis and tries to find outnew means to achievereduction in costs

3. Nature Cost Control is a preventive

function. Under it, costs areoptimized before they areincurred

Cost reduction is a corrective

function. It operates evenwhen an efficient cost controlsystem exists. It pre-supposesthat there is always a room for reduction in the achieved costs


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4. Emphasis In case of Cost Control, theemphasis is on the past. It aimsat keeping the costs within thelimits already set. In case thecosts reach the target level, the

objective of cost control isachieved

In case of Cost reduction, theemphasis is on the present andthe future. The emphasis is noton what have been the costs

but what could be possible

improvements in the cost.Thus there is no end to costreduction.

5. Assumptions Cost Control assumes theexistence of certain standardsand norms which are notchallenged.

Cost reduction assumes theexistence of concealed

potential savings in thestandards or norms which aretherefore subject to constantchallenge or improvement.

Thus cost control is only a means to achieve the end of cost reduction.


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ORGANIZATION FOR COST REDUCTION

Cost reduction involves a real and permanent reduction in costs. It is a continuous process. Hence,it requires co-operation of all people at all levels. The environment in the organization should bemade so congenial that healthy discussion takes place at all levels of management. The criticismsshould be accepted in the right spirit with honesty and grace by all, so that the corrective actionmay be taken in time. This requires the formation of a separate Cost Reduction cell within theorganization. The cell functions under the supervision and direction of a high powered authorityknown as the Cost reduction committee. The committee consists of responsible executives fromvarious functions such as purchase, planning and design, production, sales, distribution, finance,research etc. the committee should chalk out a proper cost reduction programme and fix upresponsibility of the executives to review the actual performance from time to time.

The functions of the cost cell can be enumerated as follows:

1. It collects cost data from different departments2. It invites suggestions from different executives for improvement and reduction of costs at

the point of their occurrence3. It creates cost reduction environment in the organization by emphasizing and explaining to

the workers the importance of cost reduction and the benefits which will accrue to them4. It invites the employees to participate in framing the schemes for controlling the costs at

the point of their occurrence5. It identifies areas where cost reduction is Necessary, Desirable, Possible and fixes the

priorities6. It frames policies, guidelines and issues directives for bringing changes in the product

designs, introducing new products and new designs in consultation with technocrats for reducing the cost of production without impairing the quality.

7. It frames policies regarding reduction of costs in administrative and distribution divisionswithout adversely affecting their efficiency


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COST REDUCTION PROGRAMME

Cost reduction programme aims at improvement of human efforts at all levels of the organizationwhich helps in reducing costs. It may be a short-term or a long-term programme. A short-term

programme is undertaken for sorting out immediate problems; e.g. a problem involving controllingwastages and inefficiencies in a certain department which are likely to push up the cost and reducethe profit margin. Long-term cost reduction programme involves major reduction in costs and mayalso require capital expenditure. It involves setting up of the target return on capital employed anddeveloping a scheme for its achievement through various cost reduction measures.

The following are the essential requisites for successful implementation of a cost reduction programme:

I. There should be a separate cost reduction cell responsible for proper planning andimplementation of the cost reduction programme.

II. There should be an efficient system of management reporting at all levels of management.III. The programme should have support from the top management. It is a continuous process

and, therefore, should not be allowed to degenerate into a routine affair.IV. There should be an operation and research procedureV. There should be co operation amongst different executives concerned with the programme.

Each departmental head should be given a list of the areas where he is expected to effecteconomies in cost. Moreover, he should also be encouraged to put forward his ownsuggestions for improvement.

VI. There should be regular follow-up to the plan and continuous appraisal of the programme performed with the actual cost reduction performance.

VII. The plan should not be confined only to reducing costs but should also examine whether anexpenditure is really required or not. In other words, there should be efforts to eliminateuneconomic and unnecessary activities.

Fields covered by cost reduction programmeThe following are the specific areas which are covered by a cost reduction programme: (a) Product Design:

Designing the product is a pre-requisite to its production. It is therefore necessary that

proper care is given to designing the product to affect the economies in the cost of materials, labour, tools and equipment. The technique of value analysis, as discussed later,is greatly helpful in designing the product. Product should be designed in a manner that itgives the maximum value at the minimum cost.

Product designing may be required either for introducing a new design or improvement of the existing design. The introduction of a new design is advantageous but risky since thenew venture may or may not be successful. Hence, a careful analysis of its cost elements


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(i.e. materials, labour and expenses) and its marketability is necessary. The ventureconcerning improvement of the existing design is advantageous since the reputation gained

by the old product is likely to be enhanced and improved further through improved designof the product. The improvement should be in the direction of making the product lesscostly; more utility oriented, attractive and durable.

(b) Production Planning:

Production planning can also be greatly helpful in cost reduction. The location and thelayout of the factory have significant influence on cost. Of course, the factory locationcannot be changed so easily but its layout can be organized on more scientific lines so as toreduce the cost of production.

The Charted Institute of Management Accountants, London, in its publication on costreduction, has laid down the following principles for developing a sound production

planning system:

1. Production planning should be based on realistic and detailed sales forecast.2. Efficient production system requires fullest possible employment of suitable productionfacilities, elimination of unnecessary movement and handling of materials provision of adequate working instructions, drawing tools etc. and the most economical storage of stocks.

The design of a production system is dependent on its location because the resulting physical factors influence layout and also because of the fact that the location determinesoperating and capital costs. In so far as physical factors of plant design are concerned,location may determine the following costs:

Whether or not power is purchasedThe extent of air conditioning and humidification requiredWhether local sub-contracting facilities for components are available or whether

provision for the manufacture of components has to be made in the factoryStorage space requirements depending on the availability of raw material in thevicinity.The type of transportation facilities available for receiving raw materials anddispatching finished goods etc.

From the standpoint of costs, transportation costs, labour costs, cost of land, construction

cost, etc. will be influenced by the location of the factory

Even if an existing company intends to start an additional factory, the addition of a new plant is not a matter of determining location independent of the location of the existing plants. Establishment of a new plant may involve re-allocation of capacities so that thecombined production and distribution costs are minimized.


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Plant layout aims at developing a production system that meets the requirements of thecapacity and quality in the most economical way. Under ideal conditions of manufacture,

plant and manufacturing facilities will be laid down after due consideration of all thefactors, tending to reduce waste of time, effort, material and resources to the minimum

possible level. Easily available and most suitable equipment should be obtained and

utilized to the maximum possible extent.

Any dislocation of production occasioned by change of layout may lead to increased costs.Such dislocation can be averted by initially planning the layout in the best possible way.The production controlled department should keep abreast of the technologicaldevelopments and recommend the use of the most suitable and economical type of plantand equipment.

3. The assessment and coordination of equipment, labour and material requirementsdemand the formulation of a complete operation sequence for all products the setting up of material standards and the establishment of reliable process time by the use of work

measurement techniques.4. Efficient production control and economic manufacture require careful determination of the lot size according to nature of methods of production employed5. Machine loading and labour requirements should be related to full capacity available.Where the idle capacity is found to exist, efforts should be made to ensure its economicsutilization, say, by the introduction of a new product.6. The production plan once formulated should be used as a measure of the effectivenessof actual performance with a view to correcting the unfavorable divergencies as they occur.It should nevertheless be flexible enough to cope with essential changes arising fromchanged conditions.

(c) Direct Materials Cost Reduction:

Direct materials generally constitute 50% of the cost of a product. The following steps may be helpful in reducing material costs:

1) Control should be exercised on purchasing of raw materials. The adoption of theJapanese just in time (JIT) technology may greatly reduce the material costs.2) The various inventory control techniques, viz., fixation and observation of inventory levels, ABC Analysis, Ageing Schedule; perpetual inventory system followed

by continuous stock taking etc., should be adopted.3) All efforts should be made to minimize/avoid losses and wastage of raw materials.

(d) Direct Labour Cost Reduction:

Direct labour constitutes second important element of the cost of a product. Costreduction in labour is possible through proper organization and functioning of the

personnel, works study and engineering departments. The personnel department isconcerned with finding the right man for the right job.


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COST REDUCTION TECHNIQUES:

The following are some of the important cost reduction techniques:

Budgetary control Standard costing Inventory control Job study, Works study and Motion study Job evaluation and merit rating Reduction in variety of products Value analysis


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(I). BUDGETARY CONTROL:

Budgetary control is an important technique of control on business activities by management,in which business activities are operated on the basis of pre-prepared budget and thereafter actual results are evaluated in the light of budget estimates. In brief, budgetary control is a tool of

management control and accounting which directs and co-ordinates the working operation onthe basis of budgets. If there are variances in actual results, then either they are corrected or

budget is modified so that the objective of maximum efficiency as per the policy of managementmay be achieved.

Objectives of Budgetary Control:

Budgetary control is essential for policy planning and control. It also acts as an instrument of co-ordination. The main objectives of budgetary control are as follows:

1. To assist in policy formulation on the basis of proper and reliable data.

2. To ensure planning for future by setting up various budgets.3. To determine short-term and long-term financial and physical targets.4. To operate various cost centres and departments with efficiency and economy.5. To classify expenses according to their nature such as direct and indirect expenses;

fixed, variable and semi-variable expenses, etc.6. To help administration as under this system, executives perform their functions

according to pre-determined budgets.7. To anticipate capital requirements and to make necessary arrangement for it.8. To make cost accounting more reliable and systematic.9. To promote research in order to bring down cost, to increase efficiency and to

achieve the targets of sales.

10. To develop co-ordination and co-operation among employees and executives.11. To eliminate wastes and increase in profitability.12. To correct the variations from the established standards.13. To fix the responsibility of various individuals in the organization.

Imp./merits/advantages of budgeting or budgetary control:-

There are three important functions of top managementplanning, co-ordination and control.Budgetary control helps in all these functions and in this context the advantages of

budgetary control may be studied under following three heads:

1. BUDGETING AND PLANNING:

A budget is a plan of the policy to be pursued during the defined period of time to attain a givenobjective. In other words, planning and budgeting are closely related with each other and in thiscontext following advantages may be mentioned:

Action on the basis of Well Decided Plan : Under budgetary control all actions are guided by well thought out plan because a budget is prepared after a careful study and research.


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Mechanism for Policy Implementation : Budgeting provides a mechanism through whichthe policies of management can be implemented effectively.

Work on the basis of best option : Various available options are considered, while preparing budgets and efforts are made to select the best option. It improves the effectivenessof planning.

Communication : Budget is an important medium of communication which establisheslink between the top management and the operatives. Thus, the actual operators canunderstand the policy of top management more precisely and clearly.

Objectivity: Budgeting expresses all business activities in numerical terms and it developsthe quality of objectivity in planning.The fact is that budgeting provides a strong basefor effective planning of business activities which bring certainty in activities and

prepares an outline for proper use of available resources.

2. BUDGETING AND CO-ORDINATION:

Co-ordination is the essence of management and budgeting makes the work of co-ordination

simple and sure. Budgeting is useful in co-ordination in following manner:

Co-ordination in budget preparation : While preparing budgets, individual goal, problem and potentiality of all departments are given due considerations and eachdepartmental executive is given an opportunity to present his case. All these aspects andview are coordinated in the budget.

Co-ordination in working : Budgeting promotes co-ordination among policies, plans andactual working.

Communication and co-ordination : Budget is a media of communication and on the basisof it each member of management is having perfect and clear-cut knowledge as what isthe plan and how, when and by whom it can be implemented.

Thus, budgetary control helps in maintaining continuous co-ordination among administration,management and organisation.

3. BUDGETING AND CONTROL:

Control on cost of production : Budgetary control helps in controlling cost of production by determining budgets of different budget centres.

Control on Liquidity : The liquidity position of the firm can easily be controlledaccording to need by the technique of cash budgeting.

Control on capital expenditure : Capital budgeting helps in making control on capitalexpenditure and having best use of available resources of capital.

Effective utilization of resources : It ensures effective utilization of men, materials,machines and money because production is planned according to the availability of theseresources.

Standard for measuring performance : Budget provides standards of expected performance, against which actual performance of departments and employees can becompared.


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Feeling of cost consciousness : Budgetary control helps in developing a feeling of costconsciousness and in restricting expenditure to the minimum.

Limitations of Budgetary Control

Though budgetary control is an important device of management control, it suffers from thefollowing limitations:

Budgets are based on Plan Estimates : Budgets are based on estimates made for planning. Naturally the success or failure of budget depends to a large extent upon the accuracy of these estimates. Though it is not possible to have cent-percent accuracy in theseestimates but if they are very far from reality, the entire system of budgeting will be afutile exercise. This aspect of budgeting should always be kept in mind whileinterpreting the results thereof.

Budgeting is not a substitute of management: Budget is not a substitute of management; it is only a tool of management for achieving the objectives of the concern.

Hence, the success of budgeting depends on the ability and efficiency of those persons whoare responsible for budgetary system.

Operation of the Budget plan is not automatic: Mere preparation of budget cannot ensurethe advantages of budgeting. The execution of budget is as important as its

preparation. However, its operation is not automatic. In this context it is requiredthat each executive must feel his responsibility and should make necessary efforts to attainthe budgeted goals.

Time effect: It takes some time in preparing budgets and during this period many suchchanges may occur due to which it becomes difficult to maintain the accuracy of

budget. Prohibitive cost: The installation of budgeting system involves too much time and costs.

Normally, small concerns cannot afford it. Therefore, there should be proper balance between expected profits from budgetary system and cost of its operation.

Effects of changing conditions : In rapidly changing conditions it may not be possibleto achieve the budgeted targets. Budgets may have to be revised from time to time butfrequent revision of targets reduces the importance of budget and involves additionalexpenditure too.

Constraints on managerial initiative : Budgetary control may serve as constraints onmanagerial initiative because every executive tries to achieve the budgeted targetsonly. There may be some efficient persons who can exceed the targets but they will alsofeel contended by reaching the targets.

Conflicts among functional executives : Budgetary control may lead to conflict amongfunctional executives because every executive may try to secure a larger share of budgetaryallocation, while the success of budgetary control depends upon the team work.


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(II). STANDARD COSTING:

The CIMA, London has defined standard cost as a predetermined cost which is calculated frommanagements standards of efficient operations and the relevant necessary expenditure. They arethe predetermined costs on technical estimate of material labor and overhead for a selected period

of time and for a prescribed set of working conditions. In other words, a standard cost is a plannedcost for a unit of product or service rendered.

The technique of using standard costs for the purposes of cost control is known as standardcosting. It is a system of cost accounting which is designed to find out how much should be thecost of a product under the existing conditions. The actual cost can be ascertained only when

production is undertaken. The predetermined cost is compared to the actual cost and a variance between the two enables the management to take necessary corrective measures.

Basically, standard costing is a management tool for control. In the process, we have takenstandards as parameters for measuring the performance. Cost analysis and cost control is essential

for any activity. Cost includes material labor and overheads. Sometimes, we need to revise thestandards due to change in uses, raw material, technology, method of production etc. For a proper organization, it is required to implement this under a committee for the activity. It is a continuedactivity for the optimum utilization of resources.

Advantages

Standard costing is a management control technique for every activity. It is not only useful for costcontrol purposes but is also helpful in production planning and policy formulation. It allowsmanagement by exception. In the light of various objectives of this system, some of the advantagesof this tool are given below:

Efficiency measurement -- The comparison of actual costs with standard costs enables themanagement to evaluate performance of various cost centers. In the absence of standardcosting system, actual costs of different period may be compared to measure efficiency. Itis not proper to compare costs of different period because circumstance of both the periodsmay be different. Still, a decision about base period can be made with which actual

performance can be compared. Finding of variance -- The performance variances are determined by comparing actual

costs with standard costs. Management is able to spot out the place of inefficiencies. It canfix responsibility for deviation in performance. It is possible to take corrective measures atthe earliest. A regular check on various expenditures is also ensured by standard cost

system. Management by exception -- The targets of different individuals are fixed if the

performance is according to predetermined standards. In this case, there is nothing toworry. The attention of the management is drawn only when actual performance is lessthan the budgeted performance. Management by exception means that everybody is given atarget to be achieved and management need not supervise each and everything. Theresponsibilities are fixed and every body tries to achieve his/her targets.


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Cost control -- Every costing system aims at cost control and cost reduction. The standardsare being constantly analyzed and an effort is made to improve efficiency. Whenever avariance occurs, the reasons are studied and immediate corrective measures are undertaken.The action taken in spotting weak points enables cost control system.

Right decisions -- It enables and provides useful information to the management in taking

important decisions. For example, the problem created by inflating, rising prices. It can also be used to provide incentive plans for employees etc. Eliminating inefficiencies -- The setting of standards for different elements of cost requires

a detailed study of different aspects. The standards are set differently for manufacturing,administrative and selling expenses. Improved methods are used for setting these standards.The determination of manufacturing expenses will require time and motion study for labor and effective material control devices for materials. Similar studies will be needed for finding other expenses. All these studies will make it possible to eliminate inefficiencies atdifferent steps.

Limitations of Standard Costing

It cannot be used in those organizations where non-standard products are produced. If the production is undertaken according to the customer specifications, then each job willinvolve different amount of expenditures.

The process of setting standard is a difficult task, as it requires technical skills. The timeand motion study is required to be undertaken for this purpose. These studies require a lotof time and money.

There are no inset circumstances to be considered for fixing standards. The conditionsunder which standards are fixed do not remain static. With the change in circumstances, if the standards are not revised the same become impracticable.

The fixing of responsibility is not an easy task. The variances are to be classified intocontrollable and uncontrollable variances. Standard costing is applicable only for controllable variances.

For instance, if the industry changed the technology then the system will not be suitable. In thatcase, we will have to change or revise the standards. A frequent revision of standards will becomecostly.

Setting Standards

Normally, setting up standards is based on the past experience. The total standard cost includesdirect materials, direct labor and overheads. Normally, all these are fixed to some extent. Thestandards should be set up in a systematic way so that they are used as a tool for cost control.


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Determination of Standard Costs

1. Determination of Cost Center

According to J. Betty, A cost center is a department or part of a department or an item of

equipment or machinery or a person or a group of persons in respect of which costs areaccumulated, and one where control can be exercised. Cost centers are necessary for determiningthe costs. If the whole factory is engaged in manufacturing a product, the factory will be a costcenter. In fact, a cost center describes the product while cost is accumulated. Cost centers enablethe determination of costs and fixation of responsibility. A cost center relating to a person is called

personnel cost center, and a cost center relating to products and equipments is called impersonalcost center.

2. Current Standards

A current standard is a standard which is established for use over a short period of time and isrelated to current condition. It reflects the performance that should be attained during the current

period. The period for current standard is normally one year. It is presumed that conditions of production will remain unchanged. In case there is any change in price or manufacturing condition,the standards are also revised. Current standard may be ideal standard and expected standard.

3. Ideal Standard

This is the standard which represents a high level of efficiency. Ideal standard is fixed on theassumption that favorable conditions will prevail and management will be at its best. The price

paid for materials will be lowest and wastes etc. will be minimum possible. The labor time for making the production will be minimum and rates of wages will also be low. The overheadsexpenses are also set with maximum efficiency in mind. All the conditions, both internal andexternal, should be favorable and only then ideal standard will be achieved.

Ideal standard is fixed on the assumption of those conditions which may rarely exist. This standardis not practicable and may not be achieved. Though this standard may not be achieved, even thenan effort is made. The deviation between targets and actual performance is ignorable. In practice,ideal standard has an adverse effect on the employees. They do not try to reach the standard

because the standards are not considered realistic.

4. Basic Standards

A basic standard may be defined as a standard which is established for use for an indefinite periodwhich may a long period. Basic standard is established for a long period and is not adjusted to the

preset conations. The same standard remains in force for a long period. These standards are revisedonly on the changes in specification of material and technology productions. It is indeed just like anumber against which subsequent process changes can be measured. Basic standard enables themeasurement of changes in costs. For example, if the basic cost for material is Rs. 20 per unit andthe current price is Rs. 25 per unit, it will show an increase of 25% in the cost of materials. Thechanges in manufacturing costs can be measured by taking basic standard, as a base standard


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cannot serve as a tool for cost control purpose because the standard is not revised for a long time.The deviation between standard cost and actual cost cannot be used as a yardstick for measuringefficiency.

5. Normal Standards

As per terminology, normal standard has been defined as a standard which, it is anticipated, can beattained over a future period of time, preferably long enough to cover one trade cycle. Thisstandard is based on the conditions which will cover a future period of five years, concerning onetrade cycle. If a normal cycle of ups and downs in sales and production is 10 years, then standardwill be set on average sales and production which will cover all the years. The standard attempts tocover variance in the production from one time to another time. An average is taken from the

periods of recession and depression. The normal standard concept is theoretical and cannot be usedfor cost control purpose. Normal standard can be properly applied for absorption of overhead costover a long period of time.

6. Organization for Standard Costing

The success of standard costing system will depend upon the setting up of proper standards. For the purpose of setting standards, a person or a committee should be given this job. In a bigconcern, a standard costing committee is formed for this purpose. The committee includes

production manager, purchase manager, sales manager, personnel manager, chief engineer and costaccountant. The cost accountant acts as a co-coordinator of this committee.

7. Accounting System

Classification of accounts is necessary to meet the required purpose, i.e. function, asset or revenue

item. Codes can be used to have a speedy collection of accounts. A standard is a pre-determinedmeasure of material, labor and overheads. It may be expressed in quality and its monetarymeasurements in standard costs.


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(III). INVENTORY CONTROL:

Inventory control is the delicate balance of the costs versus profits associated with havingstock on hand. Inventory control means keeping the overall costs associated withhaving inventory as low as possible without creating problems. This is also sometimes

called stock control. It is an important part of any business that must have a stock of products or items on hand. Correctly managing inventory control is a delicate balanceat all times between having too much and too little in order to maximize profits. Thecosts associated with holding stock, running out of stock, and placing orders must allbe looked at and compared in order to find the right formula for a particularbusiness.

Inventory control is concerned with minimizing the total cost of inventory. In the U.K. the termoften used is stock control. The three main factors in inventory control decision making processare:

The cost of holding the stock (e.g., based on the interest rate). The cost of placing an order (e.g., for row material stocks) or the set-up cost of production. The cost of shortage, i.e., what is lost if the stock is insufficient to meet all demand.

The third element is the most difficult to measure and is often handled by establishing a "servicelevel" policy, e. g, certain percentage of demand will be met from stock without delay.

It is impossible to have an unlimited supply on hand, for a number of different reasons. Many businesses simply dont have enough money to keep excessively large inventories. There are costsassociated with purchasing the items as well as storing them, and having too many products leadsto further losses when they dont move off of the shelves.

At the same time, there are issues with inventory control when there isnt enough stock on hand.One common problem is running out of inventory, which is caused by trying to reduce inventorycosts too much. This is something that no business wants to have happen, but it happens tovirtually all of them at some point. Even the largest stores run out of certain products from time totime when they sell or use more than they expected. This can cause financial losses wheninventory is not available for customers to purchase. Part of inventory control is trying to minimizeshortages so these are rare occurrences. Most businesses expect they will have shortages onoccasion and they have calculated that the small loss is worth the money saved by not having anoverstock.

Another important element of inventory control is called reorder point. Businesses need to think ahead and calculate the best time for reordering products. Doing so too soon may cause financialdifficulties or running out of space. On the other hand, waiting to long to reorder will result in ashortage and running out of inventory before the next shipment arrives. When figuring out areorder point, its necessary to calculate how long it will take the shipment to arrive and theamount of demand for a particular item. The overhead costs, fees, and shipping expenses of ordering large versus small quantities should also be looked at.


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Inventory control is an ongoing process that is rarely, if ever, executed perfectly. Experience,expertise, and practice help people to make the best decisions regarding stock, but there are alwaysunknown circumstances and variables. Stores can make good estimates about how many of aspecific product they will sell, but they get things wrong from time to time. This is unavoidable.Inventory control can break a business if it is executed poorly, because either expenses will be too

high or customers will get tired of dealing with shortages and find another place to spend their money.


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(IV). JOB EVALUATION AND MERIT RATING:

Job evaluation is a practical technique, designed to enable trained and experienced staff to judgethe size of one job relative to others. It does not directly determine pay levels, but will establish the

basis for an internal ranking of jobs.

The two most common methods of job evaluation that have been used are first, whole job ranking,where jobs are taken as a whole and ranked against each other. The second method is one of awarding points for various aspects of the job. In the points system various aspects or parts of the

job such as education and experience required to perform the job are assessed and a points valueawarded - the higher the educational requirements of the job the higher the points scored. The mostwell known points scheme was introduced by Hay management consultants in 1951. This schemeevaluates job responsibilities in the light of three major factors - know how, problem solving andaccountability.

Some Principles of Job Evaluation Clearly defined and identifiable jobs must exist. These jobs will be accurately described in

an agreed job description. All jobs in an organisation will be evaluated using an agreed job evaluation scheme. Job evaluators will need to gain a thorough understanding of the job Job evaluation is concerned with jobs, not people. It is not the person that is being

evaluated. The job is assessed as if it were being carried out in a fully competent and acceptable

manner. Job evaluation is based on judgement and is not scientific. However if applied correctly it

can enable objective judgements to be made. It is possible to make a judgement about a job's contribution relative to other jobs in an

organisation. The real test of the evaluation results is their acceptability to all participants. Job evaluation can aid organisational problem solving as it highlights duplication of tasks

and gaps between jobs and functions.

Job Evaluation - The Future

As organisations constantly evolve and new organisations emerge there will be challenges toexisting principles of job evaluation. Whether existing job evaluation techniques andaccompanying schemes remain relevant in a faster moving and constantly changing world, wherenew jobs and roles are invented on a regular basis, remains to be seen. The formal points systems,used by so many organisations is often already seen to be inflexible. Sticking rigidly to an existingscheme may impose barriers to change. Constantly updating and writing new jobs together withthe time that has to be spent administering the job evaluation schemes may become toocumbersome and time consuming for the benefits that are derived.

It is essentially a comparative process. Job evaluation evaluates selected job factors, which areregarded as important for the effective performance of the job, according to one of several


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alternative methods. The resulting numerical gradings can form the basis of an equitable structureof job gradings. The job grades may or may not be used for status or payment purposes.

Job Evaluation is concerned with measuring the demands the job places on its holder. Most factorsthat contribute to this job pressure, e.g. physical strength required, knowledge of mathematics

required, are assessed and the result is a numerical estimate of the total job pressure. Whenevaluations are carried out on all hourly paid personnel the techniques uses include establishingrelative wage rates for different tasks. It is possible to use it for all grades of personnel, even senior management.

Illustration:

The Time Span of Discretion is an interesting and unusual method of job evaluation developed byElliot Jaques for the Glacier Metal Company. In this method the job pressure is assessed accordingto the length of time over which managers decisions commit the company. A machine operative,for example, is at any moment committing the company only for the period needed to make one

product unit or component. The manager who buys the machine is committing the company for tenyears.


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(V). REDUCTION IN VARIETY OF PRODUCTS :

It is common knowledge that larger is the variety of products more is involved. A large variety of products means more investment in terms of equipment in both fixed and working capital andlarger sales efforts which all push up the cost of production and sales. The reduction in variety of

products will lead to cost reduction because of the following reasons:

i. Standardization :Reduction in variety of production will lead to standardization of products. The termstandardization means that the product should be a standard one i.e. made of standardmaterials and components having a standard design and a standard cost. The standard ineach of the above cases has to be determined by the management.The standardization of products will have the following advantages:a. It will reduce investment in the inventories since only few standard products will have

to be kept in stock. b. The products can be manufactured in larger quantities in each process as a result of

increase in the size of each batch.c. The products will be of improved quality, greater reliability and of less cost.

ii. Simplification :Reduction in variety of products will lead to simplification of the production process. Asimplification of the production process involves less of machine time, longer runs,increased productivity and lower cost of inspection. As a matter of fact, standardizationwill automatically lead to simplification of the production process

iii. Quality control :Since a standard product is to be provided to the customer it implies that the quality of the

product should not be allowed to get deteriorated but rather it should continuously beretained and, if possible, improved. This will require inspection of the product at differentstages of production so that the defects may e remedied at the earliest stage. It will bringeconomy in reducing the cost in terms of reduction in the number of defective units.


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(VI). VALUE ANALYSIS:

Concept of value: The term value has different meanings for different persons; however, anindustrial product may have the following concept of value:

1. Use Value

This refers to the characteristics which the product should possess to provide useful service for which it is intended. For instance, a watch is meant for indicating time. In case it gives fairlycorrect time, it is giving its full use value. The use value is measured in terms of quality of

performance. In order to decide whether the product is giving a good value, for the moneyspent on it, it will be appropriate to divide its worth for the concerned person by the price paidfor it. A product may perform several functions. Accordingly, its value can be divided intothree categories:-(a) Primary use value(b) Secondary use value

(c) Auxiliary use value

For instance, paint has different use values. It has primary use value when it is applied to protect some service. It has a secondary use value when it is used for marking lines on the roadfor crossing by pedestrians. It has an auxiliary use value when it pleases aesthetic sense. Such afunctional classification would help one in identifying which paint one should use keeping inmind the objective. If this is not done, perhaps one may use costly enamel paint where use of ordinary paint would have been prudent.

2. Cost Value

The value is measured in terms of cost in case product is manufactured in the organization. Itrefers to the cost of production. In case a product is procured from outside, it refers to cost of its purchase.

3. Exchange Value

It refers to sales value which a product would fetch. It is important for the sales departmentsince the profit is excess of the selling price (i.e. exchange value) over the cost of the product.Hence, the sales department must ascertain what value the product has for the customers ascompared to competitive products available in the market. It will help in advising themanagement in fixing the selling rice of the product

4. Esteem value

This may also be referred to as the prestige value. Certain products or articles have valuesimply because of their attractiveness or esteemed features. A watch made of gold has anesteem value for its owner, though its utility is not more than that of an ordinary watch. For some people purchase of a gold watch may be a waste. However, it commends a value for the

person who wishes to impress upon others and thus have a personal satisfaction.


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Importance of value analysis in cost reduction:

Also termed as value engineering, the approach focuses on improvement in value by resulting to acareful and in-depth study of products at the stage of their designing. The different componentscan be redesigned or standardized. Less costly manufacturing processes or methods may also be

used. Such a study reveals the fields which involve avoidable costs and after locating there areas,steps can be taken to eliminate or if not possible reduce such unwanted costs, of course, without inany way compromising on quality.

Following points deserve consideration before embarking upon value analysis in order to criticallyexamine each and every product and its part. These are as follows:

Exact function of the item must be identified and its significance evaluated. Cost-benefit analysis of the item must be carried out. The aspect of standardization should be assessed in order to have durability. The requirement of redesigning should be assessed in order to have durability Economics of labour etc. should also be measured. Redesigning may be adopted if it results in lower costs. Combination of activities, items or segregation should be also be considered to reduce costs

of incentives etc.


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CASE STUDY

(COST REDUCTION IN DYEING OF COTTONWITH REACTIVE DYES)


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The reactive dye business, due to its maturity, is very competitive and price sensitive. As older dyetechnologies have moved out of patent, these have been taken up by manufacturers in thedeveloping world, driving down manpower costs and total production costs. Therefore, a large

proportion of cotton processing has also moved to the cheaper and less environmentally consciouseconomies of the developing world.

In the case study, a modified process for rinsing after dyeing has been suggested for cost reductionand environment benefits.

Reactive dyeing process

The process for reactive dyeing of cotton can be divided into three steps: the pre-treatment, thedyeing and the rinsing after dyeing. Traditionally, the consumption of energy, chemicals and water in rinsing is crucial; approximately half of the total energy consumption and of the total water consumption are attributed to the rinsing process after dyeing. Therefore there is much scope for cost reduction in rinsing operation.

Water consumption in reactive dyeing:

During the pre-treatment, the cotton fabric is scoured and bleached and washed. After some rinses,the dyestuff is poured into the dye bath and a diffusion of the dyestuff molecules between thecellulose fibres takes place. After some time, salt is added to obtain adsorption of the dyestuff tothe cellulose fibre. After this, adjusting temperature (50-80C) and pH (10,5-11,5) completes thereaction between the dyestuff and the cellulose. Some of the dyestuff will be hydrolysed duringthis dyeing process, and the adsorbed hydrolysate must be removed in the succeeding rinsing after dyeing.

The rinsing traditionally consists of several baths, as in Table 1.

TABLE 1STEP PROCESS WATER (litres)1 Dyeing 7002 Overflow rinse 73003 Warm rinse 7004 Neutralisation 7005 Overflow rinse 73006 Hot soapi ng 7007 Warm rinse 700

8 Overflow rinse 43009 Hot soaping 70010 Warm rinse 70011 Overflow rinse 430012 Neutralisation & Softening 700

TOTAL 20800


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The large water consumption in the rinsing after dyeing is primarily caused by the large number of baths but also by the common use of overflow rinses. Before the temperature is raised in the rinse,the dyestuff producers recommend neutralisation to pH around 8, when dyestuffs with vinylsulphone reactive groups are used. This neutralisation has, however, in some dye-houses, becomeusual practice for all sorts of reactive dyestuffs.

After neutralisation, the rinsing consists of a number of soaping sequences: hot soaping, warmrinse and overflow rinse. In the hot soaping steps 6 and 9 in table1 soaping additives are used, inthe form of surface active agents (detergents), complexing agents and dispersing agents. Thereasons for the use of these auxiliary agents are protection against hardness in the water and/or thecotton, and keep the unfixed dye in dispersed form.

The process is completed with neutralisation to pH around 7 and treatment with softening agents,necessary for the subsequent sewing process.

Cost saving rinsing operation New water saving, chemical free, high temperature and high speed rinsing steps are shown inTable 2

TABLE 2STEP PROCESS WATER (litres)1 Dyeing 7002 Hot rinse 7003 Hot rinse 7004 Hot rinse 700

5 Neutralisation & Softening 700TOTAL 3500

50 industrial scale trials with the new recipe documented that a chemical free, high temperaturerinse, using a reduced number of rinses, and thus saving water, chemicals and process time can beimplemented in the dye house with no adverse effect on product quality. When implementing thewater saving, chemical free, high temperature and high speed rinse after reactive dyeing of cottonin batch, the following cost reduction and cleaner production options should be considered:


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A) Change from overflow rinsing to stepwise rinsing .

Rinsing by overflow, i.e. pouring clean cold water directly into the process water in themachine while excess water is drained out of the machine, is used both for rinsing and for cooling purposes. Overflow is quick but causes unnecessary water consumption.

TABLE 3A Fill the machine according to liquor ratioB 10 minutes rinsingC Discharge rinsing water D 5 minutes draining

B) Omit the use of detergents in the rinsing after reactive dyeing of cotton.

Surplus and un-fixed reactive dyestuffs are highly water-soluble, in spite of this, detergents areoften used during rinsing after dyeing. In international literature, it has been documented thatdetergents do not improve removal of hydrolysed reactive dyestuffs from the fabric. More than50 full-scale dyeings carried out at various dye-houses without the use of detergents. All havesuccessfully proven that detergents can be omitted without negative impact on product quality.

C) Omit the use of complexing agents in the rinsing

If soft water with a quality of below 5 dH is used, complexing agents can be omitted withoutany negative effects on dyed fabric. However, if hardness builders e.g. calcium and magnesiumare present in the dyeing processes and in the rinsing after dyeing, they might have a negativeeffect on the dyeing result, e.g. change in shade or problems with reproducibility. For thatreason, soft water is recommended as standard procedure in the dyeing processes. However,water softening in the dyeing machine by using complexing agents, forming bonds with thehardness-builders, are both economically and environmentally a bad solution. Water softeningcan profitably be done in a separate plant by the ion-exchange technique or the membranefiltration technique.

D) Use only neutralization after dyeing

When using Vinyl sulphone (VS) reactive dyestuffs Neutralisation in the first rinse after dyeingcan be restricted to the vinyl sulphone (VS) reactive groups. Some VS dyestuffs have poor alkaline washing fastness (low bond stability) and thus sensitive to high pH and hightemperature simultaneously. Nevertheless, it is not uncommon that all recipes for reactivedyeing in a dye-house include neutralisation in the first rinse after dyeing, whether VS reactivedyestuffs are used or not.

The dyeing can be successfully carried out without the use of neutralisation in the first rinseafter dyeing. This in spite of the fact that more than half of the dyeings were carried out withdyestuffs based on VSgroups. As it is not possible to put forward general guidelines on when


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to neutralise dyestuffs based on VSgroups, it is recommended always to neutralise these. Thereis no reason to neutralise in this step when all other reactive dyestuffs are used, e.g. based onmonochlorotrazine (MCT), dichlorotriazine (DCT), trichloropyrimidine (TCP) or difluorochloropyrimidine (DFCP). In general, it is recommended to select dyestuffs with asuperior alkaline washing fastness when selecting VS-dyestuffs.

E) Chemical-free high speed rinsing after reactive dyeing of cotton Tests have shown that rinsing is more effective and faster at elevated temperatures e.g.around 30% more unfixed hydrolysed reactive dyestuff is rinsed out after 10 minutes at 95Cthan at 75C.Tests using hot 90-95C rinsing after reactive dyeing of cotton have proved that the techniquehas no negative effects on the dyeing results. Most often the fastness of the goods were better after the hot rinsing than after the traditional rinsing with overflow, detergents, complexingagents and neutralisation in the first rinse. Furthermore, when using 90-95C rinsing water, afew stepwise rinses (table 2) can reduce the rinsing time by around 50% compared to a

standard recipe (table 1).

Main achieved cost and environmental benefits:

Reduction in water consumption and wastewater generation.

Cost saving in chemical consumption and reduction in pollution load of waste water

Time and energy saving.

Applicability

1. The new process can be implemented in all types of textile companies involved in reactivedyeing of cotton.

2. The new process can only be implemented if the company do have availability of softgroundwater or is operating with a soft-water system (which is normally the case).

3. It is recommended always to neutralise in the first rinse when dyestuffs based on VS-groups are used. There is no reason to neutralise in this step when all other reactivedyestuffs based on monochlorotrazine (MCT), dichlorotriazine (DCT), trichloropyrimidine(TCP) or difluorochloropyrimidine (DFCP).


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Economics

1. The economic feasibility is obvious. 50-70% reduction in the consumption of water for rinsing. Total savings will depend on the number of reactive dyeings at the company.

2. Omit the use of detergents, complexing agents and acetic acid. Savings will depend on thenumber of reactive dyeings at the company.

Driving force for implementation

1. High costs for water and wastewater discharge and/or low availability for water of appropriate quality.

2. High costs for chemicals and wastewater load.

3. A desire for reduced operation time per lot and increased capacity per machine.


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REFERENCES

COST ACCOUNTING- theory & problems- Maheshwari & Mittal

www.wikipedia.org (accessed as on date)

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www.halfcostplus.com (accessed as on-----------

www.iata.org (accessed as on---------

http://www.managers-net.com/job_evaluation.html (accessed as on----

http://www.merchantos.com/articles/inventory/what-is-inventory-

control/ (accessed as on---
http://www.wikipedia.org/http://www.ccrba.com/http://www.halfcostplus.com/http://www.iata.org/http://www.managers-net.com/job_evaluation.htmlhttp://www.managers-net.com/job_evaluation.htmlhttp://www.merchantos.com/articles/inventory/what-is-inventory-control/http://www.merchantos.com/articles/inventory/what-is-inventory-control/http://www.wikipedia.org/http://www.ccrba.com/http://www.halfcostplus.com/http://www.iata.org/http://www.managers-net.com/job_evaluation.htmlhttp://www.merchantos.com/articles/inventory/what-is-inventory-control/http://www.merchantos.com/articles/inventory/what-is-inventory-control/

Documents

Cost Red. Final