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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
http://www.businessdictionary.com/definition/business.htmlhttp://www.businessdictionary.com/definition/monetary.htmlhttp://www.businessdictionary.com/definition/valuation.htmlhttp://www.businessdictionary.com/definition/material.htmlhttp://www.businessdictionary.com/definition/resource.htmlhttp://www.businessdictionary.com/definition/utility.htmlhttp://www.businessdictionary.com/definition/risk.htmlhttp://www.businessdictionary.com/definition/incurred.htmlhttp://www.businessdictionary.com/definition/opportunity.htmlhttp://www.businessdictionary.com/definition/production.htmlhttp://www.businessdictionary.com/definition/delivery.htmlhttp://www.businessdictionary.com/definition/final-good-service.htmlhttp://www.referenceforbusiness.com/encyclopedia/Con-Cos/Cost-Accounting.htmlhttp://www.referenceforbusiness.com/encyclopedia/Con-Cos/Cost-Accounting.htmlhttp://www.businessdictionary.com/definition/business.htmlhttp://www.businessdictionary.com/definition/monetary.htmlhttp://www.businessdictionary.com/definition/valuation.htmlhttp://www.businessdictionary.com/definition/material.htmlhttp://www.businessdictionary.com/definition/resource.htmlhttp://www.businessdictionary.com/definition/utility.htmlhttp://www.businessdictionary.com/definition/risk.htmlhttp://www.businessdictionary.com/definition/incurred.htmlhttp://www.businessdictionary.com/definition/opportunity.htmlhttp://www.businessdictionary.com/definition/production.htmlhttp://www.businessdictionary.com/definition/delivery.htmlhttp://www.businessdictionary.com/definition/final-good-service.htmlhttp://www.referenceforbusiness.com/encyclopedia/Con-Cos/Cost-Accounting.html8/6/2019 How to Control Cost of Manufacturing Concern
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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.
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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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