Boland1
AUTONOMOUS
GROUP
LEARNING
Dr. Bob Boland
1
Mini AGL 2 - Cost Control
PART I - EARLY MORNING
WITH A PARTNER
Geneva, September 2005
Note: The program works best with a 17” screen!
2
Program for Part I - Early Morning
08.30 - 08.50
Sect. 1 - Introduction
08.50 - 09.00
Sect. 2 - Objectives
17
09.00 - 09.20
Sect. 3 - Key Learning Points
20
09.20 - 09.40
Sect. 4 - Study - Basic Cost Control
36
09.40 - 10.00
Sect. 5 - Study - Direct & Indirect Costs 59
10.00 - 10.30
Sect. 6 - Review of Part I
10.30 - 11.00
at last ... a coffee break … and then Part II
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97
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1. Introduction
(Total time - 20 Minutes)
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1.1 Printing & Glossary
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A print-out of the Learning Maintenance Workpack
puts the whole program into text form, from the Word
file LM.doc (Arial 12 point) in Part II of the program.
But first click ONCE on GLOSSARY below … and use
the ARROW keys and the RETURN key … to get very
simple definitions of some key words …. ready … go ...
and explore … for two minutes … please … and then use
ESCAPE to exit … and come back here ...
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1.2 AGL
AGL (Autonomous Group Learning) programs are groupbased 2/3 day management training seminars designed by
ex-professors from INSEAD/IMD/Cranfield/GSB and used
in over 20 countries around the world in several
languages for over 50,000 managers, as a six part series:
AGL 1
AGL 2
AGL 3
AGL 4
AGL 10
AGL 20
Accounting Reportss
Cost Control
Planning and Budgetary Control
Capital Investment Analysis
EVA and Financial Management of Working Capital
Communication for Effective Management
This Mini-AGL in just four hours, is based on AGL 2 ...
6
hopefully … it should be fun!
1.3 Good morning ....
This diskette of the short management training
was specially prepared for the MBA and
Exectuve Programs of a major international
business school.
A customized version for a client company with
local cases usually takes a week of research.
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1.4 Learning Environment
To use the program THREE "learning aids" are
helpful for the morning:
1. A partner to learn with.
2. A pre-learning audio tape (available on demand).
3. A text book to provide learning maintenance.
... have we got everything? ... audio ... partner? ...
text? ... off we go together .…
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1.5 Help Available
Any difficulties? Please call the "hot line" for
help:
Dr. Bob Boland
Tele: 33-450-40-89-82
Email: robertboland@wanadoo.fr
... 24 hour service ... and in return ... FEEDBACK
TODAY please …
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1.6 Pre-test - just for fun …
WELCOME ... FIRST A LITTLE PRETEST TO SEE HOW
MUCH YOU KNOW ABOUT THE AREA BEFORE WE
BEGIN THE PROGRAM ... CHOOSE ABOUT 20
QUESTIONS ... AT RANDOM ...
Click ONCE on QUIZ below … press RETURN to get
the file … press RETURN again to confirm it … then
type 20 ... press RETURN … then type R … and press
RETURN … use the ARROWS to choose each answer:
a, b, c or d… and press RETURN … on we go … for
only eight minutes please … then press RETURN to
come back here ...
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1.7 A New Way of
Now ...Learning
do you want to get the most out of this program
… then please study very carefully the next three slides
... quite difficult ... but very rewarding ...
Take just five minutes to prepare your mind to learn:
1. Efficiently - doing things right, an
2. Effectively - doing the right things
by reflecting very seriously on how you can adapt
yourself ... just for a morning ... to a very new way of
learning ... you may surprise yourself ...
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1.8 A New Way of Learning
(continued)
Recognize - that most of what we do in life, we do without
special awareness ... almost ... non-consciously rather
than consciously ... responding to our environment which
communicates with us all the time ... e.g. driving the car.
Recognize - that our non-conscious mind is very powerful
... it has an almost unlimited capacity to learn ... and much
much faster than our conscious mind ... if ... we can make
the emotional investment to allow the learning process to
operate freely and not be blocked ...
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1.8 A New Way of Learning
(continued)
Convince - our non-conscious mind, that we really
must and can understand, use and remember,
everything in this short learning process... and for this
we must get ... emotionally invested …
Develop - the confidence to relax and let our powerful
non-conscious mind guide us through a very
rewarding and yet highly emotional ... learning
experience ...... we can do it .. just for the morning …
together ... OK?
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1.9 CLE
Now print out and do a five minute CLE (Creative Learning
Exericse):
1. Relax, close the eyes and take three deep breaths.
2. Pretend that you cannot open the eyes for five minutes.
3. Relax every part of the body from head to toes.
4. Count slowly down from 10 to 1 saying “deeper relaxed”
each time.
5. Feel deeply relaxed and comfortable
6. Tell yourself that you will highly motivated to learn
and easily remember everything in the course.
7. Repeat this slowly to yourself several times … positively …
8. Relax … and feel well and happy … and content ..
9. Tell yourself that as you count 1-5 you will awake and feel
active, alert, motivated and happy to learn.
10. Count up 1-5 very loudly … and come back to the course ...14
Question
Now ... choose the "most correct" answer ...
If we buy a whole pig for 100 ECU, the cost of one of
the pig's ears:
a.
b.
c.
d.
may be computed scientifically
is related to the selling price of the pig
depends upon why we buy the pig
is impossible to compute
Now write down your answer and then … click for ours
…
c
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1.10 Remember
1.Please
This is a four hour learning experience using
new learning theories to achieve both
conscious and non-conscious learning.
2. The LEARNING is achieved by studying and
speaking ... so try to speak ... all the time ... to
reinforce your learning … as if you were ...
continually ... explaining ... to someone else ...
3. The PARTNER continually encourages you to
... complete the whole program on time ...
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2. Objectives
(Total time - 10 Minutes)
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2.1 Objectives - Cost Control
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a. To use the language and concepts of cost control
and to recognize the potential of out- sourcing for
continuous cost reduction.
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b. To compute the cost of products, services and
organizational units.
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c. To interpret cost data and cost accounting reports.
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d. To identify CCI's (Cost Control Initiatives) in the
current operations of the organization.
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e. To motivate further study in the future.
Question
8. For effective control of costs, we need:
a.
b.
c.
d.
accurate costs
scientific standards
good accountants
something else
… now write your answer and then click for ours ...
d
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3. Key Learning Points
(Total time - 20 Minutes)
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3.1 Instructions
Relax ... but study carefully. Read each note with your partner
... with emotion ... use a variety of tones to try to convince
your the partner (do it alternately) ... show how each point is ...
valid ... practical ... related by example to you your own
experiences ...
Review the glossary as necessary.
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Question
If we buy goods for ECU 4 and sell half of them immediately
for ECU 6, retaining the remainder for sale later, our profit
to date is:
a.
b.
c.
d.
ECU 2
ECU 4
ECU 8
impossible to compute
… now write your answer and then click for ours ...
b
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3.2 Cost Reduction and
Cost Control Initiatives
Cost reduction is a key objective of cost accounting and
control, with new CCI's (Cost Control Initiatives)
becoming continually evident.
Every cost can be reduced over time by: economy,
technological advance, cutting operations and planning.
Every cost can be reduced over time by: technology,
creativity, motivation and the INTERNET.
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3.3 Opportunities
Compare operations five years ago with today, to
indicate the past potential for cost savings.
Then treat cost saving as a normal part of management.
Costs grow naturally unless controlled.
Managers should not be "happy" but motivated towards
cost reduction.
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3.4 Internet as a Motivator
The successful e-manager welcomes the impact of the
INTERNET on business for cost control in terms of:
speed (of data and decision-making)
flexibility (for continuous learning),
collaboration (new company alliances)
discipline (with new standard protocols
communication ( internal and external)
data skills (for the mass of data available)
customer focus (from recruitment to retention)
knowledge management (ability to share), and
leadership (huge investment in organisation to create an ebusiness).
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3.4 Internet as a Motivator
The major cost of e-business is not hardware and software, but
rather CONTINUOUS MANGER AND STAFF TRAINING at every
level, throughout the organisation.
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3.5 Team Work & Outsourcing as a Motivator
Set up cost reduction teams with INERNET and IT
skills, for creative problem-solving and outsourcing.
Use the INTERNET and such tools as: O & M,
operations research, ABC, JIT, standard cost
accounting, strategic cost management etc.
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3.6 ABC as a Motivator
Activity based costing (ABC) recognizes that with
increasing automation, direct labour may be only 10% of
manufacturing cost.
Thus other "cost drivers" should be used to allocate
overhead, to get a more useful product cost, which
motivates managers ...
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Question
7. The system of cost accounting chosen for a
particular business should:
a. be the same as that for other firms in the
same industry
b. relate to the product
c. relate to the organization of the business
d. relate to the product and organization of the
business
… now write your answer and then click for ours ...
d
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3.6 ABC as a Motivator
(continued)
ABC motivates managers to reduce "non-value-added"
activities in: design, purchasing, receiving, storage, handling,
inspection, processing etc. using INTERNET for "benchmarking" and re-engineering techniques.
ABC is justified when management is not motivated by other
cost control systems and there is significant variation in:
product volume, mix, size, complexity, materials, set-up, parts
etc. such that direct labor or machine hours are not good "cost
drivers".
Now check "cost drivers" I, II and III in the glossary.
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3.7 JIT as a Motivator
Just In Time (JIT) inventory control by major companies
reduces inventory holding and handling charges, through
managed supplier relationships, INTERNET sourcing and
auctions with proven suppliers, sharing of production and
scheduling data, inventory reduction to "hours" instead
of months etc.
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3.8 Standard Costing as a
Motivator
Standard cost accounting (SCA) provides engineering
standards of product cost and allows variances with actual
cost to be associated with price, efficiency and volume
analysis.
Standards used to be set by engineers ... now the market
and INTERNET research tells the engineers what the
standard must be!!
"Backflush accounting" uses standards to simplify
accounting forwork in process and finished goods, and
relies heavily on physical controls of efficiency e.g. number
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of defective parts, waste quantities etc.
3.9 Waste Reduction Audit as a
Motivator
Waste reduction audit (WRA) investigates material inputs
and outputs for each process, to identify waste and achieve
cost savings by waste reduction, re-use and recycling.
WRA is profitable - since waste = inefficiency!
Waste is a resource ... in the wrong place!
INTERNET research on alternative uses of waste.
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3.10 Strategic Cost Control as
a Motivator
Strategic cost control (SCC) starts with the cost
structure of the enterprise in terms of fixed and
variable costs to reinforce only those activities that
"add value" to the operations of the enterprise.
EVA!!!
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3.10 Strategic Cost Control as
a Motivator
It creates environmental motivation within the
organization which motivates managers to seek higher
levels of cost efficiency (doing things right) and
effectiveness (doing the right things).
INTERNET research of technology alternatives in
terms of creating different company units for high
volume and low volume products.
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3.11 Internet Marketing
Operations as a Motivator
Creation of "dot.com" subsidiaries which compete
and collaborate with the normal organisation to achieve
cost savings in: advertising, customer order processing,
production to order, purchasing staff, inventory
levels, customer disputes, billing, rapid cash flow, lower
bad debts, easier expense approval, budgetary control,
accounting systems etc.
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3.12 Overall
THE KEY TO COST REDUCTION IN BOTH
MATERIALS AMND SERVICES IS MANAGEMENT
MOTIVATION ...
EVERY COST CAN BE REDUCED ... WITH
TECHNOLOGY ... WITH TIME ... AND ... WITH ...
CREATIVE MANAGEMENT ...
IN 2000 THE INTERNET AND E-BUSINESS ARE THE
KEYS TO COST CONTROL.
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3.12 Overall
IN 2000 E-BUSINESS AND THE INTERNET ARE THE
KEYS TO COST CONTROL.
SEE THE ECONOMIST, NOVEMBER 11-17,2000
FOR A DETAILED REPORT ON COST SAVINGS
ACHIEVED BY MAJOR COMPANIES USING
INTERNET RESOURCES AND INITIATIVES:
“HOW TO BRING E-BUSINESS INTO YOUR BUSINESS”.
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Question
Cost reduction can usually be achieved by all of
the following except:
a.
b.
c.
d.
elimination
direct costing
combination
simplification
… now write your answer and then click for ours ...
b
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Question
10. Continuous cost reduction programs are necessary because:
a. we need more profit
b. managers are careless
c. costs grow naturally over time
d. taxes are increasing
… now write your answer and then click for ours ...
c
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... just one more thing ... if you feel like
it .... start the program again ... you can do
so fairly quickly ... thus you can absorb ... indirectly ...
... and then ... on we go to ... section 4 ...
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4. Study - Basic Cost
Control
(Total time - 20 Minutes)
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4.1 Instructions
a. Study and read the materials with the same ...
convincing emotion ... try to understand ...
everything!
b
Use the glossary as you need to ...
c. Note special points as needed ...
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4.2 Financial and cost
Accounting
Financial accounting uses "accounting concepts" to
produce balance sheets and income statements for the
whole business.
Cost accounting is accounting specially for Management
and has several objectives. It seeks to relate to specific
segments of the business, estimate the cost of products
or operations or departments, and to always relate
actual cost against a standard of performance.
NOTE: Cost is exactly what we define it to be,
nothing more. There is no “true cost” of anything.
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Question
2. Cost Accounting is a technique for calculating the:
a.
b.
c.
d.
overall profit or loss of business
price at which a business could be bought
selling price of a product
cost of a unit of production
d
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4.3 Specific Cost accounting
Objectives
a. Estimate product cost as an aid to pricing.
b. Compute the cost of work in process for profit
computation.
c. Control costs by associating them with centers of
responsibility.
d. Compare actual against planned cost and motivate
responsible managers to take corrective action.
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4.4 Cost and Tentative Selling
Price
Product cost and tentative selling price simply computed:
Amount
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18
24
Direct labor
Direct material
Prime cost
Manufacturing overhead
(say 50% of prime cost)
12
Manufacturing cost
36
Selling and administrative 12
Total cost
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Profit (say 50% of cost)
24
Tentative selling price
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definite
definite
estimate
estimate
estimate
estimate
estimate
estimate
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4.5 Contribution
Selling price depends upon the market - not merely
the cost.
Excess of selling price over variable cost is the
CONTRIBUTION not the profit.
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Question
4. Strategic cost control (SCC) starts with the:
a.
b.
c.
d.
Activities that do not add-value
Cost structure of the enterprise
Relevant costs
Cutting of fixed overheads.
b
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4.6. Types of Costs - Nature
(continued)
Cost may be analyzed into direct and indirect costs:
a.
Direct costs:
Direct labor - conveniently associated with a
unit of production.
Direct material - conveniently associated with
a unit of production.
Direct expenses - conveniently associated with
a unit of production.
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4.6. Types of Costs - Nature
(continued)
b. Indirect costs (overheads):
Manufacturing overhead - labor, materials and
services NOT conveniently associated with a unit
of production.
Selling, administrative and general expenses
Note: Overhead may be allocated to compute full cost of
each product. Separate overhead rates may be used
for each type of overhead. However, all costs are
estimates based upon assumptions - there is no "true
cost" of anything!
51
4.7 Types of Costs - Activity
Cost may be analyzed into:
a. Direct or indirect cost.
b. Variable or fixed cost - varying in total (not per
unit) with the volume of production.
c. Relevant or non-relevant cost - to a particular
management decision to be taken.
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4.7 Types of Costs - Activity
(continued)
d. Book or opportunity cost (value) - book cost as
opposed to the real value of an opportunity missed
or foregone.
e. Controllable or non-controllable cost - at the
particular level of management.
f. Engineered, managed or committed cost - engineered
(increasing automatically with the volume of
production) or managed (discretion of management)
of committed (management can do nothing about
them).
g. Manufacturing, selling and administrative cost.
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4.8 Types of Costs - By Results
Cost may also be analyzed into:
a. Product cost - including labor, material and
overhead (either direct or full cost)
b. Departmental cost - running an operation.
c. Standard cost - engineering standards of labor,
materials and overhead for efficient production.
d. Actual cost - labor, material and overhead actually
incurred (compared against a standard or an
estimate).
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Question
11. Strategic cost management seeks increased:
a. EVA
b. cost of capital
c. PFD
d. cash flow
a
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4.8 Types of Costs - By
Results (continued)
e. Past cost - operations completed.
f. Future cost - estimates for future periods.
g. Factory (manufacturing) cost - labor, material and
factory overhead only (not selling and administrative).
h. Selling and administrative expense.
NOTE: The accountant cannot give you “the cost”,
unless he knows which cost you need. Most
costing systems produce actual cost which is
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an estimate of full cost, based upon assumptions.
4.9 Types of Costs - By
System
Cost systems involve cost analysis into: job, batch,
contract, output, process, standard, direct cost etc.
systems.
When overheads are very high (over 300% of direct
labor), then ABC (Activity based Costing) systems are
often used.
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4.10 Relevant Costs Analysis
There is no true cost, only a cost relevant for a
particular purpose. For each purpose determine the
relevant cost.
Variable costs are usually relevant, whereas fixed cost
(which do not change with the decision) are usually not
relevant. In the long run all costs are variable!!!
Unit costs are deceptive because they are based on
assumptions of the volume which may not be relevant;
so try to work on total cost.
Use future not past costs for future decisions.
Use opportunity costs rather than book costs.
Remember all costs are based upon assumptions.
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4.11 Approach to Cost
Control Problems
For practical management decision-making we need a
systematic approach:
1. Define carefully the problem and key relevant factors.
2. Think creatively about alternatives; there are
ALWAYS seven alternatives for every cost control
problem,
3. Compute quantitative data for each relevant
alternative.
4. Evaluate each alternative in quantitative and nonquantitative terms (Q plus NQ = D (decision).
5. Decide and justify your decision, and do a PFD (provision
for disaster); decide what to do if assumptions invalid.59
4.12 Out-sourcing - Make or
Buy Decisions
a. A key area for cost control is effective purchasing (outsourcing). In 2000 almost any R&D, marketing,
accounting, production, training, materials and services
etc. can be … out-sourced. Management must decide
what to make (do in-house) and what to buy.
b. Relevant costs are normally only variable costs
since fixed costs may not change in the defined
HORIZON (time period).
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4.12 Out-sourcing - Make or
Buy Decisions
c. Estimate FUTURE RELEVANT OPPORTUNITY
costs, rather than past historical book costs.
d. The difference between the variable cost to make and
the purchase price to buy is sometimes called the
"contribution from making or buying out".
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4.12 Out-sourcing - Make or
Buy Decisions (continued)
e. Decide the relative attractiveness of make v buy for a
series of items/services. Tend to make those that provide
the higher contributions.
f. Be sure to include "global cost to buy" including all
relevant costs which may involve: R&D, production,
transport, storage etc.
g. Non-quantitative factors of strategy, core
competence, secrecy, quality, delivery, out-of-stock
damage etc are always relevant. Strategy and long
term effects are particularly important.
62
Question
12. Waste reduction audit is:
a.
b.
c.
d.
envaironmentally necessary
technical
usually profitable
only applicable to manufacturing
c
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4.13 General
... and that completes the study ... except for a little
CLE ... say five minutes please ... and then ... on we
go …
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5. Study - Direct and
Indirect Costs
(Total time - 20 Minutes)
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5.1 Instructions
a. Study and read the materials with the same ...
convincing emotion ... try to understand ...
everything!
b
Use the glossary as you need to ...
c. Note special points as needed ...
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5.2 Direct Cost
Cost conveniently associated with a unit of production.
a. Direct labor - which is direct operating labor.
Normally excludes: storemen, foremen, transport
drivers, office clerks, salesmen, inspectors, managers,
and other indirect labor etc.
b. Direct material - which forms part of the
product sold. Normally excludes: oil, grease,
machine repairs, rags and other indirect
materials.
c. Direct services which are special costs for
particular jobs e.g. hire of machines
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Question
19. A cost driver is:
a.
b.
c.
d.
An activity based method of allocating overhead
A fully qualified chauffeur.
Anything except direct labour
A part number.
a
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5.2 Indirect Cost
Cost not conveniently associated with a unit of production:
a.
Manufacturing cost - factory overhead expenses.
b. Selling cost - marketing, selling and distribution cost.
c. Administrative cost - general cost of administering the
business which are not selling or manufacturing.
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Question
14. What is most important in actually running a business?
a)
b)
c)
d)
love
cash
profit
security
b
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5.3 Cost Structure
For cost control study the structure of cost, in terms of both
full and direct costing:
a.
Full costing:
Cost
Direct labor
10
Direct material
20
Prime cost
30
Manufacturing overhead 30
Manufacturing cost
60
Selling and administrative
Overhead
40
Total cost
100
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definite
definite
poor estimate
poor estimate
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5.3 Cost Structure
(continued)
NOTE:
Inventory is valued at manufacturing cost only.
Selling and administrative overhead is charged as
expense in the income statement.
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5.3 Cost Structure (cont.)
b. Direct cost
Direct labor
Direct material
Direct manufacturing
variable overhead
Direct selling and
admin. var. overhead.
Total direct cost
Cost
10
20
Comment
definite
definite
5
definite
8
definite
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Note: Manufacturing, selling and administrative
overhead only associated with each product by special
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studies. Inventory valued at direct cost only.
Question
20. To determine what is direct as opposed to "indirect"
labor, we must ask the question:
a. Does the labor work regularly?
b. Is the labor employed in the machine shop?
c. Can the labor be conveniently associated
with a unit of production?
d. Is the labor done by a worker or an
engineer?
c.
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5.4 Inventory Effects on Cost
Cost must be adjusted for inventory changes. The material cost
is therefore:
Opening inventory 100, plus purchases 50, less closing
inventory 20, giving material actually used in production
(100 + 50 - 20) = 130.
Value of inventory of raw materials, work in process and
finished goods, must be adjusted in the income statement to
compute the cost of manufacturing.
Selling and administrative expenses are never charged to
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inventory but charged direct to income statement for the period.
Question
21. In computing the cost of a unit of production,
normally:
a. direct costs are fairly definite and overhead
costs depend upon allocations an assumptions
b. all costs depend upon broad assumptions
c. the indirect costs are more definite than the
direct costs
d. once the overhead rate is fixed, the direct
costs may be calculated
a
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5.5 Cost, Profit and Investment
Centers
a. Cost centers may be either productive or service centers.
Productive centers are concerned with operations. Service
centers provide services to productive centers. The costs of
service centers are allocated to productive cost centers.
b. Allocation of cost is always possible using some basis i.e.
number of workers, floor areas, units produced, estimates,
activity etc. However allocated costs are rough estimates
which are less definite than specific direct costs.
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5.5 Cost, Profit and Investment
Centers (continued)
c. For control, associate each activity with a manager
responsible. Centers of responsibility may be:
Cost centers - cost against standard or budget
Profit centers - profit against standard or budget
Investment centers - profit against assets employed
(return must exceed cost of capital to achieve EVA)
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Question
22. Management control is usually:
a. continuous and rhythmic
b. intermittent
c. the controllers main job
d. easier as time goes by
a
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Question
The cost of the foreman's salary is normally:
a.
b.
c.
d.
direct labour
manufacturing overhead
administrative overhead
indirect overhead
b
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5.6 Overhead Rates
a. No rate is scientific - merely an estimate on assumptions.
b.
Key management decisions in overhead rates are:
Number of cost centers - not many with similar rates
Choice of measure - labor rate, machine rate,
prime cost, sales volume etc. (labor rates
over 300% are probably suspect - use
machine rates or ABC systems).
c. To determine the overhead rate, estimate three things:
overhead amount, measure of activity, and the forecast
81
volume of that measure.
5.6 Overhead Rates
(continued)
d. Under or over-allocated overhead results
when the actual overhead is more or less
than the amount allocated to the products.
e. The difference is due to either cost or
volume and results in a loss or profit because
product costs do not contain enough overhead.
f. Do not change product costs - merely take a
profit or loss from over- or under-allocated
overhead in the income statement of the
period.
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5.7 Overhead Rate for Each
Cost Center
a. Determine specific cost for the particular cost center.
b. Allocate the non-specific costs on some assumed basis
(number of people, floor area, units produced etc.)
to the cost center.
c. Set a volume of activity.
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5.7 Overhead Rate for Each
Cost Center
d. Compute an allocation rate as follows:
Overhead 100/ direct labor 50 hours = 2.00 per hour.
Overhead 100/ machine 100 hours
= 1.00 per machine hour
Overhead 100/ labor cost $200.00
= 50% of labor cost
84
5.8 Control of Fixed and
Variable Overhead
a. Study the STRUCTURE of cost - how much is variable and
how much fixed?
b. Fixed cost does not change in the short term and is often not
relevant to short term decisions.
c. We may ALLOCATE the fixed cost on the basis of a
variable cost (say direct labor) but this does NOT change its
nature as a FIXED cost.
NOTE: ALLOCATION SPREADS COST - IT DOES NOT
CONTROL IT!!
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5.8 Control of Fixed and
Variable Overhead (cont.)
d. Fixed cost is normally indirect and remains unchanged for
volume within limits.
e. Fixed cost per unit decreases with additional volume - but is
still FIXED. Variable cost per unit does not decrease
(normally) with additional volume (within
f. Variable cost is normally DIRECT cost - clearly associated
with a product such that each additional a unit produced
always involves the same additional a variable cost per unit.
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Question
24. The cost of factory heat and power is normally:
a.
b.
c.
d.
direct labour
manufacturing overhead
selling and administrative overhead
indirect material
b
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5.9 Contribution Concept
Contribution is selling price less variable cost only:
a. Contribution not calculated:
Selling price
2.00
Total cost
1.98
Profit
0.02
b. Contribution calculated:
Selling price
Variable cost
Contribution
Fixed cost
Profit
2.00
.68
1.32
1.30
0.02
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5.10 Breakeven Concept
a. Useful tool for understanding and communicating the
effect on profit of: volume, costs and prices. Sales and
costs computed at different sales volumes.
Distinguish fixed and variable costs. Breakeven point
where sales equal total cost - with no profit.
b. Breakeven analysis aids understanding of cost and profit
targets:
1. Shows profit (loss) at different sales volumes.
2. For any volume indicates what must be changed to
achieve profit target.
89
5.10 Breakeven Concept
(cont.)
c. Not accurate - only an estimate for a limited known range
of volumes.
d. Conceals real difficulty of changing assumptions i.e. it
may be more difficult to reduce cost by 2% than increase
selling price by 4%.
e. In the longer horizon, all costs are VARIABLE.
f. At higher volumes fixed costs may not be a straight line
i.e. they may increase in steps.
90
5.11 Standards
Cost must be related to a standard i.e. engineering target or
estimate or previous year or past job or competitive company.
OLD BEST standard to measure efficiency was "standard
cost" based on engineering studies …
NEW BEST standard is the MARKET ... and the policy of
CONTINUOUS COST REDUCTION 8% EVERY YEAR ...
Measure actual against standard to determine a variance;
associate the variance with a responsible manager or team.
DON'T REVISE STANDARDS TOO EASILY ... KEEP THEM
TOUGH BUT ACHIEVABLE.
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5.12 Measurement ofPerfomance
Management wants to know:
a.
b.
c.
d.
How much was done?
How well was it done?
What was the cost?
Are the competitors doing better?
To measure performance, therefore we must have
standards against which to compare actual
performance.
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5.12 Measurement ofPerfomance
(continued)
Consider performance now - and in tho future - don't cut
today and destroy the market volume tomorrow.
A bigger contribution may provide more profit than a lower
cost.
Use total cost and profit figures, not just per unit
figures.
Performance also relates to working capital management of
inventory and receivables which may achieve significant
overhead cost-reduction. See Exhibit A for JIT.
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Question
Just In Time (JIT) inventory control:
a.
b.
c.
d.
Is appropriate for all companies.
Leads to selection of local suppliers.
Reduces materials handling costs
Usually forces suppliers to hold high
inventories.
b
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5.13 JIT - Just in Time
Inventory Control
JIT inventory control seeks to reduces inventory holding
and material handling charges, through managed supplier
relationships.
Inventory levels of four weeks supply are often been
reduced to the level of four hours, with sub-contracted
parts moving from transport directly to production lines,
with cost reduction for less handling and storage and
working capital investment!
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5.13 JIT (cont.)
JIT systems require stable suppliers and delivery systems to
avoid shut-downs due to lack of parts. This involves special
selection of major and back-up suppliers and quality control
arrangements, to enable delivery within hours.
Thus distant suppliers unable to deliver within fixed time
limits (say 48 hours) may be excluded, unless they set up
local facilities.
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5.10 JIT (cont.)
JIT may well force suppliers to hold the inventory levels
formerly held by their major client companies.
JIT usually leads to simplification of parts, materials
handling, packaging and quality control procedures as well
as cutting inventory levels.
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5.10 JIT (cont.)
Write down and justify the answers to the following
questions (true/false):
1.
In 2000 every company should adopt some JIT systems.
2. The major cost reduction of JIT systems is savings in
interest on inventory levels.
3. The major cost reduction of JIT systems is savings in
material handling.
4. JIT requires a new costing system.
5. The major risk of JIT is shut-down due to lack of parts.
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5.10 JIT
(cont.)
Answers: F F T F T
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Question
16. Cost reports may be more useful in controlling
costs
if such reports are submitted:
a.
b.
c.
d.
annually with absolute accuracy
semi-annually
monthly with absolute accuracy
rapidly with reasonable accuracy
d
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Question
2. Cost Accounting is a technique for calculating the:
a.
b.
c.
d.
overall profit or loss of business
price at which a business could be bought
selling price of a product
cost of a unit of production
… now write your answer and then click for ours ...
d
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5.11 Overall
… so much for the study ...
… and now canm you do a little CLE
… before the review …
… and the coffee ...
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6. Review of Part I
(Total time - 30 Minutes)
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6.1 Instructions
1. Study each mini-case study which follows.
2. Respond intuitively ... in ONLY three minutes ... in writing ...
3. Then check with our answer after three minutes ... make
SPECIFIC NOTES of what you missed ... and think about ...
WHY ... VERY IMPORTANT ... WHY ... you just
did not think about it … although you really knew it ...
4. Then try the next minicase ... and do better
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6.2 Minicase Eliza
Manufacturing Company
Your proposed budget for the year 2000 indicates a doubling
of sales but a stable (unchanged) inventory and a gross profit
increase from 32% to 40%.
Why do you feel that budget is probably not reasonable?
How can you quickly check out what is reasonable in your
industry in 2000?
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6.2 Minicase Eliza
Manufacturing (cont,)
OUR ANSWER:
a. The underlying assumptions do not seem to be consistent
with "normal" financial expectations. When you double
sales in one year, you normally need the support of a
higher inventory investment. Has this already been made?
Can the unchanged inventory levels be justified by special
studies?
b. Similarly receivable levels would be higher unless sales are
mainly for cash. With a competitive market, it would seem
that doubling sales and increasing the gross profit increase
by 3% would be difficult
e. Overall: the budget seems to be over-optimistic; check it
out with the industry averages to see if other companies are
106
achieving similar rults?
6.3 Minicase Allan Solo Co.
Contract completed at far above the estimate, and the
manager held the foreman responsible.
Foreman blamed material prices - responsibility of
purchasing.
Purchasing blamed production control for high overhead
rates due to low capacity working.
Production control blamed marketing due to lack of orders
and low prices. Marketing blamed the Controller for the
new costing system.
To what extent can we hold the foreman responsible?
107
6.3 Minicase Allan Solo Co.
OUR ANSWER:
Failure to reach target may be due to: poor estimating, price
variances, volume variances, efficiency variances, poor
reporting, poor selling of products.
Foreman has only lmited responsibility for efficiency - unless
he operates as a profit center.
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6.3 Minicase - Keith Co.
Accountant refuses to release the monthly cost reports until
four weeks after the month end, to ensure that they are
"absolutely accurate", on the ground of previous criticism
that his "inaccurate costs" are a dangerous.
Is he right?
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6.3 Minicase - Keith Co.
OUR ANSWER:
Fast rough cost figures on time within four days of
the month end, are far more useful to management
than "so called accurate cost reports" later.
Manager must decide what he needs in terms of
accuracy not the accountant - manager is
the "customer" of the accountant!!
There are no absolutely accurate costs; only costs
that are useful for a purpose based upon
assumptions.
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6.4 Minicase - Leemac
Accountant insists that controller department salaries are
"fixed costs" and will always be fixed costs.
How could you best convince him that he may not be right?
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6.4 Minicase - Leemac
OUR ANSWER:
Fire him!!
Note: In the long run every cost is variable ...
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6.5 Minicase - Oparko
The CEO is anxious to make a major cost reduction and
organizational change that will affect three key departments in
the organization.
Department A is the largest in the organization.
Department B while smaller than A is also a larger department.
Department C is the smallest and acts as a coordinating and
operational department between A and B. The employees in the
Department are young with broad operational responsibility.
Question: How should the CEO bring about change? Which
department will be the most resistant? What win-win solution?
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6.5 Minicase - Oparko
OUR ANSWER:
The small department with liaison authority is likely to be
the most influential. These are the people that would
normally act as change agents and would be most helpful in
bringing about change.
The large department with many employees will have vested
interest in the existing system and will resist change.
The success of the change will depend largely on the small
influential departments's ability to win over the other two
departments.
114
6.6 Summary Lecture
... and so end the minicases ...
… on to a summary lecture for Part 1 ...
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6.6 Summary Lecture
1. Cost reduction is a key objective of cost accounting and
control, with new CI's (Cost Control Initiatives) becoming
continually evident.
2. Every cost can be reduced over time by: economy,
technological advance, cutting operations and planning.
3. Compare activity five years ago with today, to indicate the
past potential for cost savings.
4. Then treat cost saving as a normal part of management.
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6.6 Summary Lecture
5. Costs grow "naturally" unless controlled. Managers
should not be "happy" but "motivated towards
increasing efficiency.
6. Set up cost reduction teams using such tools as: O & M,
operations research, ABC, JIT, standard cost
accounting, strategic cost management etc.
7. Activity based costing (ABC) recognizes that with
increasing automation, direct labor may be only 10% of
manufacturing cost and thus other "cost drivers" should
be used to allocate overhead cost to products.
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6.6 Summary Lecture
8. Just In Time (JIT) inventory control by major
companies reduces inventory holding and handling
charges, through managed supplier relationships.
9. Standard cost accounting (SCA) provides engineering
standards of product cost and allows variances with
actual cost to be associated with price, efficiency and
volume analysis.
10. Now such standards are strongly influenced by the
MARKET e.g. you have to find a way to make part
XXX for $25 or else!!!
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6.6 Summary Lecture
11. Backflush Accounting uses standards to simplify
accounting for work in progress and finished goods,
and relies heavily on physical controls of efficiency e.g.
number of defective parts, waste quantities etc.
12. Waste reduction audits (WRA) investigate material
inputs and outputs for each process, to identify waste
and achieve cost savings by reduction, re-use and
recycling.
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6.6 Summary Lecture
13. Strategic cost control (SCC) starts with the cost
structure of the enterprise in terms of fixed and
variable costs to reinforce only those activities that
"add value" to the operations of the enterprise.
14. It creates "environmental motivation" within the
organization which motivates managers to seek
higher levels of cost efficiency and effectiveness.
Locate and reduce those "non-value-added"
activities ... with bench-marking and re-engineering ...
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6.6 Summary Lecture
The key to cost control is management …
and employee motivation ...
at every level in the organization ...
not a technical ... but a human problem!!
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Question
4. Strategic cost control (SCC) starts with the:
a.
b.
c.
d.
Activities that do not add-value
Cost structure of the enterprise
Relevant costs
Cutting of fixed overheads.
… now write your answer and then click for ours ...
b
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6.6 Summary Lecture
And ... so ends our summary lecture for Part I of the
program ... time for a coffee ... and then on to Part II ...
Note: If you find the program to be valuable for you
…and do not yet have Part II … please email us today
123
Boland1
AUTONOMOUS
GROUP
LEARNING
Dr. Bob Boland
125
Mini AGL 102 - Cost Control
PART II - LATE MORNING
WITH A PARTNER
Geneva, March 2005
126
Program for Part II - Late Morning
11.00 - 11.20
Sect. 1 - Study - Systems & Standards
5
11.20 - 12.00
Sect. 2 - Case Studies
42
12.00 - 12.20
Sect. 3 - Study - Control & Reporting
60
12.20 - 12.40
Sect. 4 - Key Learning Points
91
12.40 - 13.00
Sect. 5 - Learning Maintenance
106
... and at the end ... a well earned lunch ...
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CLE - Creative Learning
Exercise (1 Minutes)
Please take just one minute to relax ... feel well and
confident ... to make the best use of the program ...
to enjoy it ... and to remember everything! OK ...?
128
1. Study - Systems and
Standards
(Total time - 20 Minutes)
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1.1 Introduction
Study carefully to relate each point to your own practical
experience ...
Review the glossary … for a minute ...
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Question
33. The wages of an inspector of production in a factory
should usually be treated as:
a. direct labour
b. part of material cost
c. indirect labour, unless conveniently associated with a
unit of production
d. manufacturing overhead, even if it can be conveniently
associated with a unit of production
c
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1.2 Cost System Objectives
It is difficult for a single cost system to achieve all
these objectives equally effectively:
a. Compute product cost as an aid to pricing
b. Value work in process
c. Control costs by responsibility
Determine the volume of activity and management
requirements before deciding upon the appropriate
system. Relate the cost of the system (or systems) to
their value to management.
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132
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1.3 Product Cost
Product cost is exactly what we define it to be.
Computed in terms of labor, material and overhead.
Direct costing defines product cost as: direct cost
clearly associated with the product. Definite but fails
to include all overhead costs.
Full costing defines profit cost as both direct and
indirect (allocated) overhead cost. Appears to be
definite but in reality includes many estimates and
assumptions.
Always question the assumptions underlying product
133
cost.
Question
The total cost of a new machine purchased during
the year is normally
a.
b.
c.
d.
direct material
manufacturing overhead
selling and administrative overhead
something else
d
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1. 4 Contract, Job & Batch
Costing
a. In contract costing, the unit of cost is one contract.
labor, material and some other costs are direct contract
costs. General overhead ,may be allocated on some
basis. Profit on contracts may be taken during or at the
end of the contract.
b.
In job and batch costing the unit of cost is one job or
batch of jobs. Direct and indirect costs are charged.
Sometimes selling and administrative overhead charges
are allocated as a percentage of manufacturing cost.
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1. 4 Contract, Job & Batch
Costing
NOTE:
Allocation of overhead costs on the basis of sales or
previously accumulated costs is adding one estimate to
an other and may not produce a useful result.
Such total costs should be treated with considerable
skepticism.
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1. 4 Contract, Job & Batch
Costing
c. Control of costs in contract, job and batch costing
is by comparison of estimated cost against actual
cost to indicate:
1. Profitability
2. Efficiency
3. Accuracy of estimating procedures
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1. 4 Contract, Job & Batch
Costing
d. Try to use standard costs and rates in computing
contract, job and batch costs. Standard rates are
simpler and standard costs are a better measure
of efficiency.
Analyze the variance between actual and
standard cost into price, efficiency and volume
variances.
Avoid actual or average rates; they are not more
useful than standard rates.
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1. 5 Output Costing
With only one product we have output costing.
Divide each cost by the volume of output for the
period.
To measure efficiency: compare actual against
standard.
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Question
The depreciation of the chief executive's motor car is
normally:
a.
b.
c.
d.
direct material
manufacturing overhead
selling and administrative overhead
indirect material
c
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1. 6 Process Costing
Suitable for continuous production flow with final
products resulting from a sequence of operations
or processes. Output of one process is the input of
the next.
Cost collected by period for each process and the
unit of cost of each process computed by dividing
the total process cost by the output (like output
costing).
System is in effect output costing for each process
in a series which together form a production cycle.
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1. 6 Process Costing
The measure of efficiency in process costs is the
same as for output costing: actual against previous
cost, standard or budget. use standard as much as
possible.
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1. 7 Standard Costing
The best performance target is the standard cost
computed by engineering studies on a standard
cost sheet - BUT DRIVEN BY MARKET FORCES TO
ACHIEVE CONTINUOUS COST REDUCTION EVERY
YEAR!!
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1. 7 Standard Costing
(Continued)
Standard cost accounting provides engineering
standards of product cost and allows variances with
actual cost to be associated with price, efficiency and
volume analysis.
"Backflush" accounting uses standards to simplify
accounting for work in progress and finished goods.
The best performance target should be the standard
cost from engineering studies on a "Standard Cost
Sheet" indicating:
1. standard hours at standard labour rate
2. standard material quantities at standard costs
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3. standard overhead allocations
1. 7 Standard Costing
(Continued)
The standard cost system is only as good as the
standards set each year.
Product cost is standard cost.
Standards are set by the engineering department
together with purchasing, personnel and operating
managers.
They are not normally changed during the
year.
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1. 7 Standard Costing
(Continued)
Variances are developed not by products but by
departments responsible for operations, in terms of:
1. price - difference in actual and standard price for the
actual quantity purchased
2. efficiency - difference between actual quantity of
material and labour used
3. volume - difference in fixed overhead due to actual
volume being more or less than standard.
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1. 7 Standard Costing
(Continued)
Do not change standards too frequently: associate
variances with managers responsible; control the
"material" (significant) variance very carefully.
Some multi-nationals are beginning to set revised (lower)
standard costs every year, with "market" pressures for
lower costs" rather than from what engineers say is
"necessary"; this is to motivate engineers and managers
towards continuing efforts in cost reduction, every year!
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1. 7 Standard Costing
(Continued)
Standard cost reports show total sales, standard
cost of sales, standard gross profit, variances
(price, efficiency and volume), to show actual gross
profit.
Departmental reports analyze operational
inefficiencies in terms of price, efficiency and
volume.
Variances may also be due to: poor standards, poor
accounting, changes in product mix.
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1. 7 Standard Costing
(Continued)
“Backflush" cost accounting is a new
development, which uses standard accounting for
work in progress and finished goods, and relies
heavily on physical controls of efficiency e.g.
number of defective parts, waste quantities etc.
Product cost then becomes direct material plus
conversion costs, to achieve the finished product.
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1. 7 Standard Costing
(Continued)
Now write down and justify the answers to the following
questions (true/false):
1. Every manufacturing enterprise could have better
cost accounting with standard costs.
2. Price variances are usually due to purchasing
inefficiencies.
3. Standards should be changed frequently to ensure
that the are accurate.
4. Standards used (in the past) to reflect engineering
values rather than competitive market needs.
5. Standard cost accounting enables variances to be
analysed into price, efficiency and volume causes.
6. Backflush accounting is more complex than normal
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standard cost accounting.
1. 7 Standard Costing
(Continued)
Answers: T F F T T F
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1. 8 Cost and Control
a. Compare actual cost against standard to determine
variances; analyze the causes.
b. Determine who is responsible for the variance and
take corrective action; motivate managers to achieve
targets in the future.
c. Revise standards annually or every two years. Do
not revisetoo often because of paperwork. Control
variances closely.
d. Periodically check with special case studies the
actual product costs; determine the relevance of the
standards to reality.
e. Do not accept the standard cost without checking
regularly onvariances and the reliability of the
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standards.
1. 8 Cost and Control
Answers: F F F T T
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1.9 Choice of Cost System
a. Move towards standard costing and variances in
terms of price, efficiency and volume PLUS the
MARKET NEED to achieve continuous cost reduction
every year.
b. Choose the most appropriate cost system (with
standards) by selecting the unit of production
appropriate to the industry and company.
BENCHMARK your costs with competitors.
c. Introduce standard rates for materials, labor and
overhead -do not try to use actual rates.
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1.9 Choice of Cost System
(Continued)
d. Consider the cost of the system in relation to its
value to all levels of management.
e. Renew re-think and revise the system regularly
based upon INTERNAL RIGOROUS RESEARCH IN
THE COMPANY, with all levels of management. The
system gets rusty and efficient unless you do
"Preventive Maintenance".
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1.9 Choice of Cost System
(Continued)
f. With highly automated production with little labor and
high overheads (i.e. labor/overhead rates of 300%
plus) consider using ABC either in the main stream
or (more economically) ONLY FOR special studies
as needed, while keeping the system uncomplicated
- so that managers will understand it.
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Question
Dividends and income tax payable by a company
are normally:
a.
b.
c.
d.
direct labour
manufacturing overhead
selling and administrative overhead
something else
d
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1. 10 Activity Based Costing
(ABC)
ABC recognizes that with increasing automation,
direct labor may be only 10% of manufacturing
cost and thus other "cost drivers" should be
used to allocate overhead cost to products.
ABC is justified when management is not
motivated by other cost control systems and
there is significant variation in: product volume,
mix, size, complexity, materials, set-up, parts etc.
such that direct labor or machine hours are not
good "cost drivers".
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1. 10 Activity Based Costing
(Continued)
ABC starts by defining the critical activities that "add
value"; it then defines "cost categories" and "cost
drivers" to allocate overhead to product cost. Product
cost then changes from: direct material plus direct
labor plus overhead, to material plus a series of
conversion costs.
This avoids the traditional overhead allocation based
on direct labour or machine hours, and tries to focus
management attention on activities that "add value" to
the product, with a series of "cost drivers e.g. number
of parts, number of set-ups, automated operation per
part, manual operation per part etc.
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1. 10 Activity Based Costing
(Continued)
Simple example:
Labour based cost:
Direct materials per unit
Direct labour
Manufacturing ovd. @ 250% DL
Manufacturing cost per unit
Activity based cost (ABC):
Direct materials per unit
Materials handling 70 parts @ ECU.30
Machining 2 hours @ ECU 34.00
Assembly 70 parts @ ECU 1.90
Inspection 1 unit @ ECU 20.00
Manufacturing cost per unit
ECU
400.00
100.00
250.00
750.00
ECU
400.00
210.00
68.00
133.00
20.00
642.00
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1. 10 Activity Based Costing
(Continued)
In highly automated manufacturing direct labour
may be only 5% of manufacturing cost and thus
inappropriate for overhead allocation. Where
different products and volumes require special setups, direct labour based cost drivers tend to:
a. under-cost small complex runs (many different
parts) and
b. over-cost simplified (standardized parts) high
volume products.
161
1. 10 Activity Based Costing
(Continued)
Write down and justify the answers to the following
questions (true/false):
1. Part No. 111 costs ECU 10 and can be used for
only one product, is cheaper than part No. 112,
which costs ECU 12 but can do the same job in all
of the product range.
2. JIT and ABC always go together.
3. For most manufacturing enterprises ABC is now
better than labour based cost accounting.
4. For relevant cost analysis ABC probably gives
better data than labour based cost accounting.
5. Cost reduction is motivated by ABC.
162
1. 10 Activity Based Costing
(Continued)
Answers: F F F T T
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Question
If a cost center has direct labour of ECU 2000
against specific overhead of ECU 4000 and a
share of general manufacturing overhead of
ECU 1000, the overhead rate for the cost center
is:
a.
b.
c.
d.
100% of the direct labour cost
200% of the direct labour cost
250% of the direct labour cost
40% of the direct labour cost
c
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Question
In computing the total cost of each productive cost
center, we must take the cost of each service cost
center and allocate it to all:
a.
b.
c.
d.
productive cost centers equally
all productive cost centers on a fair basis
cost centers equally
appropriate cost centers on a fair basis
write down your answer and then ...
d. … and now … on we go to the cases ...
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2. Case Studies
(Total time - 20 Minutes)
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2.1 Instructions
1. Study each case study which follows.
2. Respond intuitively ... in ONLY three minutes ... in
writing ...
3. Then check with our answer ... make SPECIFIC NOTES
of what you missed ... and think about ... WHY ...
VERY IMPORTANT ... WHY ... you just did not think
about it … although you really knew it ...
4. Then on to the next minicase ... to do much better ...
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2.2 Case: Millard
The installation of a new cost reduction program
in a large textile mill is resisted by old line
managers. They have resisted change for several
years and have been a constant source of
embarrassment to the CEO.
The informal leader of the old line managers is
presently on vacation. The CEO believes this may
be an opportune time to rapidly force the change
through. a win-win solution.
Question: Do you agree with the CEO's strategy?
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2.2 Case: Millard
OUR ANSWER:
Yes. if the old line managers have a reputation and
record for resistance to change it is unlikely that
further discussion with them will be of any benefit.
The absence of the informal leader presents an
opportunity that may not occur for some time.
If the change is forced the through now the other
old line managers may give in and accept the
change.
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2.3 Case: Pat Pipper
Company manufactures industrial tools in a variety of
sizes and patterns. It's "actual" costing system uses
labor and manufacturing overhead rates computed each
month. These rates are also used to estimate for new
jobs.
Costs are not available until four weeks after the month
end and this delays cost reports and job estimates.
Furthermore in slack months the overhead rate is very
high and customers complain about widely different
estimates based on "cost" for the same type of job in
different months.
What should be done?
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2.3 Case: Pat Pipper
OUR ANSWER:
Do not calculate monthly rates for labor and overhead.
Use standard annual rates for the whole year. Eliminate
changes in job estimating due to heavy or light activity
in a particular month.
Avoid excessively "pseudo-accurate" cost
data. Speed up the monthly cost data. Use special rates
for estimating on new jobs.
Price should depend finally on the market not the cost.
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2.3 Case: Dave Rave
The company accountant set up a new costing
system but could not decide what was "direct labor"
for operating departments producing and
assembling a variety of small machines.
Foremen? Inspectors? Machine operators
processing parts? Assembly workers? Inventory
control clerks? Storekeepers?
What is direct labor? What do you advise?
172
2.3 Case: Pat Pipper
OUR ANSWER:
Direct labor can conveniently be associated a unit of
production without arbitrary allocation.
Items 3 and 4 are clearly direct labor; the others are
overhead.
Particular production systems and a limited product
range may allow other solutions.
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2.4 Case: Bob Action
KEY CASE !!! Company produced automotive parts. There was heavy
competitive pressure to cut costs and prices as the manufacturing
processes became more automated with great variation in product
volumes, set-ups, quality control etc.
Product cost was computed for labour, materials and a
general rate for manufacturing overhead based on 500% of direct labour.
As a cost reduction program, consultants were asked to classify the
products on criteria of: market, quality and cost. Class I products would
continue to be manufactured, Class II would be reviewed every quarter,
and Class III would be out-sourced and eventually dropped. Product X
which was about 33% of the total sales, was classified as Class III.
Question: Is this a good decision? What effect on the
cost of other products? What do you suggest for the future?
174
2.4 Case: Bob Action
OUR ANSWER:
No. Ousourcing may not be justified!
Cost data based on 500% overhead rate is not
valid for make v buy decisions.
Need to compute the "contribution" of Product
X before outsourcing, since fixed costs will be
loaded on to other products. Need ABC for
better cost data. Fire the consultants!
175
2.5 Case: Brongolf Truck
Company manufactured truck bodies to order. Each
job was similar but had differences to suit
customer preferences.
Job cost system used. Control by comparing actual
against estimate.
Main competitor was using standard costing.
Should we change ? How?
176
2.5 Case: Brongolf Truck
OUR ANSWER:
Definitely yes! First standardize production parts
and sub- assemblies as far as possible (what are
competitors doing?). Then introduce standard rates
for labor and materials.
Products do not have to be the same for standard
costing. Work up standard cost sheets for each
product before introducing the system.
Standard costing provides better data for both
management control and estimating. Variances
between actual and standard are best analyzed by:
price, efficiency and volume.
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2.6 Case: Heavy Mac
Company was experiencing very heavy losses due to
fall-off in the market and subsequent low production
levels.
Cost reduction program was instituted and each
manager was asked to suggest maximum cost savings
which could be conveniently made now.
Managers responded with savings of about 2%.
What to do about cost reduction?
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2.6 Case: Heavy Mac
OUR ANSWER:
Analyze the structure of costs to set a target of
potential savings. Cost reduction in crisis
situations can never be entirely "voluntary". Set
cost reduction targets of 20% to 40% to indicate
the kind of "cost cut" required from each
manager, and then let him decide how to achieve it.
Be firm.
Managers tend to allow and protect activities that
are not at all absolutely necessary, due to EI
(emotional investment). They need pressure to keep
179
operations efficient. Change some managers too?
2.7 Case: Andremer
Company set up a standard costing systems only three
years ago and (June 1997) discovers rather high
variances in price, efficiency and volume.
CEO wants to revise all the standards now and continue
to change them each month until the year end in
December 31, 2000, so that variances become
insignificant.
Should the Company change its standards now?
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2.7 Case: Andremer
OUR ANSWER:
Do not change the standards until the end of the year.
In the meantime control the variances very carefully.
Changing standards involves a lot of effort and is not
justified more than once a year. Maybe variances really
do reveal production inefficiencies.
However, when using standard costs for decisionmaking, remember to consider the effect of significant
variances on product cost.
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2.7 Case: Miguel
For more accurate costing the controller increased
the number of cost centers from 6 to 48. Typical
range of overhead rates under the new system was:
Cost Center
35
36
37
Overhead Rate
116%
118%
120%
General manager had some doubts about the new
system but felt unqualified to comment because he
was not an accountant. What do you think?
182
2.7 Case: Miguel
OUR ANSWER:
Cost centers give more precision to cost accounting but
they must be useful to management. No point in having
48 different overhead rates if they are almost the same!!
Overhead rates are only estimates. Reduce the number
of rates to those that fit the organization and do show
significant differences.
.. end of thecases ... play them again? ... or on we go ...
183
3. Control and Reporting
(Total time - 20 Minutes)
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3.1 Instructions
1. Read the notes very carefully.
2. Use the glossary as necessary.
3. Keep personal notes on key points currently
relevant to your company.
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Question
Just In Time (JIT) inventory control:
a.
b.
c.
d.
Is appropriate for all companies.
Leads to selection of only local suppliers.
Reduces materials handling costs
Usually forces suppliers to hold high
inventories.
c
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Question
Strategic cost control (SCC) starts with the:
a.
b.
c.
d.
Activities that do not add-value
Cost structure of the enterprise
Relevant costs
Cutting of fixed overheads.
b
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Question
Cost reduction is:
a. Not always possible, even in the long term.
b. Dependent mainly upon cost accountants.
c. A continuing routine management
responsibility.
d. Best done by O & M specialists.
c
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3.2 Control Concepts
a. Set a clear organizational structure of cost, profit
and investment responsibility centers.
b. Set standards in quantative and non-quantative
terms as performance targets. Try to qualify targets
but use multiple measures.
c. Set up a reporting system for both routine and
special reporting, which is fast and accurate
enough, for the purpose (but not excessively
accurate) and not too slow.
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3.2 Control Concepts
(Continued)
d. Get top management support for rapid action where
performance falls below target.
e. Set up a free-flow information system whereby
information is not filtered before it reaches all levels
of management, but goes directly from controller to
all managers concerned.
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3.3 Reporrting Effectiveness
Reports should be effective. They should be "marketed" to
managers just like a product to customers, to ensure that
they are giving consumer (manager) satisfaction
Reports are designed for managers not controllers.
Reports must be clear and include comparative and
descriptive data preferably in figures and learning pattern
form.
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3.4 Responsibility Centers
Responsibility of managers for cost, profit and return on
investment must be clearly defined. Standards of
performance must be set (generally but not absolutely)
in relation to authority and responsibility .
Managers must be subject to rapid follow up by top
Management when they fail to meet target.
Managers must be judged not only on financial results
but on the total job. Meeting the financial target is not
necessarily doing the job. Operational profit/net assets
employed should produce a return which is ABOVE the
Cost of Capital!!
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Question
Waste reduction audit is:
a.
b.
c.
d.
environmentally necessary
technical
usually profitable
only applicable to manufacturing
c
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3.4 Responsibility Centers
(Continued)
Control actual performance against target for:
a. Cost centers
b. Profit centers
c. Investment centers
NOTE: All are effective for cost control but b. and c. are
more effective for EVA, because they motivate the
managers to seek profit and to use resources effectively
with a return on assets employed which is ABOVE the
Cost of Capital.
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3.5 Human Problems
a. Budget and cost targets are devices to achieve
objectives in an organization.
b. Cooperation is the key. Willingness to participate and
become involved discourages individual and group
opposition to Top Management.
c. People generally say that they do no like targets or
budgets but in practice such targets help people - and
give them great satisfaction.
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3.5 Human Problems (Continued)
d. Motivation is vital. Help managers and workers to
reconcile head office, local and personal priorities.
Motivation is complex, but in the long term: challenge,
responsibility and achievement are effective!
Similarly trustworthiness, trust, empowerment and
alignment, can provide a motivating organizational
environment.
NOTE: Other methods may achieve the results to survive
today without developing anyone for the future! (i.e.
fear, money and KITA)
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3.6 Cost Reduction
Every cost can be reduced over time by:
a.
b.
c.
d.
Economy
Technological advance
Cutting out operations
Planning
Compare activity five years ago to activity today, to
indicate the past potential for cost savings. Then treat
future cost saving as a normal part of management not an exceptional operation.
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3.6 Cost Reduction (Continued)
Costs grow naturally unless specific efforts are made to
reduce them. Staff should not be "happy" but should be
motivated towards meeting their personal needs, with
increasing efficiency and effectiveness.
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3.7 Cost Reduction Routine
Develop the attitude of cost control and cost reduction
every year! Budget cost reductions every year. Make
critical examination to consider systematically the
application of the following concepts to each area of
operations:
a.
b.
c.
d.
Elimination
Combination
Changing sequence
Simplification
Revise standards to enforce technical improvements
every year!
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3.7 Cost Reduction Routine
(Continued)
Set up cost reduction teams using the tools of value
analysis, O&M, operational research, waste
reduction audit, strategic cost management etc. top
cut costs.
Use a creative approach to cost cutting and avoid
routine blocks.
Lateral thinking and brain storming are particularly
useful for developing new ideas to cost control
problem solving without EI (emotional investment).
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3.8 Cost Reduction - Crash
Programs
Financial crises lead to crash programs for
"restructuring", re-engineering, cost reduction etc.:
a. Less essential departments - eliminated
b. Reduction of staff by a flat 20% - forces
managers to reconsider priorities.
c. Action teams with specific financial targets
achieve "miracles" in cost reduction.
d. Cost reduction done quickly so that staff may
readjust to the new situation.
e. Strategy of "cost surgery" is not to continue an
insecure position too long, but to cut rapidly and
clearly, so as to re-establish CONFIDENCE in the
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company.
3.9 Types of Reports
a. Cost statements may show:
Cost of each job or unit of production or product group.
Overhead cost of one section or departments
Cost of the whole business
Operating results of divisions or the whole business.
b. Timing of reports relates to ability of managers to
control operations and make decisions - to actually do
something with the data.
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3.9 Types of Reports (Cont.)
c. Reports indicate actual cost against a (one only)
standard, not several different standards.
d. Reports signal significant exceptions rather than
every item.
e. Cost reports should show:
1. What is significant
2. How figures compare with standard of
performance
3. What were the cause of significant differences
4. Who is responsible
5. What action should be taken.
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3.10 Functions of the Controller
a. Controller is the key accounting manager in the
company; unless he is part of the management
team he becomes a scorekeeper.
b. Engineers may be better controllers than
accountants because they are not prejudiced
by the attitudes of auditing and accounting.
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3.10 Functions of the Controller
(Continued)
c. Controller functions include:
1. Design and planning control systems (often with
consultants) with periodic RESEARCH, revision
and rethinking to meet developing needs.
Note: No system works effectively forever because the environment changes in terms of:
technology, economy, policy, education,
sociology, politics etc,. therefore the strategy
organization and control systems must change.
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Question
Cost reduction can usually be achieved by all of
the following except:
a.
b.
c.
d.
elimination
direct costing
combination
simplification
b
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Question
Continuous cost reduction programs are
necessary because:
a.
b.
c.
d.
we need more profit
managers are careless
costs grow naturally over time
taxes are increasing
c
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3.10 Functions of the Controller
(Continued)
2. Information recording, storage and retrieval.
3. Reporting
4. Aid to mangers in developing and using the data
effectively - they are his "customers"!
5. Encouraging an organizational environment in which
the control system functions creatively and NOT
defensively.
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3.10 Functions of the Controller
(Continued)
NOTE:
Controller should encourage cost control and
reduction as a key factor in avoiding waste of
resources and achieving the objectives of EVA for
ALL of the STAKEHOLDERS ... customers,
employees, owners, suppliers, managers, TU's,
NGO's, government, community etc.
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3.11 Cost Control and Reduction
Cost reduction on an ad-hoc basis can be only minimally
effective.
Set up a five year planning system for effective use of
resources. Integrate the cost control and budgetary
system.
Think of cost reduction in terms of total management
control - rhythmic, continuing integrated operation.
Create an attitude of mind for cost reduction, a continual
seeking for better standards of performance. Cost
reduction is not really a technical problem at all - it
is a HUMAN PROBLEM!!!
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3.12 Waste Reduction Audit
Waste reduction audit (WRA) investigates material inputs
and outputs for each process, to identify waste and
achieve cost savings by waste reduction, re-use and
recycling (Exercise later).
WRA is usually very profitable!
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3.13 Strategic Cost Control
Strategic cost management (SCC) starts with the cost
structure of the enterprise in terms of fixed and variable
costs to identify and reinforce only those activities that
"add value" (EVA) to the operations of the enterprise
It creates environmental motivation within the
organization which motivates managers to seek higher
levels of cost efficiency and effectiveness.
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Question
Cost reports may be more useful in controlling
costs if such reports are submitted:
a.
b.
c.
d.
annually with absolute accuracy
semi-annually
monthly with absolute accuracy
rapidly with reasonable accuracy
d
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... and that ends the study ... do it again? ...
... or on we go .... are you ready ...?
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4. Key Learning Points
(Total time - 20 Minutes)
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4.1 Instructions
Relax ... but study carefully. Read each note with your
partner ... with emotion ... use a variety of tones to try to
convince your the partner (do it alternately) ... show
how each point is ... valid ... practical ... related by
example to you your ownexperiences ...
Review the glossary as necessary.
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Question
If we buy goods for ECU 4 and sell half of them
immediately for ECU 6, retaining the remainder for sale
later, our profit to date is:
a.
b.
c.
d.
ECU 2
ECU 4
ECU 8
impossible to compute
… now write your answer and then click for ours ...
b
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4.2 Cost Reduction and Cost
Control Initiatives
Cost reduction is a key objective of cost accounting and
control, with new CCI's (Cost Control Initiatives)
becoming continually evident.
Every cost can be reduced over time by: economy,
technological advance, cutting operations and planning.
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4.3 Opportunities
Compare operations five years ago with today, to
indicate the past potential for cost savings.
Then treat cost saving as a normal part of management.
Costs grow naturally unless controlled.
Managers should not be "happy" but motivated towards
cost reduction.
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4.4 ABC as a Motivator
Activity based costing (ABC) recognizes that with
increasing automation, direct labour may be only 10% of
manufacturing cost.
Thus other "cost drivers" should be used to allocate
overhead, to get a more useful product cost, which
motivates managers ...
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Question
7. The system of cost accounting chosen for a
particular business should:
a. be the same as that for other firms in the
same industry
b. relate to the product
c. relate to the organization of the business
d. relate to the product and organization of the
business
… now write your answer and then click for ours ...
d
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4.4 ABC as a Motivator
(continued)
ABC motivates managers to reduce "non-value-added"
activities in: design, purchasing, receiving, storage, handling,
inspection, processing etc. using "bench-marking" and reengineering
techniques.
ABC is justified when management is not motivated by other
cost control systems and there is significant variation in:
product volume, mix, size, complexity, materials, set-up, parts
etc. such that direct labor or machine hours are not good "cost
drivers".
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4.5 JIT as a Motivator
Just In Time (JIT) inventory control by major companies
reduces inventory holding and handling charges, through
managed supplier relationships.
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4.6 Standard Costing as a
Motivator
Standard cost accounting (SCA) provides engineering
standards of product cost and allows variances with actual
cost to be associated with price, efficiency and volume
analysis.
Standards used to be set by engineers ... now the market
tells the engineers what the standard must be!!
"Backflush accounting" uses standards to simplify
accounting forwork in process and finished goods, and
relies heavily on physical controls of efficiency e.g. number
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of defective parts, waste quantities etc.
4.7 Waste Reduction Audits as a
Motivator
Waste reduction audits (WRA) investigate material inputs
and outputs for each process, to identify waste and achieve
cost savings by waste reduction, re-use and recycling.
WRA is profitable - since waste = inefficiency!
Waste is a resource ... in the wrong place!
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4.8 Strategic Cost Control as a
Motivator
Strategic cost control (SCC) starts with the cost structure of
the enterprise in terms of fixed and variable costs to reinforce
only those activities that "add value" to the operations of the
enterprise. EVA!!!
It creates environmental motivation within the organization
which motivates managers to seek higher levels of cost
efficiency (doing things right) and effectiveness (doing the
right things).
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4.9 Overall
THE KEY TO COST REDUCTION IN BOTH
MATERIALS AMND SERVICES IS MANAGEMENT
MOTIVATION ...
EVERY COST CAN BE REDUCED ... WITH
TECHNOLOGY ... WITH TIME ... AND ... WITH ...
CREATIVE MANAGEMENT ...
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Question
Cost reduction can usually be achieved by all of
the following except:
a.
b.
c.
d.
elimination
direct costing
combination
simplification
… now write your answer and then click for ours ...
b
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Question
10. Continuous cost reduction programs are necessary because:
a. we need more profit
b. managers are careless
c. costs grow naturally over time
d. taxes are increasing
… now write your answer and then click for ours ...
c
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5.Learning Maintenence
(Total time - 20 Minutes)
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Question
19. A cost driver is:
a.
b.
c.
d.
An activity based method of allocating overhead
A fully qualified chauffeur.
Anything except direct labour
A part number.
a
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5.1 Overall
… so much for the study ... and now for a little CLE
… before the the test …and the lunch ...
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5.2 Relax and Review
1.
Now is the time to review the morning …
2.
Relax ... close the eyes and think about ... what you
have learned was it hard? ... fun? ... what difficulties#
are you beginning to experience and overcome ... D
above all, how you "feel about the learning" at this 5
particular moment?
3.
Did the partner help?
… and so on we go ...
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5.3 Post-test - just for fun …
NOW A LITTLE POST-TEST TO SEE HOW MUCH
YOU HAVE LEARNED ABOUT THE AREA AT THE
END OF THE PROGRAM ... CHOOSE ABOUT 20
QUESTIONS ... AT RANDOM ...
SPEND ONLY 15 MINUTES ... FOUR HOURS
ALMOST GONE ... TO COMPLETE THE WHOLE
PROGRAM IN A MORNING!
Click on quiz below … READY ... STEADY ....GO ...
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5.4 Learning Maintenance
Now for Learning Maintenance ... to retain the learning
achieved ... from today ... would you ... please ... take a
little time each day to:
a. Print the text from file LM.doc (Word Arial 12
point.
b. Trace the program learning book: Basic Cost
Accounting - Boland (Hodder- Headline) or a
CAI version awailable from us. on request.
c. Play the Learning Recall tape (audio - 30 minutes)
available from us on request.
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5.4 Learning Maintenance
(continued)
d. Use this program for:
1. EXERCISES - three challenges ...
2. REPETITION OF PART I AND PART II at high
speed in 37 minutes.
3. GLOSSARY - review
4. QUIZ - do the full quiz of 100 questions.
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Question
The key justification for ABC is usually:
a.
b.
c.
d.
A new child
A new controller.
A new automation
A new computer
c
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5.5 Final Notes
1. Do you remember the objectives of the program ...
way back :
a. To use the language and concepts of cost control and
to explore the potential of outsourcing for
continuous cost redcuction.
b. To compute the cost of products, services and
organizational units.
c. To interpret cost data and cost accounting
reports.
d. To identify CCI's (Cost Control Initiatives) in the
current operations of the organization
e. To motivate further study in the future.
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5.5 Final Notes (Continued)
2.
Did you achieve them?
Are you not a little surprised by …
how well you could learn ...
with the right partner and approach
.... you did it all yourself ... well done!!
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5.5 Final Notes (Continued)
3. You will retain and expand the KSA (knowledge,
skills and attitudes) that you have acquired from
the program … you do the "Learning Maintenance
Routine"
… and you also seek out every opportunity to
use what you have learned ... every day ...
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5.5 Final Notes (Continued)
4. AGL (Autonomous Group Learning) programs are
group-based 2/3 day management training seminars
designed by ex-professors from INSEAD/IMD/GSB
Cranfield, and have been used in over 20 countries
around the world in several languages for over
50,000 managers …
... designed to be intensive ... but to be fun ...
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5.5 Final Notes (Continued)
5. That is about enough for now ... except …
Read the WSJ (Wall Street Journal) every day
... it is as good as an MBA program in finance.
Thank you for working so hard ...
For our research on learning efficiency and
effectiveness … please send us an email
robertboland@wanadoo.fr or to:
Chemin Garenne, Prevessin, 01280 France.
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5.5 Final Notes (Continued)
6. Good luck with cost control ... send us your
mini-cases ...
But remember cost control is no good if it destroys
the the organization ...
… we need to build organizations where good
communication ensures effective management …
… and where ...
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5.5 Final Notes (Continued)
… the values of:
individual
inter-personal
managerial
organizational
-
trustworthiness
trust
empowerment, and
alignment ...
… become the "norms" of the organization ... and
when these are the "shared values" of all stakeholders
... then cost control becomes easy ... because
everyone is motivated ... everyone cares ...
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5.5 Final Notes (Continued)
7. So good luck to you … and bye for now ...
Dr Bob Boland and team
September 2000
P.S. The exercises are a challenge .. for
another day ...
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6. Exercises
(Total time - 60 Minutes)
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6.1 Waste Reduction Audit
Waste reduction audit (WRA) investigates material inputs
and outputs for each process, to identify waste and
achieve cost savings by waste reduction, re-use and
recycling.
WRA is essentially a "materials balance" conducted at an
individual industrial facility, to see what comes into the
plant, to see what goes out, and to make sure that
resources are not being wasted.
The "materials balance" demonstrates the opportunities
for reducing the use of resources: water, chemicals,
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materials, gases, energy etc.
6.1 Waste Reduction Audit
Waste and cost reduction is achieved by: changes in
materials, processes, products, recycling and on/off-site
disposal arrangements, and above all by better
"housekeeping".
WRA is a highly cost-effective technique which follows
material inputs into the production process and accounts
for them quantatively, in any form (solid, liquid, air) to
identify losses due to waste which can then be reduced.
The "Phases" of a WRA are described in Exhibit A (which
follows).
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6.1 Waste Reduction Audit
In a new area start with pilot project with five
enterprises, and carefully DEMONSTRATE that WRA can
be cost effective and profitable to both the "highly
efficient" and "less efficient" companies.
Advantages - often immediately profitable for the
enterprise and most appropriate at plant level.
Disadvantages - some changes may require excessive
capital investment at high risk; not a substitute for
annual external environmental compliance auditing.
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6.2 Phases of WRA
A. PHASE 1 - PRE-ASSESSMENT:
1. Audit focus and preparation.
2. Listing unit operations
3. Constructing process flow diagrams
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6.2 Phases of WRA
B. PHASE 2 - MATERIAL BALANCE:
PROCESS INPUTS AND OUTPUTS
4. Determining inputs
5. Recording water usage
6. Measuring current levels of waste
reuse/recycling
7. Quantifying process outputs
8. Accounting or waste water
9. Accounting for gaseous emissions
10. Accounting for off-site wastes
11. Assembling input and output information
for unit operations
12. Deriving a preliminary material balance for
unit operations
13. Evaluating the material balance
14. Refining the material balance
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6.1 Phases of WRA
C. PHASE 3 - SYNTHESIS
15.
16.
17.
18.
19.
Examining obvious waste reduction measures
Targeting and characterizing problem wastes
Segregation
Developing long term waste reduction options
Environmental/economic evaluation of waste
reduction options
20. Developing and implementing an action plan:
reducing wastes and increasing production
efficiency
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6.1 Waste Reduction Audit
Write the answers to the following questions
(true/false):
1. WRA confirms the environmental concept that
pollution prevention always pays.
2. Many multi-national companies are achieving
significant cost savings through continuous WRA's.
3. Cost reduction in WRA is achieved by changes in
materials, processes, products, and recycling.
4. Significant waste and cost reduction can be
achieved with improved "housekeeping".
5. When governments introduce PPP (polluting party
pays) legislation, then WRA will be profitable both
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for business and environment.
6.1 Waste Reduction Audit
Answers: F T T T T
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6.2 Strategic Cost Managewment
Strategic cost management (SCC) starts with the cost
structure of the enterprise in terms of fixed and variable
costs to identify and reinforce only those activities that
"add value" to the operations of the enterprise.
SCC seeks motivating "cost drivers" for these critical
"added value" activities thereby seeking "competitive
advantage" for the enterprise in the market.
Under SCC cost accounting should be action-oriented
with "timely data" to support cost reduction by: scorekeeping, focussing attention on critical areas and
providing relevant data to assist in problem solving. 255
6.2 Strategic Cost Managewment
Such timely "feedback" motivates cost reduction by
change of goals, methods, forecasts, processes,
rewards and it stimulates managers to find new
alternatives (CCI's).
SCC sets a clear organization structure of cost, profit
and investment responsibility centers. It sets standards
and reporting with a "free-flow information system"
whereby information is not "filtered" before it reaches
all levels of management, but goes directly from the
controller to the managers concerned.
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6.2 Strategic Cost Managewment
SCC creates "environmental motivation" within the
organization which motivates managers to seek higher
levels of cost efficiency and effectiveness. In SCC the
key to cost accounting, control and reduction is
"management motivation".
Special studies of the cost structure of a product may
reveal useful data for management decision-making,
such as the cost analysis which tries to associate all
costs (from research to distribution) very directly with
a particular product or product group:
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6.2 Strategic Cost Managewment
Variable Fixed
R & D - ECU
20
60
Design
15
35
Manufacture
90
30
Marketing
30
15
Distribution
25
10
Total product cost 250
150
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Total
80
50
120
45
35
400
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6.2 Strategic Cost Managewment
Write down and justify (true/false):
1. The critical issue in strategic cost accounting is to
identify the critical activities that add-value.
2. Under SCC cost control reports may have to be
delayed until six weeks after the month end, to ensure
that they are "absolutely accurate" because
"inaccurate cost data is dangerous".
3. Company buys containers but the normal supplier
quotes price increases of 25%; the company now has
at least seven alternatives courses of action.
4. Under SCC the analysis of the cost structure of an
enterprise, may indicate whether ABC would be more
appropriate than labour based cost accounting.
5. Strategic cost accounting requires both routine cost
reports and special cost analyses for particular
purposes.
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6.2 Strategic Cost Managewment
Answers: T F T T T
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6.3 Cost Reduction Programs
Every cost can be reduced over time by:
economy,
technological advance, cutting operations and
planning.
Compare activity five years ago with today to
indicate the past potential for cost savings. Then
treat cost saving as a normal part of management.
Costs grow "naturally" unless controlled.
Managers should not be "happy" but "motivated
towards increasing efficiency.
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6.3 Cost Reduction Programs
Develop attitudes for cost control and reduction
every year.
Budget for cost reduction every year.
Examine each area of operations for possible:
elimination, combination, changing sequence and
simplification.
Revise standards to enforce technical improvements
every year.
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6.3 Cost Reduction Programs
Set up cost reduction teams using such tools as:
O & M, operations research, ABC, JIT, standard
costs, strategic cost management etc. to cut
costs.
Use a creative approach to avoid routine blocks;
use lateral thinking and brain storming to develop
new ideas for cost control problem solving.
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6.3 Cost Reduction Programs
Other cost reduction techniques include:
1.
New standard costs - related to market needs
rather than engineering, thus requiring
simplification and change in: materials, number of
parts, number of set- ups, processes, products,
packaging etc.
2.
Direct labour and overhead cutting by adopting
increased automation.
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6.3 Cost Reduction Programs
3. Development of profit centers for manufacturing,
marketing and sales units, with transfer prices to
motivate "profit orientation"
4. Strategic purchasing management to get benefit
from "make v buy" opportunities from design to
distribution of all products.
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6.3 Cost Reduction Programs
Cost reduction may use the "six C's" approach involving:
1. Controls - timely reporting of actual and against
target
2. Compensation - reward and punishment systems
that provide economic incentives
3. Change process - welcome for change in materials,
processes, plant, products, marketing, distribution
and disposal of products
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6.3 Cost Reduction Programs
4. Continuous education for management to stimulate
new ideas and ways of thinking about problems
5. Champions - publication of results by specific units
that achieve exceptional results.
6. Commitment - to cost reduction every year as a
normal task of every operating manager
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6.3 Cost Reduction Programs
Cost accounting should be action-oriented with
"timely data" to support cost reduction by: scorekeeping, focussing attention on critical areas and
providing relevant data to assist in problem
solving.
Such timely "feedback" motivates cost reduction
by change of: goals, methods, forecasts,
processes, rewards and it stimulates managers to
find new alternatives (CCI's).
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6.3 Cost Reduction Programs
Financial crises may require "crash" programmes
whereby: less essential departments are eliminated,
staff are reduced by a flat 20% to force managers to
rethink activities that "add value".
Action teams get specific targets to perform "miracles"
of cost cutting, and a strategy of "cost surgery" is to
cut rapidly and clearly, so as to quickly re-establish
confidence in the organization.
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6.3 Cost Reduction Programs
For cost reduction programmes the routine cost
accounting reports are never adequate.
Thus special relevant cost studies and reports
must be prepared to help with decision-making.
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6.3 Cost Reduction Programs
Write down and justify (true/false):
1. Cost reduction is much harder in older industries.
2. Standards set by good engineers should not be
changed by market considerations.
3. The five C's are: compensation, champions,
change process, continuous training, controls and
commitment.
4. Waste reduction benefits the environment and
company profits.
5. Management training for cost reduction is "costeffective" in all industries.
6. All fixed costs are variable over time.
7. Cost reduction under financial crisis must be
perceived by management as fair.
8. All costs grow naturally over time.
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6.3 Cost Reduction Programs
Answers: F F T T T T T T
... bye for now ... you are doing so well now …
… good luck … with all the learning maintenance …
… which couldl serve for a lifetime …
kindest … BB and Team September 2005
P.S. For help … robertboland@wanadoo.fr
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