Institute of Management Sciences, Lahore

Final Project COST AND MANAGEMENT ACCOUNTING

HOW TO CONTROL COST Of ANY MANUFACTURING CONCERN

Submitted by: Wasay Khalid Khurram Majid Ehsan Arslan Khan Muhammad Imran Naveed Iqbal Submitted to: 102420 103412 103 102 103407

Prof. Syed Zia-ul-Hassan Shamsi

Introduction:

Now-a-days managements are facing problems of survival because of acute competition. Only those organizations can meet the competition effectively and have a hold on the market which is in a position to keep their cost minimum. For this purpose every company is implementing cost accounting principles to minimize cost as much as possible. In the following discussion main key elements of cost control are discussed that can be implemented so that a manufacturing concern can achieve cost control in its entire business.

Cost Accounting:
Cost is a forgoing measured in monetary terms incurred and potentially to be incurred to achieve a specific objective. In business, cost is usually a monetary valuation of effort, material, resources, time and utilities consumed, risks incurred, and opportunity forgone in production and delivery of a good or service. Cost control, also known as cost management or cost containment, is a broad set of cost accounting methods and management techniques with the common goal of improving business cost-efficiency by reducing costs, or at least restricting their rate of growth. Businesses use cost control methods to monitor, evaluate, and ultimately enhance the efficiency of specific areas, such as departments, divisions, or product lines, within their operations. The basic objective of accounting is to provide information which is useful for persons inside the organization (i.e. owners, management and employees) and for persons or groups outside the organization (i.e. investors, creditors, Financial government, consumers etc.). The needs of the majority of the users of accounting information can be satisfied by financial accounting. statements are concerned with the past whereas the managements main interest lies not in past but in future. It is mainly concerned with planning and controlling, preparation of various budgets, such as sales budget, production budget, cash budget, capital expenditure budget, etc. is an important part of planning and preparing various budget is an important aspect of Cost Accountancy. Controlling is the function of seeing that programmers laid down

in various budgets are being actually achieved i.e. actual performance is compared with the budgeted performance, enabling the managements to exercise control in case of weak performance.

Important Cost Systems used for cost allocation and Control Job-order cost system
It is often called process cost system is used to assign costs to manufactured products for the purposes of controlling costs and costing products. A job-order cost system accumulates costs of material, labor, and manufacturing overhead

expense by specific orders, jobs, batches, or lots. Job-order cost systems are widely used in construction, furniture, aircraft, printing, and similar industries where the costs of a specific job depend on the particular order specification.

Process costing:
Is an accounting methodology that traces and accumulates direct costs, and allocates indirect costs of a manufacturing process. Costs are assigned to products, usually in a large batch, which might include an entire month's production. Eventually, costs have to be allocated to individual units of product. It assigns average costs to each unit, and is the opposite extreme of Job costing which attempts to measure individual costs of production of each unit. Process costing is usually a significant chapter.

It is used by companies whomanufacture products through continuous-flow systems or on a mass-production basis. Industries that use process cost systems include chemicals, petroleum products, textiles, cement, glass, mining, and many others. In a process cost system, costs for a department or process are accumulated. Per-unit costs are obtained by dividing the total departmental costs by the quantity produced during a given period in the department or process.

Activity Based Costing

Using activity based costing (ABC) information to support organizational strategy improve operations and manage cost is called activity based management or ABM. Activity-based costing (ABC) is a special costing model that identifies activities in an organization and assigns the cost of each activity with resources to all products and services according to the actual consumption by each. This model assigns more indirect costs (overhead) into direct costs compared to conventional costing models. With ABC, an organization can soundly estimate the cost elements of entire products and services. That may prepare decisions on either identify and eliminate those products and services that are unprofitable and lower the prices of those that are overpriced (product and service portfolio aim) or identify and eliminate production or service processes that are ineffective and allocate processing concepts the lead to the very same product at a better yield (process reengineering aim). In a business organization, the ABC methodology assigns an organization's resource costs through activities to the products and services provided to its customers. ABC is generally used as a tool for understanding product and customer cost and profitability based on the production or performing processes. As such, ABC has predominantly been used to support strategic decisions such as pricing, outsourcing, identification and measurement of process improvement initiatives.

Budgeting:
A budget is a list of all planned expenses and revenues. It is a plan for saving and spending. A budget is an important concept in microeconomics, which uses a budget line to illustrate the trade-offs between two or more goods. In other terms, a budget is an organizational plan stated in monetary terms. In summary, the purpose of budgeting is to: 1. Provide a forecast of revenues and expenditures, that is, construct a

model of how our business might perform financially if certain strategies, events and plans are carried out. 2. Enable the actual financial operation of the business to be measured against the forecast. The budget of a company is often compiled annually, but may not be. A finished budget, usually requiring considerable effort, is a plan for the shortterm future, typically one year, while traditionally the Finance department compiles the company's budget, modern software allows hundreds or even thousands of people in various departments (operations, human resources, IT, etc.) to list their expected revenues and expenses in the final budget. If the actual figures delivered through the budget period come close to the budget, this suggests that the managers understand their business and have been successfully driving it in the intended direction. On the other hand, if the figures diverge wildly from the budget, this sends an 'out of control' signal, and the share price could suffer as a result.

Budget Types:
Sales budget: The sales budget is an estimate of future sales, often broken down into both units and dollars. It is used to create company sales goals. Production budget: Product oriented companies create a production budget which estimates the number of units that must be manufactured to meet the sales goals. The production budget also estimates the various costs involved with manufacturing those units, including labor and material. Cash Flow/Cash budget: The cash flow budget is a prediction of future cash receipts and expenditures for a particular time period. It usually covers a period in the short term future. The cash flow budget helps the business determine when income will be sufficient to cover expenses and when the company will need to seek outside financing. Marketing budget: The marketing budget is an estimate of the funds needed for promotion, advertising, and public relations in order to market the product or service. Project budget: The project budget is a prediction of the costs associated with a particular company project. These costs include labor, materials, and other related expenses. The project budget is often broken down into specific tasks, with task budgets assigned to each.

Revenue budget: The Revenue Budget consists of revenue receipts of government and the expenditure met from these revenues. Tax revenues are made up of taxes and other duties that the government levies. Expenditure budget: A budget type which include of spending data items.

Cost Control
Now-a-days managements are facing problems of survival because of acute competition. Only those organizations can meet the competition effectively and have a hold on the market which is in a position to keep their cost minimum. Cost control can be defined as: The regulation by executive action of the cost of operating an undertaking particularly where such action is guided by cost accounting. The terms regulation and executive action indicates conscious attempt of regulating the cost on the basis of predetermined ideas about what cost should be. It is only when costs are predetermined i.e. a system of standard costing is in operation, that cost control measures can give their best. Thus, cost control aims at reducing inefficiencies and wastages and setting up predetermined costs and in achieving them. Cost control is executed through setting standards or norms or targets and comparing actual performance therewith with a view to ascertaining derivatives from set targets or norms or standards and taking corrective action to ensure that future performances conforms to the set standards or norms or targets. For an effective system of cost control, the firm should have a definite plan of organization. Authority and responsibility of each executive should be clearly defined. Targets for performance of work as well as the cost to be incurred for the purpose should be laid down for each area of responsibility so that

responsibility may be fixed for the deviation of actual cost from the predetermined cost. Cost Control Application a complex business requires frequent information about operations in order to plan for the future, to control present activities, and to evaluate the past performance of managers, employees, and related business segments. To be successful, management guides the activities of its people in the operations of the business according to pre-established goals and objectives. Management's guidance takes two forms of control: (1) the management and supervision employees. behavioral While employee of behavior, behavior and (2) the impacts and evaluation on of performance. Behavioral management deals with the attitudes and actions of ultimately issues success, not management involves certain assumptions

applicable to accounting's control function. On the other hand, performance evaluation measures outcomes of employee's actions by comparing the actual results of business outcomes to predetermined standards of success. In this way management identifies the strengths it needs to maximize, and the weaknesses it seeks to rectify. This process of evaluation and remedy is called cost control. Cost control is a continuous process that begins with the proposed annual budget. The budget helps: (1) to organize and coordinate production, and the selling, distribution, service, and administrative functions; and (2) to take maximum advantage of available opportunities. As the fiscal year progresses, management compares actual results with those projected in the budget and incorporates into the new plan the lessons learned from its evaluation of current operations. Control refers to management's effort to influence the actions of individuals who are responsible for performing tasks, incurring costs, and generating revenues. Management is a two-phased process: planning refers to the way that management plans and wants people to perform, while control refers to

the procedures employed to determine whether actual performance complies with these plans. Through the budget process and accounting control, management establishes overall company objectives, defines the centers of responsibility, and determines specific objectives for each responsibility center, and designs procedures and standards for reporting and evaluation. A budget segments the business into its components or centers where the responsible party initiates and controls action. Responsibility Centers represent applicable organizational units, functions, departments, and divisions. Generally a single individual heads the responsibility center exercising substantial, if not complete, control over the activities of people or processes within the center and controlling the results of their activity. Cost Centers are accountable only for expenses, that is, they do not generate revenue. Examples include accounting departments, human resources departments, and similar areas of the business that provide internal services. Profit centers accept responsibility for both revenue and expenses. For example, a product line or an autonomous business unit might be considered profit centers. If the profit center has its own assets, it may also be considered an investment center, for which returns on investment can be determined. The use of responsibility centers allows management to design control reports to pinpoint accountability, thus aiding in profit planning. A budget also sets standards to indicate the level of activity expected from each responsible person or decision unit and the amount of resources that a responsible party should use in achieving that level of activity. A budget establishes the responsibility center, delegates the concomitant responsibilities, and determines the decision points within an organization. The planning process provides for two types of control mechanisms: 1. 2. Feed forward: providing a basis for control at the point of action (the Feedback: providing a basis for measuring the effectiveness of control decision point); and after implementation.

Management's role is to feed forward a futuristic vision of where the company is going and how it is to get there, and to make clear decisions coordinating and directing employee activities. Management also oversees the development of procedures to collect, record, and evaluate feedback.

Techniques and Ways for Controlling Costs

The first step in the cost control management is to find out the cost centers and arrive at a conclusion in how much percentage they differ or vary from the standards of the industry. It is also important to study how the close competitors of your company manage to control their costs and in turn, maximize their profits. Before discussing about the cost control methods or the cost control techniques, it is very important to carry out a very proper cost analysis. The costs incurred by all the departments of the company should be considered so that, you can chalk out some smart cost control strategies to overcome these financial problems. It is very important to find out the exact and relevant reasons for why the costs of the company are more than the standards adhered to by the industry. The most important of all the cost control techniques is to appoint a small team of highly qualified and experienced people well versed in the financial management team to manage the daily finances of the company in a very professional and systematic manner. The finance team should take correct decisions in favor of the company and opt for less expensive materials and resources for the company without compromising on their quality. You should be very clear about the number of employees you require for a particular project. There are many companies who find it difficult to earn decent profits as their employee count is way beyond the necessity. You can also consider the idea of recruiting employees on contract basis to cut down your costs. While deciding how much salary to pay to a particular employee, you need to be very careful. You should decide the salary strictly on the basis of overall

performance. Instead of giving awards to the employees in the form of frequent salary hikes, you should give out bonuses to eligible employees. Following practices recommended in cost method of accounting may benefit your company. The cost control software can be helpful in doing the work in comparatively less time and with more accuracy. In the times of recession, many firms resort to cost control techniques such as reducing the extra facilities to the employees such as the recreational facilities. The cost control techniques might also include cutting down the expenditure incurred on traveling by air and luxury hotel accommodations in order to harness the cash flow. As a part of the cost cutting measure, few firms may postpone or cancel their plans of acquiring new companies, investing in new businesses and buying new machinery or systems. The cost control techniques should be utilized to save cash and bring back the financial strength of the company. The cost control techniques used by different organizations are different and are largely dependent on their business model and strength of their balance sheet. The better the implementation of these techniques, the better would be the future of the concerned organizations.

Cost Control Methods

Business managers throughout the world fight a never ending battle against rising costs. Cost control methods are constantly being derived, developed, deployed and discarded, in order to reduce the cost of all operations Any business or corporation has to encounter difficulties, which are practical, financial as well as technical. The ones that survive these difficulties live to tell their stories of success. The following are some simple successful cost control methods.

Review and Modify Business Model: There is a great, economically and commercially successful business model that is used to lay down the foundations of any company. The business model must be however subject to small and big changes. It means as a manger, you should subject the business model to changes according to your competitors actions and markets status. By the term change, I also mean that you should be upgrading and improving all possible business operations. You need to come up with new process and procedures to reduce costs.

Daily Updates: One of the best ways to start controlling costs it to have daily updates of production, all possible long and short term expenditures. Divide all these expenditures, even the ones such cost of machinery or insurance, and sales, by the number of working days. This will give you a concrete figure of the total amount that has been spent. Similarly after sales of your goods or services, you may also divide the total amount of sales by the number of working days. This will give you a micro figure about the daily expenditure and sales. It will definitely help you to zero down on all possible cost problems that you incur. Uniformity: Cost control management is all about deriving the best outputs in a least cost. Hence, set up a highly efficient and specialized stores department which will oversee all purchases. You may also take a risk and make long term agreements regarding the quality and quantity of materials that are being supplied to your manufacturing process. This uniformity will ensure a timely, cheap and assured supply of raw materials.

Time Planning: Time is money! Well divide the amount of wages that you give out with the number of work hours per month. Explain to the employees per hour

expenditures that you incur, and hence the necessity for time management. You may also install good cost control systems, in order to help your employees to manage their work hours well. Cost control software will also work wonders in the finance and accounts department.

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

Cost Method of Accounting Cost Control Management

In order to have a set of good cost control methods at your disposal, you need to think creatively and effectively. You will also need to think about all the dimensions of expenditures such as time dimension, long and short term expenditures, per capita wage expenditure, etc. You can also consider all macro and micro costs. For example, the cost of running one team in comparison to the cost of all teams, or the cost of running one team compared to the revenue generated by the same team. Cost Control Strategies Every organization should have a few cost control strategies in place. If the overall cost of working is controlled, then it is obvious that the overall earnings for the company are increased. Cost control strategies are a part of financial management. However, as a concept, you don't need to be a finance brainier to understand it. Hence, here I am, a non-finance background entrepreneur, explaining to you about cost control strategies. I am not going to get into the detailed explanation of how these strategies work in synchrony with the economy. I am simply going to help my fellow entrepreneurs to control their cost, and the students, to understand the concept.

Cost Control Strategies: Cost Control Definition As per the business dictionary, cost control can be defined as, "Application of (1) investigative procedures to detect variance of actual costs from budgeted costs, (2) diagnostic procedures to ascertain the cause(s) of variance, and (3) corrective procedures to effect realignment between actual and budgeted costs." In simple terms, cost control is a procedure to see if the company is spending more or less than its budgeted amount. If yes, then to know the reason behind the increase or decrease of expenditure. Further, it works at finding a way to make the actual cost and the budgeted cost meet. Cost control management also takes care of the same arena of work. Cost Control Strategies: Cost Control Methods Now that we have seen the basic definition of cost control, how will we go about doing it. Such as, one can keep an eye over the numbers, but how can one go about controlling them? Here are a few cost control techniques and measures that one can use to keep the cost in control. Do not have a very big team over looking the finances Why do most companies have small finance teams? Because, the smaller the finance team, the lesser the disparities and misunderstandings. Make sure that all the checks are approved by one authority. This will help keep the expenses in control. Read more on glossary of accounting terms and definitions. Be frugal Frugality is often required. One needs to be wary of spending more than required. Make sure that you choose the least expensive option at all times.

Make sure that when traveling, modesty is maintained. Control salaries and overheads Keep a tight reign over salaries and overheads. Review the monthly overhead expense in comparison with the budget. Promise bonuses rather than salary hikes. Hire part-time personnel during summers and interns during internship seasons. Be creative Find different and less expensive ways to get certain jobs done. Get the suppliers involved in the cost cutting strategy. You can opt to team up with another friendly company in order to avail economy of scale. Sell excess supplies to smaller firms. This will help at reducing dumpster cost. Make use of cost control software to ensure more work in lesser time and man power. Read more on cost method of accounting. All these methods can help reduce the cost and maintain a higher profit margin. However, there are a lot of indirect costs that also need to be kept in check. Mostly, miscellaneous expenses are ignored. However, if the management chooses to keep this miscellaneous expenditure in control as well, the over all difference on the cost will be much more. This is where I sign off!! Hope this article helped you understand the basics of cost control strategies.

Conclusion:
In the light of above discussion it can be ascertained that only by controlling cost any manufacturing concern can achieve high profitability and market share. By implementing the above mentioned tools and techniques a manufacturing concern can be able to control and minimize its cost to achieve maximum gain and profit.