Cost Red. Final

COST ACCOUNTING

PROJECT ON COST REDUCTION

Submitted by : ABHINAV SHARMA 08/BBS/7142 SHREYA SHARMA 08/BBS/7134 TEJASVI AGARWAL 08/BBS/7143 B.B.S. III semester

To : MS. AANCHAL GUPTA Department of Business Studies

DEEN DAYAL UPADHYAYA COLLEGE

UNIVERSITY OF DELHI

DECLARATION This term paper is entirely based on the secondary data collected by us from various sources. This is hereby declared that this term paper is not a part of any partial / whole fulfillment of any other paper / course/ program offered by any other college / institute/ university than specified. ____________________ Abhinav Sharma 08/BBS/7142 DATE : Countersigned

_______________ Shreya Sharma 08/BBS/7134

(Ms. Aanchal Gupta)

__________________ Tejasvi Agarwal 08/BBS/7143

ACKNOWLEDGEMENT We feel very grateful and wish to thank all those who have helped us in giving a productive shape to our ideas in the form of this project. Firstly, our deepest gratitude to our teacher, Ms. Aanchal Gupta, Department of Business Studies, DDUC, for her invaluable support and guidance. Our heartfelt thanks to all the authors of the various articles referred to by us as well as to all those people who shared their valuable time and knowledge with us. This project would not be complete without thanking our institution “Deen Dayal Upadhyaya College” for giving us an opportunity to have an enriching experience in terms of this project.

TABLE OF CONTENTS S.No. 1 2 3 4 5 6 7 8 9 10 11

Topic MEANING SPECIAL FEATURES COST CONTROL VERSUS COST REDUCTION ORGANIZATION FOR COST REDUCTION COST REDUCTION PROGRAMME FIELDS COVERED BY COST REDUCTION PROGRAMME COST REDUCTION TECHNIQUES REDUCTION IN VARIETY OF PRODUCTS VALUE ANALYSIS IMPORTANCE OF VALUE ANALYSIS IN COST REDUCTION CASE STUDY

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

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

ii.

Reduction should be permanent: Cost reduction involves permanent reduction in the costs. Temporary reduction in cost is not taken as permanent reduction

iii.

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

SPECIAL FEATURES: 1. Unit cost required to be reduced by reducing the expenditure with respect to the given volume of output. 2. Unit cost is attempted to be reduced by increasing production i.e. production per unit of input (e.g. material, labour hour, per employee). It implies enhancement in the rate of yield or output, expenditure remaining the same.

COST CONTROL VERSUS COST REDUCTION Controlling the costs, already pre-determined on the basis of assumption of reasonable level of efficiency taking the past, present and future into account, is the main focus of the cost control. The actuals are tried to be bought within the ambit of targets. Cost accounting is primarily concerned with controlling the cost so that losses and wastages are eliminated or at least minimized to the extent possible. While cost reduction is entirely a matter which goes much beyond cost control and hence it is not synonymous with cost control at all, now cost accounting aims at cost reduction also, besides cost control. Cost reduction is a process which actually starts from where cost control ends. Management has to ponder over in terms of bringing down costs to levels lower than the targeted ones so as to face fierce competition and exist in this highly competitive business environment. How, without sacrificing quality or compromising with the utility of the products and services the cost can be permanently cut down, is the real objective of cost reduction. Thus, new ways and means are required to be desired, researches are to be carried out and management has to be innovative. The main distinctions between cost control and cost reduction are discussed below:

Basis

Cost Control

Cost Reduction

1. Objective

Cost Control aims at maintaining the cost in accordance with the established targets or standards.

2. Approach

Cost control locks dynamism since it aims to attain lowest possible costs under existing circumstances

3. Nature

Cost Control is a preventive function. Under it, costs are optimized before they are incurred

Cost reduction is directed to explore the possibilities of improving the targets or standards themselves. It challenges all standards and makes continuous efforts to better them Cost reduction is a continuous process and recognizes no conditions are permanent. It involves a continuous process of analysis and tries to find out new means to achieve reduction in costs Cost reduction is a corrective function. It operates even when an efficient cost control system exists. It pre-supposes that there is always a room for reduction in the achieved costs

4. Emphasis

In case of Cost Control, the emphasis is on the past. It aims at keeping the costs within the limits already set. In case the costs reach the target level, the objective of cost control is achieved

In case of Cost reduction, the emphasis is on the present and the future. The emphasis is not on what have been the costs but what could be possible improvements in the cost. Thus there is no end to cost reduction.

5. Assumptions

Cost Control assumes the existence of certain standards and norms which are not challenged.

Cost reduction assumes the existence of concealed potential savings in the standards or norms which are therefore subject to constant challenge or improvement.

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

ORGANIZATION FOR COST REDUCTION Cost reduction involves a real and permanent reduction in costs. It is a continuous process. Hence, it requires co-operation of all people at all levels. The environment in the organization should be made so congenial that healthy discussion takes place at all levels of management. The criticisms should be accepted in the right spirit with honesty and grace by all, so that the corrective action may be taken in time. This requires the formation of a separate Cost Reduction cell within the organization. The cell functions under the supervision and direction of a high powered authority known as the Cost reduction committee. The committee consists of responsible executives from various functions such as purchase, planning and design, production, sales, distribution, finance, research etc. the committee should chalk out a proper cost reduction programme and fix up responsibility of the executives to review the actual performance from time to time. The functions of the cost cell can be enumerated as follows: 1. It collects cost data from different departments 2. It invites suggestions from different executives for improvement and reduction of costs at the point of their occurrence 3. It creates cost reduction environment in the organization by emphasizing and explaining to the workers the importance of cost reduction and the benefits which will accrue to them 4. It invites the employees to participate in framing the schemes for controlling the costs at the point of their occurrence 5. It identifies areas where cost reduction is Necessary, Desirable, Possible and fixes the priorities 6. It frames policies, guidelines and issues directives for bringing changes in the product designs, introducing new products and new designs in consultation with technocrats for reducing the cost of production without impairing the quality. 7. It frames policies regarding reduction of costs in administrative and distribution divisions without adversely affecting their efficiency

COST REDUCTION PROGRAMME Cost reduction programme aims at improvement of human efforts at all levels of the organization which helps in reducing costs. It may be a short-term or a long-term programme. A short-term programme is undertaken for sorting out immediate problems; e.g. a problem involving controlling wastages and inefficiencies in a certain department which are likely to push up the cost and reduce the profit margin. Long-term cost reduction programme involves major reduction in costs and may also require capital expenditure. It involves setting up of the target return on capital employed and developing a scheme for its achievement through various cost reduction measures. The following are the essential requisites for successful implementation of a cost reduction programme: I. There should be a separate cost reduction cell responsible for proper planning and implementation of the cost reduction programme. II. There should be an efficient system of management reporting at all levels of management. III. The programme should have support from the top management. It is a continuous process and, therefore, should not be allowed to degenerate into a routine affair. IV. There should be an operation and research procedure V. There should be co operation amongst different executives concerned with the programme. Each departmental head should be given a list of the areas where he is expected to effect economies in cost. Moreover, he should also be encouraged to put forward his own suggestions for improvement. VI. There should be regular follow-up to the plan and continuous appraisal of the programme performed with the actual cost reduction performance. VII. The plan should not be confined only to reducing costs but should also examine whether an expenditure is really required or not. In other words, there should be efforts to eliminate uneconomic and unnecessary activities.

Fields covered by cost reduction programme The following are the specific areas which are covered by a cost reduction programme: (a) Product Design: Designing the product is a pre-requisite to its production. It is therefore necessary that proper care is given to designing the product to affect the economies in the cost of materials, labour, tools and equipment. The technique of value analysis, as discussed later, is greatly helpful in designing the product. Product should be designed in a manner that it gives the maximum value at the minimum cost. Product designing may be required either for introducing a new design or improvement of the existing design. The introduction of a new design is advantageous but risky since the new venture may or may not be successful. Hence, a careful analysis of its cost elements

(i.e. materials, labour and expenses) and its marketability is necessary. The venture concerning improvement of the existing design is advantageous since the reputation gained by the old product is likely to be enhanced and improved further through improved design of the product. The improvement should be in the direction of making the product less costly; more utility oriented, attractive and durable. (b) Production Planning: Production planning can also be greatly helpful in cost reduction. The location and the layout of the factory have significant influence on cost. Of course, the factory location cannot be changed so easily but its layout can be organized on more scientific lines so as to reduce the cost of production. The Charted Institute of Management Accountants, London, in its publication on cost reduction, has laid down the following principles for developing a sound production planning system: 1. Production planning should be based on realistic and detailed sales forecast. 2. Efficient production system requires fullest possible employment of suitable production facilities, elimination of unnecessary movement and handling of materials provision of adequate working instructions, drawing tools etc. and the most economical storage of stocks. The design of a production system is dependent on its location because the resulting physical factors influence layout and also because of the fact that the location determines operating and capital costs. In so far as physical factors of plant design are concerned, location may determine the following costs:     

Whether or not power is purchased The extent of air conditioning and humidification required Whether local sub-contracting facilities for components are available or whether provision for the manufacture of components has to be made in the factory Storage space requirements depending on the availability of raw material in the vicinity. The type of transportation facilities available for receiving raw materials and dispatching finished goods etc.

From the standpoint of costs, transportation costs, labour costs, cost of land, construction cost, etc. will be influenced by the location of the factory Even if an existing company intends to start an additional factory, the addition of a new plant is not a matter of determining location independent of the location of the existing plants. Establishment of a new plant may involve re-allocation of capacities so that the combined production and distribution costs are minimized.

Plant layout aims at developing a production system that meets the requirements of the capacity and quality in the most economical way. Under ideal conditions of manufacture, plant and manufacturing facilities will be laid down after due consideration of all the factors, tending to reduce waste of time, effort, material and resources to the minimum possible level. Easily available and most suitable equipment should be obtained and utilized to the maximum possible extent. Any dislocation of production occasioned by change of layout may lead to increased costs. Such dislocation can be averted by initially planning the layout in the best possible way. The production controlled department should keep abreast of the technological developments and recommend the use of the most suitable and economical type of plant and equipment. 3. The assessment and coordination of equipment, labour and material requirements demand the formulation of a complete operation sequence for all products the setting up of material standards and the establishment of reliable process time by the use of work measurement techniques. 4. Efficient production control and economic manufacture require careful determination of the lot size according to nature of methods of production employed 5. Machine loading and labour requirements should be related to full capacity available. Where the idle capacity is found to exist, efforts should be made to ensure its economics utilization, say, by the introduction of a new product. 6. The production plan once formulated should be used as a measure of the effectiveness of actual performance with a view to correcting the unfavorable divergencies as they occur. It should nevertheless be flexible enough to cope with essential changes arising from changed conditions. (c) Direct Materials Cost Reduction: Direct materials generally constitute 50% of the cost of a product. The following steps may be helpful in reducing material costs: 1) Control should be exercised on purchasing of raw materials. The adoption of the Japanese just in time (JIT) technology may greatly reduce the material costs. 2) The various inventory control techniques, viz., fixation and observation of inventory levels, ABC Analysis, Ageing Schedule; perpetual inventory system followed by continuous stock taking etc., should be adopted. 3) All efforts should be made to minimize/avoid losses and wastage of raw materials. (d) Direct Labour Cost Reduction: Direct labour constitutes second important element of the cost of a product. Cost reduction in labour is possible through proper organization and functioning of the personnel, works study and engineering departments. The personnel department is concerned with finding the right man for the right job.

COST REDUCTION TECHNIQUES: The following are some of the important cost reduction techniques: • • • • • • •

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

(I). BUDGETARY CONTROL: Budgetary control is an important technique of control on business activities by management, in which business activities are operated on the basis of pre-prepared budget and thereafter actual results are evaluated in the light of budget estimates. In brief, budgetary control is a tool of management control and accounting which directs and co-ordinates the working operation on the basis of budgets. If there are variances in actual results, then either they are corrected or budget is modified so that the objective of maximum efficiency as per the policy of management may be achieved. Objectives of Budgetary Control: Budgetary control is essential for policy planning and control. It also acts as an instrument of coordination. The main objectives of budgetary control are as follows: 1. 2. 3. 4. 5.

To assist in policy formulation on the basis of proper and reliable data. To ensure planning for future by setting up various budgets. To determine short-term and long-term financial and physical targets. To operate various cost centres and departments with efficiency and economy. To classify expenses according to their nature such as direct and indirect expenses; fixed, variable and semi-variable expenses, etc. 6. To help administration as under this system, executives perform their functions according to pre-determined budgets. 7. To anticipate capital requirements and to make necessary arrangement for it. 8. To make cost accounting more reliable and systematic. 9. To promote research in order to bring down cost, to increase efficiency and to achieve the targets of sales. 10. To develop co-ordination and co-operation among employees and executives. 11. To eliminate wastes and increase in profitability. 12. To correct the variations from the established standards. 13. To fix the responsibility of various individuals in the organization. Imp./merits/advantages of budgeting or budgetary control:There are three important functions of top management—planning, co-ordination and control. Budgetary control helps in all these functions and in this context the advantages of budgetary control may be studied under following three heads: 1. BUDGETING AND PLANNING: A budget is a plan of the policy to be pursued during the defined period of time to attain a given objective. In other words, planning and budgeting are closely related with each other and in this context following advantages may be mentioned: •

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

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Mechanism for Policy Implementation: Budgeting provides a mechanism through which the policies of management can be implemented effectively. Work on the basis of best option: Various available options are considered, while preparing budgets and efforts are made to select the best option. It improves the effectiveness of planning. Communication: Budget is an important medium of communication which establishes link between the top management and the operatives. Thus, the actual operators can understand the policy of top management more precisely and clearly. Objectivity: Budgeting expresses all business activities in numerical terms and it develops the quality of objectivity in planning.The fact is that budgeting provides a strong base for effective planning of business activities which bring certainty in activities and prepares an outline for proper use of available resources.

2. BUDGETING AND CO-ORDINATION: Co-ordination is the essence of management and budgeting makes the work of co-ordination simple and sure. Budgeting is useful in co-ordination in following manner: •

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Co-ordination in budget preparation: While preparing budgets, individual goal, problem and potentiality of all departments are given due considerations and each departmental executive is given an opportunity to present his case. All these aspects and view are coordinated in the budget. Co-ordination in working: Budgeting promotes co-ordination among policies, plans and actual working. Communication and co-ordination: Budget is a media of communication and on the basis of it each member of management is having perfect and clear-cut knowledge as ‘what is the plan’ and ‘how, when and by whom it can be implemented’.

Thus, budgetary control helps in maintaining continuous co-ordination among administration, management and organisation. 3. BUDGETING AND CONTROL: • • • • •

Control on cost of production: Budgetary control helps in controlling cost of production by determining budgets of different budget centres. Control on Liquidity: The liquidity position of the firm can easily be controlled according to need by the technique of cash budgeting. Control on capital expenditure: Capital budgeting helps in making control on capital expenditure and having best use of available resources of capital. Effective utilization of resources: It ensures effective utilization of men, materials, machines and money because production is planned according to the availability of these resources. Standard for measuring performance: Budget provides standards of expected performance, against which actual performance of departments and employees can be compared.

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

Limitations of Budgetary Control Though budgetary control is an important device of management control, it suffers from the following limitations: •

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Budgets are based on Plan Estimates: Budgets are based on estimates made for planning. Naturally the success or failure of budget depends to a large extent upon the accuracy of these estimates. Though it is not possible to have cent-percent accuracy in these estimates but if they are very far from reality, the entire system of budgeting will be a futile exercise. This aspect of budgeting should always be kept in mind while interpreting the results thereof. Budgeting is not a substitute of management: Budget is not a substitute of management; it is only a tool of management for achieving the objectives of the concern. Hence, the success of budgeting depends on the ability and efficiency of those persons who are responsible for budgetary system. Operation of the Budget plan is not automatic: Mere preparation of budget cannot ensure the advantages of budgeting. The execution of budget is as important as its preparation. However, its operation is not automatic. In this context it is required that each executive must feel his responsibility and should make necessary efforts to attain the budgeted goals. Time effect: It takes some time in preparing budgets and during this period many such changes may occur due to which it becomes difficult to maintain the accuracy of budget. Prohibitive cost: The installation of budgeting system involves too much time and costs. Normally, small concerns cannot afford it. Therefore, there should be proper balance between expected profits from budgetary system and cost of its operation. Effects of changing conditions: In rapidly changing conditions it may not be possible to achieve the budgeted targets. Budgets may have to be revised from time to time but frequent revision of targets reduces the importance of budget and involves additional expenditure too. Constraints on managerial initiative: Budgetary control may serve as constraints on managerial initiative because every executive tries to achieve the budgeted targets only. There may be some efficient persons who can exceed the targets but they will also feel contended by reaching the targets. Conflicts among functional executives: Budgetary control may lead to conflict among functional executives because every executive may try to secure a larger share of budgetary allocation, while the success of budgetary control depends upon the team work.

(II). STANDARD COSTING: The CIMA, London has defined standard cost as “a predetermined cost which is calculated from managements standards of efficient operations and the relevant necessary expenditure.” They are the predetermined costs on technical estimate of material labor and overhead for a selected period of time and for a prescribed set of working conditions. In other words, a standard cost is a planned cost for a unit of product or service rendered. The technique of using standard costs for the purposes of cost control is known as standard costing. It is a system of cost accounting which is designed to find out how much should be the cost of a product under the existing conditions. The actual cost can be ascertained only when production is undertaken. The predetermined cost is compared to the actual cost and a variance between the two enables the management to take necessary corrective measures. Basically, standard costing is a management tool for control. In the process, we have taken standards as parameters for measuring the performance. Cost analysis and cost control is essential for any activity. Cost includes material labor and overheads. Sometimes, we need to revise the standards due to change in uses, raw material, technology, method of production etc. For a proper organization, it is required to implement this under a committee for the activity. It is a continued activity for the optimum utilization of resources.

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

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Efficiency measurement-- The comparison of actual costs with standard costs enables the management to evaluate performance of various cost centers. In the absence of standard costing system, actual costs of different period may be compared to measure efficiency. It is not proper to compare costs of different period because circumstance of both the periods may be different. Still, a decision about base period can be made with which actual performance can be compared. Finding of variance-- The performance variances are determined by comparing actual costs with standard costs. Management is able to spot out the place of inefficiencies. It can fix responsibility for deviation in performance. It is possible to take corrective measures at the earliest. A regular check on various expenditures is also ensured by standard cost system. Management by exception-- The targets of different individuals are fixed if the performance is according to predetermined standards. In this case, there is nothing to worry. The attention of the management is drawn only when actual performance is less than the budgeted performance. Management by exception means that everybody is given a target to be achieved and management need not supervise each and everything. The responsibilities are fixed and every body tries to achieve his/her targets.

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Cost control-- Every costing system aims at cost control and cost reduction. The standards are being constantly analyzed and an effort is made to improve efficiency. Whenever a variance occurs, the reasons are studied and immediate corrective measures are undertaken. The action taken in spotting weak points enables cost control system. Right decisions-- It enables and provides useful information to the management in taking important decisions. For example, the problem created by inflating, rising prices. It can also be used to provide incentive plans for employees etc. Eliminating inefficiencies-- The setting of standards for different elements of cost requires a detailed study of different aspects. The standards are set differently for manufacturing, administrative and selling expenses. Improved methods are used for setting these standards. The determination of manufacturing expenses will require time and motion study for labor and effective material control devices for materials. Similar studies will be needed for finding other expenses. All these studies will make it possible to eliminate inefficiencies at different steps.

Limitations of Standard Costing • • • •

It cannot be used in those organizations where non-standard products are produced. If the production is undertaken according to the customer specifications, then each job will involve different amount of expenditures. The process of setting standard is a difficult task, as it requires technical skills. The time and motion study is required to be undertaken for this purpose. These studies require a lot of time and money. There are no inset circumstances to be considered for fixing standards. The conditions under which standards are fixed do not remain static. With the change in circumstances, if the standards are not revised the same become impracticable. The fixing of responsibility is not an easy task. The variances are to be classified into controllable and uncontrollable variances. Standard costing is applicable only for controllable variances.

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

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

Determination of Standard Costs 1. Determination of Cost Center According to J. Betty, “A cost center is a department or part of a department or an item of equipment or machinery or a person or a group of persons in respect of which costs are accumulated, and one where control can be exercised.” Cost centers are necessary for determining the costs. If the whole factory is engaged in manufacturing a product, the factory will be a cost center. In fact, a cost center describes the product while cost is accumulated. Cost centers enable the determination of costs and fixation of responsibility. A cost center relating to a person is called personnel cost center, and a cost center relating to products and equipments is called impersonal cost center.

2. Current Standards A current standard is a standard which is established for use over a short period of time and is related to current condition. It reflects the performance that should be attained during the current period. The period for current standard is normally one year. It is presumed that conditions of production will remain unchanged. In case there is any change in price or manufacturing condition, the standards are also revised. Current standard may be ideal standard and expected standard.

3. Ideal Standard This is the standard which represents a high level of efficiency. Ideal standard is fixed on the assumption that favorable conditions will prevail and management will be at its best. The price paid for materials will be lowest and wastes etc. will be minimum possible. The labor time for making the production will be minimum and rates of wages will also be low. The overheads expenses are also set with maximum efficiency in mind. All the conditions, both internal and external, should be favorable and only then ideal standard will be achieved. Ideal standard is fixed on the assumption of those conditions which may rarely exist. This standard is not practicable and may not be achieved. Though this standard may not be achieved, even then an effort is made. The deviation between targets and actual performance is ignorable. In practice, ideal standard has an adverse effect on the employees. They do not try to reach the standard because the standards are not considered realistic.

4. Basic Standards A basic standard may be defined as a standard which is established for use for an indefinite period which may a long period. Basic standard is established for a long period and is not adjusted to the preset conations. The same standard remains in force for a long period. These standards are revised only on the changes in specification of material and technology productions. It is indeed just like a number against which subsequent process changes can be measured. Basic standard enables the measurement of changes in costs. For example, if the basic cost for material is Rs. 20 per unit and the current price is Rs. 25 per unit, it will show an increase of 25% in the cost of materials. The changes in manufacturing costs can be measured by taking basic standard, as a base standard

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

5. Normal Standards As per terminology, normal standard has been defined as a standard which, it is anticipated, can be attained over a future period of time, preferably long enough to cover one trade cycle. This standard is based on the conditions which will cover a future period of five years, concerning one trade cycle. If a normal cycle of ups and downs in sales and production is 10 years, then standard will be set on average sales and production which will cover all the years. The standard attempts to cover variance in the production from one time to another time. An average is taken from the periods of recession and depression. The normal standard concept is theoretical and cannot be used for cost control purpose. Normal standard can be properly applied for absorption of overhead cost over a long period of time.

6. Organization for Standard Costing The success of standard costing system will depend upon the setting up of proper standards. For the purpose of setting standards, a person or a committee should be given this job. In a big concern, a standard costing committee is formed for this purpose. The committee includes production manager, purchase manager, sales manager, personnel manager, chief engineer and cost accountant. The cost accountant acts as a co-coordinator of this committee.

7. Accounting System Classification of accounts is necessary to meet the required purpose, i.e. function, asset or revenue item. Codes can be used to have a speedy collection of accounts. A standard is a pre-determined measure of material, labor and overheads. It may be expressed in quality and its monetary measurements in standard costs.

(III). INVENTORY CONTROL: Inventory control is the delicate balance of the costs versus profits associated with having stock on hand. Inventory control means keeping the overall costs associated with having inventory as low as possible without creating problems. This is also sometimes called stock control. It is an important part of any business that must have a stock of products or items on hand. Correctly managing inventory control is a delicate balance at all times between having too much and too little in order to maximize profits. The costs associated with holding stock, running out of stock, and placing orders must all be looked at and compared in order to find the right formula for a particular business. Inventory control is concerned with minimizing the total cost of inventory. In the U.K. the term often used is stock control. The three main factors in inventory control decision making process are: • • •

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

The third element is the most difficult to measure and is often handled by establishing a "service level" policy, e. g, certain percentage of demand will be met from stock without delay. It is impossible to have an unlimited supply on hand, for a number of different reasons. Many businesses simply don’t have enough money to keep excessively large inventories. There are costs associated with purchasing the items as well as storing them, and having too many products leads to further losses when they don’t move off of the shelves. At the same time, there are issues with inventory control when there isn’t enough stock on hand. One common problem is running out of inventory, which is caused by trying to reduce inventory costs too much. This is something that no business wants to have happen, but it happens to virtually all of them at some point. Even the largest stores run out of certain products from time to time when they sell or use more than they expected. This can cause financial losses when inventory is not available for customers to purchase. Part of inventory control is trying to minimize shortages so these are rare occurrences. Most businesses expect they will have shortages on occasion and they have calculated that the small loss is worth the money saved by not having an overstock. Another important element of inventory control is called reorder point. Businesses need to think ahead and calculate the best time for reordering products. Doing so too soon may cause financial difficulties or running out of space. On the other hand, waiting to long to reorder will result in a shortage and running out of inventory before the next shipment arrives. When figuring out a reorder point, it’s necessary to calculate how long it will take the shipment to arrive and the amount of demand for a particular item. The overhead costs, fees, and shipping expenses of ordering large versus small quantities should also be looked at.

Inventory control is an ongoing process that is rarely, if ever, executed perfectly. Experience, expertise, and practice help people to make the best decisions regarding stock, but there are always unknown circumstances and variables. Stores can make good estimates about how many of a specific product they will sell, but they get things wrong from time to time. This is unavoidable. Inventory control can break a business if it is executed poorly, because either expenses will be too high or customers will get tired of dealing with shortages and find another place to spend their money.

(IV). JOB EVALUATION AND MERIT RATING: Job evaluation is a practical technique, designed to enable trained and experienced staff to judge the size of one job relative to others. It does not directly determine pay levels, but will establish the basis for an internal ranking of jobs. The two most common methods of job evaluation that have been used are first, whole job ranking, where jobs are taken as a whole and ranked against each other. The second method is one of awarding points for various aspects of the job. In the points system various aspects or parts of the job such as education and experience required to perform the job are assessed and a points value awarded - the higher the educational requirements of the job the higher the points scored. The most well known points scheme was introduced by Hay management consultants in 1951. This scheme evaluates job responsibilities in the light of three major factors - know how, problem solving and accountability. Some Principles of Job Evaluation • Clearly defined and identifiable jobs must exist. These jobs will be accurately described in an agreed job description. • All jobs in an organisation will be evaluated using an agreed job evaluation scheme. • Job evaluators will need to gain a thorough understanding of the job • Job evaluation is concerned with jobs, not people. It is not the person that is being evaluated. • The job is assessed as if it were being carried out in a fully competent and acceptable manner. • Job evaluation is based on judgement and is not scientific. However if applied correctly it can enable objective judgements to be made. • It is possible to make a judgement about a job's contribution relative to other jobs in an organisation. • The real test of the evaluation results is their acceptability to all participants. • Job evaluation can aid organisational problem solving as it highlights duplication of tasks and gaps between jobs and functions. Job Evaluation - The Future As organisations constantly evolve and new organisations emerge there will be challenges to existing principles of job evaluation. Whether existing job evaluation techniques and accompanying schemes remain relevant in a faster moving and constantly changing world, where new jobs and roles are invented on a regular basis, remains to be seen. The formal points systems, used by so many organisations is often already seen to be inflexible. Sticking rigidly to an existing scheme may impose barriers to change. Constantly updating and writing new jobs together with the time that has to be spent administering the job evaluation schemes may become too cumbersome and time consuming for the benefits that are derived. It is essentially a comparative process. Job evaluation evaluates selected job factors, which are regarded as important for the effective performance of the job, according to one of several

alternative methods. The resulting numerical gradings can form the basis of an equitable structure of job gradings. The job grades may or may not be used for status or payment purposes. Job Evaluation is concerned with measuring the demands the job places on its holder. Most factors that contribute to this job pressure, e.g. physical strength required, knowledge of mathematics required, are assessed and the result is a numerical estimate of the total job pressure. When evaluations are carried out on all hourly paid personnel the technique’s uses include establishing relative wage rates for different tasks. It is possible to use it for all grades of personnel, even senior management. Illustration: The Time Span of Discretion is an interesting and unusual method of job evaluation developed by Elliot Jaques for the Glacier Metal Company. In this method the job pressure is assessed according to the length of time over which managers decisions commit the company. A machine operative, for example, is at any moment committing the company only for the period needed to make one product unit or component. The manager who buys the machine is committing the company for ten years.

(V). REDUCTION IN VARIETY OF PRODUCTS: It is common knowledge that larger is the variety of products more is involved. A large variety of products means more investment in terms of equipment in both fixed and working capital and larger sales efforts which all push up the cost of production and sales. The reduction in variety of products will lead to cost reduction because of the following reasons: i.

Standardization: Reduction in variety of production will lead to standardization of products. The term standardization means that the product should be a standard one i.e. made of standard materials and components having a standard design and a standard cost. The standard in each of the above cases has to be determined by the management. The standardization of products will have the following advantages: a. It will reduce investment in the inventories since only few standard products will have to be kept in stock. b. The products can be manufactured in larger quantities in each process as a result of increase in the size of each batch. c. The products will be of improved quality, greater reliability and of less cost.

ii.

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

iii.

Quality control: Since a standard product is to be provided to the customer it implies that the quality of the product should not be allowed to get deteriorated but rather it should continuously be retained and, if possible, improved. This will require inspection of the product at different stages of production so that the defects may e remedied at the earliest stage. It will bring economy in reducing the cost in terms of reduction in the number of defective units.

(VI). VALUE ANALYSIS: Concept of value: The term value has different meanings for different persons; however, an industrial product may have the following concept of value: 1. Use Value This refers to the characteristics which the product should possess to provide useful service for which it is intended. For instance, a watch is meant for indicating time. In case it gives fairly correct time, it is giving its full use value. The use value is measured in terms of quality of performance. In order to decide whether the product is giving a good value, for the money spent on it, it will be appropriate to divide its worth for the concerned person by the price paid for it. A product may perform several functions. Accordingly, its value can be divided into three categories:(a) Primary use value (b) Secondary use value (c) Auxiliary use value For instance, paint has different use values. It has primary use value when it is applied to protect some service. It has a secondary use value when it is used for marking lines on the road for crossing by pedestrians. It has an auxiliary use value when it pleases aesthetic sense. Such a functional classification would help one in identifying which paint one should use keeping in mind the objective. If this is not done, perhaps one may use costly enamel paint where use of ordinary paint would have been prudent. 2.

Cost Value

The value is measured in terms of cost in case product is manufactured in the organization. It refers to the cost of production. In case a product is procured from outside, it refers to cost of its purchase. 3.

Exchange Value

It refers to sales value which a product would fetch. It is important for the sales department since the profit is excess of the selling price (i.e. exchange value) over the cost of the product. Hence, the sales department must ascertain what value the product has for the customers as compared to competitive products available in the market. It will help in advising the management in fixing the selling rice of the product 4.

Esteem value

This may also be referred to as the prestige value. Certain products or articles have value simply because of their attractiveness or esteemed features. A watch made of gold has an esteem value for its owner, though its utility is not more than that of an ordinary watch. For some people purchase of a gold watch may be a waste. However, it commends a value for the person who wishes to impress upon others and thus have a personal satisfaction.

Importance of value analysis in cost reduction: Also termed as value engineering, the approach focuses on improvement in value by resulting to a careful and in-depth study of products at the stage of their designing. The different components can be redesigned or standardized. Less costly manufacturing processes or methods may also be used. Such a study reveals the fields which involve avoidable costs and after locating there areas, steps can be taken to eliminate or if not possible reduce such unwanted costs, of course, without in any way compromising on quality. Following points deserve consideration before embarking upon value analysis in order to critically examine each and every product and its part”. These are as follows: • • • • • • •

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

CASE STUDY (COST REDUCTION IN DYEING OF COTTON WITH REACTIVE DYES)

The reactive dye business, due to its maturity, is very competitive and price sensitive. As older dye technologies have moved out of patent, these have been taken up by manufacturers in the developing world, driving down manpower costs and total production costs. Therefore, a large proportion of cotton processing has also moved to the cheaper and less environmentally conscious economies of the developing world. In the case study, a modified process for rinsing after dyeing has been suggested for cost reduction and environment benefits.

Reactive dyeing process The process for reactive dyeing of cotton can be divided into three steps: the pre-treatment, the dyeing and the rinsing after dyeing. Traditionally, the consumption of energy, chemicals and water in rinsing is crucial; approximately half of the total energy consumption and of the total water consumption are attributed to the rinsing process after dyeing. Therefore there is much scope for cost reduction in rinsing operation. Water consumption in reactive dyeing: During the pre-treatment, the cotton fabric is scoured and bleached and washed. After some rinses, the dyestuff is poured into the dye bath and a diffusion of the dyestuff molecules between the cellulose fibres takes place. After some time, salt is added to obtain adsorption of the dyestuff to the cellulose fibre. After this, adjusting temperature (50-80°C) and pH (10,5-11,5) completes the reaction between the dyestuff and the cellulose. Some of the dyestuff will be hydrolysed during this dyeing process, and the adsorbed hydrolysate must be removed in the succeeding rinsing after dyeing. The rinsing traditionally consists of several baths, as in Table 1. TABLE 1 STEP 1 2 3 4 5 6 7 8 9 10 11 12

PROCESS Dyeing Overflow rinse Warm rinse Neutralisation Overflow rinse Hot soaping Warm rinse Overflow rinse Hot soaping Warm rinse Overflow rinse Neutralisation & Softening TOTAL

WATER (litres) 700 7300 700 700 7300 700 700 4300 700 700 4300 700 20800

The large water consumption in the rinsing after dyeing is primarily caused by the large number of baths but also by the common use of overflow rinses. Before the temperature is raised in the rinse, the dyestuff producers recommend neutralisation to pH around 8, when dyestuffs with vinyl sulphone reactive groups are used. This neutralisation has, however, in some dye-houses, become usual practice for all sorts of reactive dyestuffs. After neutralisation, the rinsing consists of a number of soaping sequences: hot soaping, warm rinse and overflow rinse. In the hot soaping steps 6 and 9 in table1 soaping additives are used, in the form of surface active agents (detergents), complexing agents and dispersing agents. The reasons for the use of these auxiliary agents are protection against hardness in the water and/or the cotton, and keep the unfixed dye in dispersed form. The process is completed with neutralisation to pH around 7 and treatment with softening agents, necessary for the subsequent sewing process.

Cost saving rinsing operation New water saving, chemical free, high temperature and high speed rinsing steps are shown in Table 2 STEP 1 2 3 4 5

TABLE 2 PROCESS Dyeing Hot rinse Hot rinse Hot rinse Neutralisation & Softening TOTAL

WATER (litres) 700 700 700 700 700 3500

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

A) Change from overflow rinsing to stepwise rinsing. Rinsing by overflow, i.e. pouring clean cold water directly into the process water in the machine while excess water is drained out of the machine, is used both for rinsing and for cooling purposes. Overflow is quick but causes unnecessary water consumption. A B C D

TABLE 3 Fill the machine according to liquor ratio 10 minutes rinsing Discharge rinsing water 5 minutes draining

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

cotton.

Surplus and un-fixed reactive dyestuffs are highly water-soluble, in spite of this, detergents are often used during rinsing after dyeing. In international literature, it has been documented that detergents do not improve removal of hydrolysed reactive dyestuffs from the fabric. More than 50 full-scale dyeings carried out at various dye-houses without the use of detergents. All have successfully proven that detergents can be omitted without negative impact on product quality.

C) Omit the use of complexing agents in the rinsing If soft water with a quality of below 5º dH is used, complexing agents can be omitted without any negative effects on dyed fabric. However, if hardness builders e.g. calcium and magnesium are present in the dyeing processes and in the rinsing after dyeing, they might have a negative effect on the dyeing result, e.g. change in shade or problems with reproducibility. For that reason, soft water is recommended as standard procedure in the dyeing processes. However, water softening in the dyeing machine by using complexing agents, forming bonds with the hardness-builders, are both economically and environmentally a bad solution. Water softening can profitably be done in a separate plant by the ion-exchange technique or the membrane filtration technique. D) Use only neutralization after dyeing When using Vinyl sulphone (VS) reactive dyestuffs Neutralisation in the first rinse after dyeing can be restricted to the vinyl sulphone (VS) reactive groups. Some VS dyestuffs have poor alkaline washing fastness (low bond stability) and thus sensitive to high pH and high temperature simultaneously. Nevertheless, it is not uncommon that all recipes for reactive dyeing in a dye-house include neutralisation in the first rinse after dyeing, whether VS reactive dyestuffs are used or not. The dyeing can be successfully carried out without the use of neutralisation in the first rinse after dyeing. This in spite of the fact that more than half of the dyeings were carried out with dyestuffs based on VSgroups. As it is not possible to put forward general guidelines on when

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

E) Chemical-free high speed rinsing after reactive dyeing of cotton Tests have shown that rinsing is more effective and faster at elevated temperatures – e.g. around 30% more unfixed hydrolysed reactive dyestuff is rinsed out after 10 minutes at 95°C than at 75°C. Tests using hot 90-95°C rinsing after reactive dyeing of cotton have proved that the technique has no negative effects on the dyeing results. Most often the fastness of the goods were better after the hot rinsing than after the traditional rinsing with overflow, detergents, complexing agents and neutralisation in the first rinse. Furthermore, when using 90-95°C rinsing water, a few stepwise rinses (table 2) can reduce the rinsing time by around 50% compared to a standard recipe (table 1).

Main achieved cost and environmental benefits:  Reduction in water consumption and wastewater generation.  Cost saving in chemical consumption and reduction in pollution load of waste water  Time and energy saving.

Applicability 1. The new process can be implemented in all types of textile companies involved in reactive dyeing of cotton. 2. The new process can only be implemented if the company do have availability of soft groundwater or is operating with a soft-water system (which is normally the case). 3. It is recommended always to neutralise in the first rinse when dyestuffs based on VSgroups are used. There is no reason to neutralise in this step when all other reactive dyestuffs based on monochlorotrazine (MCT), dichlorotriazine (DCT), trichloropyrimidine (TCP) or difluorochloropyrimidine (DFCP).

Economics 1. The economic feasibility is obvious. 50-70% reduction in the consumption of water for rinsing. Total savings will depend on the number of reactive dyeings at the company. 2. Omit the use of detergents, complexing agents and acetic acid. Savings will depend on the number of reactive dyeings at the company.

Driving force for implementation 1. High costs for water and wastewater discharge and/or low availability for water of appropriate quality. 2. High costs for chemicals and wastewater load. 3. A desire for reduced operation time per lot and increased capacity per machine.

REFERENCES  COST ACCOUNTING- theory & problems- Maheshwari & Mittal  www.wikipedia.org (accessed as on date)  www.ccrba.com (accessed as on--- www.halfcostplus.com (accessed as on---------- www.iata.org (accessed as on-------- http://www.managers-net.com/job_evaluation.html (accessed as on--- http://www.merchantos.com/articles/inventory/what-is-inventorycontrol/ (accessed as on---