Cost Management - New Techniques

Cost & Management Accounting
(CMA)
Focus on cost management
Rattan Sharma
Professor
DSB, VIPS-TC
Changed Financial and Economic Environment of India
- post 1991 era :
Salient features
• Liberalization
• Privatization
• Globalization
• Transparency
• Computerization
• Professionalisation
• Softer Tax regime
• Capital market access
• Deregulated interest rate
etc.
Impact of Post- liberalization era
• COMPETITION has
increased.
• CUSTOMER is the KING.
• KEY to survival is to gain
sustainable competitive
advantage.
• Every functional area has to
contribute towards this.
Sustainable competitive Advantage - for
gaining competitive edge at the market place
Two Strategies:
• Product differentiation
• Cost leadership
PD CL
H H
H L
L H
L L
Cost Leadership:
Traditional strategies:
• Technology
• Lean and Mean organization
• Offshore outsourcing
• Mergers
• Diversification
Non-traditional Strategies:
ABC,Experience curve, Value
chain analysis etc.
View of cost
• Sales = Cost + Profits

• Profits = Sales - Costs
• costs = Sales- Target Profits
Cost Sheet
Direct Materials +
Direct Labor +
Factory overheads
Overheads
Office and administrative
overheads
Selling and distribution

overheads
=
Total cost
DM and DL cost and Overheads

Cost Sheet
Direct Material
direct Labor
Direct Expenses = Prime Cost +
Factory Overheads = Factory cost +
Office and selling overheads = cost of production
+ Selling and Distribution expenses = total cost
Base case 5%Sales 5% Cost
Company C D C D C D
Sales 100 100 105 105 100 100
Costs 80 90 84 94.5 76 85.5
Profits 20 10 21 10.5 24 14.5
Increase 5% 5% 20% 45%

in Profits
A cost decrease is better than

a sales increase 9
Major Cost Elements used in NTPC
1.0 Fuel:
• Coal
• Oil
2.0 Repairs and Maintenance
R&M cost of SG/SG aux.& Associated systems
• R&M cost TG\TG Auxiliaries and Associated system
• R&M cost of other common systems
3.0 Operating cost
4.0 Administrative cost ( 2+3+4 )
5.0 Depreciation
6.0 Interest
7.0 Sub total
8.0Total
Shortcomings of Traditional Cost Management
approaches:
1. Responsibility lies solely with operating managers.

2. Costs are only managed during crisis situations.
3. The cost reduction focus is limited in scope.
4. A partial approach is usually adopted;many
important costs are ignored.
5.Employees hold negative perceptions of the
activity.
6. Personal relationship and emotions stand in the
way of objective action.
11
Shortcoming contd.
7. One- time reductions are neither followed
up or maintained.
8.The wrong costs are often cut first because
they are the easiest to eliminate.
12
Differences between Traditional and Strategic cost
reduction
Attribute Traditional Strategic

Goals Specific Competitive
advantage
Scope Narrow Broad
Time frame Short term Long term
Frequency Periodic Continuous
Trigger Reaction Pro-action
Target Labor Entire value chain
13
Characterstics of Good Cost Management Strategy
• Fits with overall corporate and business strategies

• Establishes clear long and short run goals for cost
reduction.
• Balances human, capital and technological inputs
into cost reduction.
• Identifies and aims at reducing the important
costs, even if they are hard to measure.
• Recognizes that there are high costs associated
with capital when used as a cost cutting source.
• Generates a sense of excitement and challenge in
participants. 14
Characterstics contd.
• Continually resources costs in real terms.
• Recognizes the people who make it
happen.
• Recognizes that information is key resource
and communication is essential.
• Provides a distinct competitive advantage.
15
Useful Cost Reduction Ratios:
Relevant Questions Useful Ratios

How competitive are we ? Cost per unit of
Are our cost competitive output.
on cash basis ? Expenditure per unit
Are we spending enough of output.
on the future ? Future costs (R/D,
Market
What is our Bread even development etc.
point ? :Total costs
What is our basic cost TFC/contribution per 16
Strategic Operational
• Debt Charges • Labor

• New Plants • materials
• Products Development • Energy
• Market development • Supplies
Tangible
• Contract Services
• Poor product positioning • Poor quality

• Technological obsolescence • Absenteeism
• Poor Facility Location • Turnover
• Poor Morale
• Lost output
Intangible
• Late delivery
Categories of Cost from a Total Corporate Perspective 17

Perspectives of Cost Management
1. Experience curve
2.Cost leadership
3.Differentiation strategies
4.Competitor analysis
5.Value Chain analysis
6. Capabilitybuilding
7.Environment shifts and
scenarios
Financial
Management Managing cost Strategic
perspective Perspective
1. ABC
2. Cost Drivers
3.Cost programme as Investment
decision
4. Cost structure analysis 1. Quality Management
2.Simplification
Operations 3.Customers
perspective

Cost Management - New Techniques

Uploaded by

Copyright:

Available Formats

Cost Management - New Techniques

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Cost Management - New Techniques

Uploaded by

Copyright:

Available Formats

Cost & Management Accounting

• Sales = Cost + Profits

Selling and distribution

DM and DL cost and Overheads

Sales 100 100 105 105 100 100

Costs 80 90 84 94.5 76 85.5

Profits 20 10 21 10.5 24 14.5

Increase 5% 5% 20% 45%

A cost decrease is better than

1. Responsibility lies solely with operating managers.

Attribute Traditional Strategic

• Fits with overall corporate and business strategies

Relevant Questions Useful Ratios

• Debt Charges • Labor

• Poor product positioning • Poor quality

Categories of Cost from a Total Corporate Perspective 17

You might also like

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.