PRODUCTION MANAGEMENT

MANAGAING COST

What is

cost?

• A cost can be defined as the sacrifice made, usually measured by the resources given up, to achieve a particular purpose.

• A cost can be defined as the sacrifice made, usually measured by the resources given up, to achieve a particular purpose.

Classification of costClassification of cost

• Cost management is important to organizations because it is more than measuring and reporting cost that have occurred

• No organizations can exist unless it is profitable and economically viable

• To earn maximum/optimum profit the management must know and analyze the financial performances

• It must be able to evaluate the impact of decision taken, deviations from norms/standard (standard costing)

• and budgetary control process which are basic tools of management accounting

• Cost management is focused on the future impact of current or proposed decisions.

Standard Costing

• In management accounting standard cost is a pre determined cost, or may be said as planned cost

• Standard cost is used to measure difference between what costs are against and what cost is aimed at

• Standard cost can be termed as physical standards expressed in terms of money (e.g.: man per hour)

Uses of Standard Costing

• Identification of variances between ‘standards’ and ‘actual’ in cost

• Pinpoints control areas where special studies or efforts are necessary to keep cost under control

• Provides better comparisons. It is always better to compare a performance against the standard rather than what it was last month or so

• Illustrating the impacts of variances on cost and profit

Types of Standard Types of Standard CostingCosting

Involves determination of:

WHAT IS A BUDGET?

• Budget is a financial and /or quantitative statement, prepared and approved prior to a defined period of time, of the policy to be pursed during that period for the purpose of attaining a given objective. 

WHAT IS BUDGETING? •Budgeting is the whole process of designing implementing and operating budgets. The main emphasis in this is short-term budgeting process involving the provision of resource to support plans which are being implemented.

WHAT IS BUDGETARY CONTROL? •Budgetary control is the establishment of budgets relating the responsibilities of executives to the requirements of a policy, and the continuous comparison of actual with budgeted results, either to secure by individual action the objectives of the policy or to provide a basis for its revision.

In most business this process is formalized at least in short-term, with considerable effort put into preparing annual budgets and monitoring performance against those budgets

More useful and constructive view is to treat the budgeting process as a means for obtaining the most effective and profitable use of the company resource via planning and control

It defines the goals and helps in determining the policies.

It helps in making plans/targets to attain these goals.

It guides expenditure and helps to control the financial position.

It gives an advance information about the amount of capital needed for the budget period.

It highlights weak-spots and helps in finding the causes of inefficiency.

Cost control and Cost reduction

Cost control and Cost reduction

Cost control refers to the process by which actual cost is kept within the limits set by predetermined or standard cost

Cost reduction on the other hand is achievement of real and permanent reductions in the unit costs of productions or goods or services rendered without impairing there suitability for the indented use.

How Cost reduction is achieved ?How Cost reduction is achieved ?

By genuine savings in the cost of effecting are improvements in:

Design and outlay.Cost of manufacture and elimination of

waste/rejects.Variety reduction, standardization and value analysis.Factory organization, methods and administration.Marketing and distribution of products.Financial control

Reduction in the cost of goods to a customer arising out of reduction:×in taxes and duties;×in price of input materials by government action or otherwise;×arising out of price agreements;×cutting down welfare and amenities of employees or resorting to unfair trade practices;Is in real sense not cost reduction