The Government, Ministry of Corporate Affairs, have recently made mandatory for a large number of companies, subject to conditions, submission of Compliance report duly validated and approved by Cost Accountant.
The moot question that arises is, should this be construed as a mere statutory compliance or does it benefit the organization at large. Many entrepreneurs might imbibe this as additional burden by considering it as a mere run of the mill regulation imposed by the government. However, this is not the case in the making and as such understanding undermines the key premises. If the practice and compliance data is interpreted in right stride, it will benefit the organization in long haul, as it’s a major source for organizational introspection.
How and Why of this phenomenon is elaborated and deliberated below:
In today’s competitive world the business is grappling with situation of curtailed wafer thin margins. To exist and sustain growth in the market, it is imperative to minimize cost of production and thereby avoid pressure on otherwise reasonable margin. The ever inflationary impact on cost of material and labor becomes difficult to curb cost and control it beyond particular thresholds. So what’s the alternative? The solution exists in the Recording, Monitoring and Analysis of crucial operational information as we say slicing and dicing of various dimensions of Cost Data. Compliance Report validates that proper and accurate Cost Records are maintained in order to facilitate computation of Cost of Production and Operation, Cost of Sales and Margin for each product at various stages of Business Flow.
We can throw light on two critical piece of information which the management can derive a precursor for the compliance.
1. Product wise and manufacturing unit wise Revenues.
2. Process wise Cost of Production for each product and by manufacturing unit.
The information gathered will assist the management to conduct following Enterprise Performance Analytic such as
- Contribution and Net Profit earned from Products individually and in totality for the whole organization
- Contribution and Net Profit earned Manufacturing Unit wise
- Contribution and Net Profit earned Manufacturing unit/product wise
This can further render widening the management knowledge base to make decision on
- Product viability
- Product that should be a candidate for maximum production/sales focus
- Which product should be manufactured and from which manufacturing unit
- What will be the breakeven point for each product
- Impact of Manufacturing unit wise Cost elements through Cost Comparison
Such observations and resultants can be an eye opener for the management. Causal Analysis of process/practice is facilitated only by a well defined Costing system.
- The procedures and measures practiced at one of the Manufacturing unit resulting into effective control over cost elements can be adopted across the manufacturing units which has helped Multi National Companies to earn the scale of economies and establish Best Practice Standards
While analyzing the data of an organization it was observed that direct labor cost of factory A was considerably lower than the same in another factory B, though the Nature of Products and capacity etc was at par. When it was brought to the notice of the management, the matter was further subjected to investigation and the interesting information flowed. Factory A had made jigs to carry out particular process which resulted in to reduction of Direct Labor cost which was unknown to Factory B. This was immediately introduced and implemented in Factory B which produced tangible results with significant increase in contribution margins.
- Another area of prime importance for Management is the Process wise Costing information of product. This set of data can be shared with the Technical and R&D team to improvise the process bearing high cost of element as compared to established Standards or to set the ball rolling for hunting new innovative ways resulting in curtailment of cost.
- At times the increase in turnover by shrinking/contracting the Operating Time plays a vital role in cost control. Crucial decision regarding automation of a process needs to be corroborated by a proactive Costing System which captures Statistical information besides recording Financial Cost data. This can be exemplified in the following situation,
An organization is in to manufacture of biscuit. The Management was satisfied by the levels of production, profitability etc but they lacked a well structured Costing System which could help them identify efficiency/effectiveness of the process. The Management was instructed to introduce Maintenance of cost records, both process wise and product wise. Immediately, startling results popped up. It was found, on Analysis of Cost Data, that there was huge amount of idle time, almost 4 hours, during the changeover of a product in the production line like from X biscuit to Y or Z biscuit etc and on further investigation we observed that this process was managed manually and with the aid of scarcely available Skilled Operator only. It was so, because the settings were to be made in entire production line in accordance with the recipe, baking time, cooling time etc. When this information was shared with the management, they instantly embarked on the decision to automate this process by investing a small fund in machinery. This Prompt action from the Management spurred the production thereby pruning the Cost of Production. Further, the dependence on the skilled labor was reduced, a major production bottleneck.
- Organization, lose focus on the alimentary Business areas such as Input Conversion Loss which is a crucial aspect in determining the Cost of operation with the end result of Profitability.
A Chemical Industry into continuous batch production had multiple processes before the final Product was churned out. The Organization lacked the existence of costing system which can track the critical aspect of loss from the inception. At each period end the Yield i.e. Input /Output ratio showed aberrations and it severely impacted the Profitability. Management was perplexed and could not draw out any conclusion. The due diligence of the state of affairs was carried out and costing system was introduced, which not only identified the cause of the aberration but also provided remedial measures. The Yield aberrations where due to losses at various stages and causes of loss due to Material Handling, Process loss and other subsidiary losses were identified separately. This component of data helped the Management to plug the actual root cause of discrepancy and results fructified in a jiffy.
- A organization having multi manufacturing unit set up may find that a product is not manufactured in that factory which has the lowest cost of production and thereby the installed capacity is sub optimally utilized
- On the other hand it might reveal that the product yielding higher contribution is plagued with higher total cost due to burdened overheads resulting into lower profitability & vice a versa.
I conclude, with a strong recommendation to entrepreneurs to appreciate the wealth of information which goes a long way in building a formidable internal fortitude to withstand the vagaries of Business Cycles.
So do not wait, get going, as one has rightly said “Money Saved is Money Earned” – For Revenue and Cost are two sides of a Coin…
Let’s be our own Business Gurus and bring revolution and improvisation to maximize the Business Value.
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