SCM CLASS DISCUSSION

A QUANTUM LEAP IN COST MANAGEMENT

Two main aspect of cost accounting i.e. cost management and responsibility accounting
has clearly been explained in this article through seven postulates. These postulates are as
follows;

POSTULATE-1

First postulate explained about the two type of cost related to the business i.e.

I) Material costs
II) Cycle time costs.

Both of these costs are variable and it is assumed that there is no fixed cost. Only the
cost incurred to convert the material into the final product is considered.

POSTULATE-2

The second postulate has explained about the quantity of material and cycle time that
should represent benchmark quantities and not whatever quantity as was taken. The exact
quantity required is determined at the time of designing and launching the product and
should form the real requirement for the product, the benchmark for consumption for that
product. No allowance should be given for additional cost at the time of determining the
benchmark. A clear distinction is required to be made between actually consumed and
necessarily required costs. Strict measures should be adopted in order to reduce and avoid
the excess cost.

POSTULATE-3

The third postulate about the standard costing system in which it has explained that it
needs to be replaced by the more effective system of benchmarking with close online
monitoring and quick improvements. Due to frequent changes and fluctuations, standard
costing is not enough to determine the right price. Therefore frequent monitoring should
be done on excessive expenses and it should not be considered as allowances but as
margins of safety.

POSTULATE-4

The fourth postulate has explained about to monitor all costs in terms of the benchmarks
and to make price changes to the products proportionate to other cost changes. Value
addition should be the ultimate hallmark for validation of costs. There should be a direct
proportional relationship between change in cost and margin. Benchmarking along with
margins of safety and proportionate cost changes in input, the system helps
exercise proper controls to maintain profitability. Value addition should be the
hallmark for validation of costs. Benchmarks should be the target to achieve to
maintain high organizational efficiency.

POSTULATE-5

The fifth postulate is to use the system of business process reengineering to optimize
process costs and controls on a continuous basis. Additional cost should be determined
and necessary reengineering works should be done on processes to avoid it. Benchmarks
get continuously updated with this.

POSTULATE-6

The sixth postulate is to use effective targets, for short or long term, as suitable, which
can ably support benchmarking. Targets are in fact benchmarks by themselves. Budgets
are prepared by the top management and there is only a limited involvement of bottom
level managers. Target should be fixed by the line managers and they are responsible to
meet them.

POSTULATE-7

The seventh postulate is that cost management is a holistic analysis of the organizational
strategies in its entirety. Standard costing, benchmarking, targets all are covered
individually to specific activities under cost management and hence covers all the
aspects in an organization such as production, marketing, finance, human resource,
inter-firm costs and strategies. The company should consider its competitors and its
external environment in determining the costs and fixing the price.

The above postulates could help the corporate to determine the right price in order to
survive and grow in the industry.

BY, GROUP-8

FK- 1976 Ms. NIDHI

FK- 1977 Mr. PRABEEN KUMAR MISHRA
FK- 1978 Mr. MAYUR BHINDE
FK- 1979 Mr. BIBHUTI BHUSAN SARANGI
FK- 1980 Mr. SURENDRA KUMAR JENA
FK- 1989 Mr. BALAKRISHNAN
FK- 1990 Mr. RANVEER KUMAR