COST (REDUCTION ) MANAGEMENT

Cost management, practically, as well as politically,

A right title for todays session.

RSR Murthy, FCA Mumbai

What is Cost ?

Rupees? Dollars?
Rupees and Dollars are only a UNIT of measurement, representing more importantly, The underlying resource and time !!!

If we agree that resources and time ,more often SCARCE than NOT, should be managed We can do so thro managingCosts !!!!!! We cannot manage, what we do not , or cannot, measure

Costs can be classified in many ways

Variable & fixed costs Actual and standard costs Marginal and total costs Real costs and opportunity costs Production costs,Selling costs,Administrative costs,Finance costs, etc Sunk costs,capital costs,discretionary costs, out of pocket costs etc
To effectively manage costs, we need to understand the various costs ,as we will need to manage all types of costs at one point or the other.

What drives costs ?

The consumption of resources and time :

1. 2. 3. 4. 5.

materials people activities time money

What is Cost Management ?

The conventional definition : Cost management is the process whereby companies use cost accounting to report or control the various costs of doing business Our definition : Cost management is managing costs in a manner that wastage and infructuos usage is eliminated , and maximum benefit is derived from the resources and time spent for organisational activities

Techniques of managing costs

Comprehensive cost management plan Bench marking with similar businesses internal or external, and fixing targets FCF analysis Activity based costing (ABC) costing by activities , in the process identifying unnecessary activities and cutting costs (Only the cost dimension) Activity based management (ABM) - beyond ABC , to analyze profitability,manage resources and measure performance Target costing Through put accounting Throughput is the rate at which the system produces money ,in contrast to output which may be stored in a warehouse.

A FORMAL COST MANAGEMENT PLAN includes

EXAMINATION OF VALUE CREATION AVENUES -also known as Revenue enhancement

ASCERTAINMENT OF VALUE APPROPRIATION - Re examine in depth HOW and WHO is appropriating the Value Created

Value creation

Value creation is something like increasing the Size of the cake !!! Value creation or Revenue enhancement:

Increase plant occupancy

Improve yields Target better paying customers Better Prod mix

Value appropriation Mtnl Inc.tax FBT Society Mseb Customs Sales tax Excise Others

Employees

Customers

Suppliers

Shareholders

Value appropriation is redistributing the same cake

Steps in cost management - 1

1. Data analysis

2. Identify potential cost reduction areas from data analysis

3. Zero base study of existing costs

4. Brain storming

Steps in cost management - 2 5. What drives costs? 6. Who drive costs?

7. Identify Key drivers and associate drivers 8. Identify right targets Quantitative & financial

9. Identify measures

Steps in cost management - 3

10.The Low hanging fruits no stretch 11.The High hanging fruits calling for stretch 12.Make appropriate targets or bench marks 13.Action Plans to achieve targets 14.Relate atleast one KRA for key staff to cost management 15.Monthly review of actuals Vs targets 16. Appoint voluntary Cost Inspectors ???

Principles of setting Targets

S pecific M easurable A ctionable R ealistic T imely

Typical list of cost drivers - 1

COST ITEM
RM Consumption Packing Spares & Consumables Utilities Bank Charges

KEY DRIVERS & Measure

Plant - QTY Marketing QTY - No of tankers, etc Plant QTY wherever possible Others , Rs Plant QTY Units Finance Rates in Rs

ASSOCIATE DRIVERS
Purchase Rates(Rs.) Plant Actual packing costs - Rs Purchase Rates in Rs Engng./Purchase - Rates Exports/Purchase No of LCs, amndmnts,etc

Typical list of cost drivers - 2

COST ITEM KEY DRIVERS & Measure ASSOCIATE DRIVERS

Collections

Marketing Rs Finance monitoring attribute opportunity cost and timely feedback Finance Interest Rates in Rs Mktg / Top - Rs All - Rs Mktg/Exports- Rs Personnel - Rs Plant./Mktg Invnt./Debtor tie up in Qty/no of days All - Rs All - Rs All strength in no of people

Interest

Travelling Communications Selling Exp Manpower

Watch the costs , and the profits will take care of themselves