Cost control must be exercised over manufacturing and non-manufacturing costs. Costs should only be incurred for necessary business expenditures that will provide revenue benefit to the firm.
How Can Manufacturing Costs Be Controlled?
The purpose of cost control is to obtain an optimum product consistent with quality standards from the various input factors, including material, labor, and facilities. The input–output relationship is crucial. In other words, the best result should be forthcoming at the least cost. The office should be shut down when the factory is not in operation. Since most costs are controllable by someone within the organization, responsibility should be assigned.
Changes in standard prices for material, labor, and overhead should be noted along with their effects on the unit standard cost of the product. Perhaps there is a need for material substitutions or modifications in specifications or processes.
Labor control should be jointly developed between staff and management. Line supervisors have prime responsibility to control labor costs. Actual performance of labor should be compared against a realistic yardstick. Unfavorable discrepancies should be followed up.
The Controller and CFO may assist in controlling labor costs in these ways:
- Prepare an analysis of overtime hours and cost. Make sure overtime is approved in advance.
- Prepare a report on labor turnover, training cost, and years of service.
- Determine the standard work hours for the production program.
- Establish procedures to limit the number of employees placed on the payroll to that called for by the production plan.
- Make sure that an employee is performing services per his or her job description. Are high-paid employees doing menial work?
- Consider overtime hours and cost, turnover rate, output per worker, and relationship between indirect labor and direct labor.
- Improve working conditions improved to enhance productivity.
- Analyze machinery to ensure it is up-to-date.
Because most overhead items are small in amount, proper control may be neglected. Of course, in the aggregate, overhead may be substantial. Areas to look at include the personal use of supplies and photocopying and the use of customized forms when standardized ones would suffice.
In order to control overhead, standards must be established and compared against actual performance. Periodic reports of budget and actual overhead costs should be prepared to identify problem areas. Overhead costs can be preplanned, such as planning indirect labor staff (e.g., maintenance), to avoid excessive hours. The preplanning approach may be beneficial when significant dollar cost is involved, such as in the purchase of repair materials and supplies. A record of purchases by responsibility unit may be helpful. Purchase requirements should be properly approved.
The cost of idle equipment should be determined to gauge whether facilities are being utilized properly. A good question to ask; what is the degree of plant utilization relative to what is normal?
What Can Be Done To Minimize Manufacturing Costs?
The control of distribution costs is a much more difficult problem than the control of manufacturing costs. In distribution, we have to consider the varying nature of the personality of seller and buyer. Competitive factors must be taken into account. In production, however, the worker is the only human element. In marketing, there are more methods and greater flexibility relative to production. Several distribution channels may be used. Because of the greater possibility for variability, distribution processes are more difficult to standardize than production activities. If distribution costs are excessive, who and where does the responsibility lie? Is it a problem territory? Is the salesperson doing a poor job?
Distribution costs and effort must be planned, controlled, and monitored. Distribution costs can be analyzed by functional operation, nature of expense, and application of distribution effort.
In functional operation, distribution costs are analyzed in terms of individual responsibility. This is a particularly useful approach in large companies. Functional operations requiring measurement are identified. Examples of such operations might be circular mailing, warehouse shipments, and salesperson calls on customers.
In looking at the nature of the expense, costs are segregated by month, and trends in distribution costs are examined. The ratio of distribution costs to sales over time should be enlightening. A comparison to industry norms is recommended. In looking at the manner of application, distribution costs must be segregated into direct costs, indirect costs, and semi-direct costs.
Direct costs are specifically identifiable to a particular segment. Examples of direct costs assignable to a salesperson are salary, commission, and travel and entertainment expense. But these same costs may be indirect or semi-direct if attributable to product analysis. An expense that is direct in one application may not be in another.
Indirect costs are general corporate costs and must be allocated to segments (e.g., territory, product) on a rational basis. Examples are corporate advertising and salaries of general sales executives. Advertising may be allocated based on sales. General sales executives’ salaries may be allocated based on time spent by territory or product. Here, a time log may be kept.
Semi-direct costs are related in some measurable way to particular segments. Such costs may be distributed in accordance with the services required. For example, the variable factor for warehousing may be weight handled. Order handling costs may be in terms of the number of orders. The allocation base is considerably less arbitrary than with indirect costs.
A comparison should be made between actual and budgeted figures for salesperson salaries, bonuses, and expenses. The salary structure in the industry may serve as a good reference point.
An examination should be made as to the effect of advertising on sales. Perhaps a change in media is needed.
Telephone expense may be controlled in these ways:
- Prior approval for long-distance calls
- Controls to restrict personal use of the telephone, such as a key lock
- Discarding or returning unnecessary equipment
The trend in warehouse expense to sales should be analyzed. Increasing trends may have to be investigated.
To reduce dues and subscription expenses, a control is necessary, such as having a card record of each publication by subscribed to, by whom, and why. If another employee must use that publication, he or she knows where to go.
There should be centralized control over contributions, perhaps in the hands of a committee of senior management. A general policy must be established as to amount and for what purposes.