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COST ACCOUNTING

PROJECT
ON
COST REDUCTION

Submitted by :
ABHINAV SHARMA 08/BBS/7142
SHREYA SHARMA 08/BBS/7134
TEJASVI AGARWAL 08/BBS/7143
B.B.S. III semester

To :
MS. AANCHAL GUPTA
Department of Business Studies

DEEN DAYAL UPADHYAYA COLLEGE
UNIVERSITY OF DELHI
DECLARATION

This term paper is entirely based on the secondary data collected by us from
various sources.

This is hereby declared that this term paper is not a part of any partial / whole
fulfillment of any other paper / course/ program offered by any other college /
institute/ university than specified.

____________________
Abhinav Sharma
08/BBS/7142
DATE :
_______________
Countersigned Shreya Sharma
08/BBS/7134

(Ms. Aanchal Gupta) __________________
Tejasvi Agarwal
08/BBS/7143
ACKNOWLEDGEMENT

We feel very grateful and wish to thank all those who have helped us in giving
a productive shape to our ideas in the form of this project.

Firstly, our deepest gratitude to our teacher, Ms. Aanchal Gupta, Department
of Business Studies, DDUC, for her invaluable support and guidance. Our
heartfelt thanks to all the authors of the various articles referred to by us as
well as to all those people who shared their valuable time and knowledge with
us.

This project would not be complete without thanking our institution “Deen
Dayal Upadhyaya College” for giving us an opportunity to have an enriching
experience in terms of this project.
TABLE OF CONTENTS
S.No. Topic
1 MEANING
2 SPECIAL FEATURES
3 COST CONTROL VERSUS COST REDUCTION
4 ORGANIZATION FOR COST REDUCTION
5 COST REDUCTION PROGRAMME
6 FIELDS COVERED BY COST REDUCTION
PROGRAMME
7 COST REDUCTION TECHNIQUES
8 REDUCTION IN VARIETY OF PRODUCTS
9 VALUE ANALYSIS
10 IMPORTANCE OF VALUE ANALYSIS IN COST
REDUCTION
11 CASE STUDY
MEANING

Cost Reduction can be defined as the achievement of real and permanent reduction in the unit cost
of goods produced or services rendered without impairing their quality or functional suitability.
The above definition brings out the following as the essential features of cost reduction:

i. Reduction should be real:

Cost reduction involves genuine savings in cost of production or providing services. This
can be achieved either through research or by eliminating wasteful expenditure. Cost
reduction obtained as a result of lower material prices, price agreements, reduction in
government duties or taxes or windfall is not to be taken as real and hence it cannot be
termed as cost reduction

ii. Reduction should be permanent:

Cost reduction involves permanent reduction in the costs. Temporary reduction in cost is
not taken as permanent reduction

iii. Quality or utility to be maintained:

Cost reduction should not affect the quality or the utility of the goods or services. In other
words, goods and services should continue to be suitable for the intended use even after
cost reduction.

SPECIAL FEATURES:

1. Unit cost required to be reduced by reducing the expenditure with respect to the given
volume of output.

2. Unit cost is attempted to be reduced by increasing production i.e. production per unit of
input (e.g. material, labour hour, per employee). It implies enhancement in the rate of yield
or output, expenditure remaining the same.
COST CONTROL VERSUS COST REDUCTION

Controlling the costs, already pre-determined on the basis of assumption of reasonable level of
efficiency taking the past, present and future into account, is the main focus of the cost control.
The actuals are tried to be bought within the ambit of targets. Cost accounting is primarily
concerned with controlling the cost so that losses and wastages are eliminated or at least
minimized to the extent possible. While cost reduction is entirely a matter which goes much
beyond cost control and hence it is not synonymous with cost control at all, now cost accounting
aims at cost reduction also, besides cost control. Cost reduction is a process which actually starts
from where cost control ends. Management has to ponder over in terms of bringing down costs to
levels lower than the targeted ones so as to face fierce competition and exist in this highly
competitive business environment. How, without sacrificing quality or compromising with the
utility of the products and services the cost can be permanently cut down, is the real objective of
cost reduction. Thus, new ways and means are required to be desired, researches are to be carried
out and management has to be innovative.

The main distinctions between cost control and cost reduction are discussed below:

Basis Cost Control Cost Reduction
1. Objective Cost Control aims at Cost reduction is directed to
maintaining the cost in explore the possibilities of
accordance with the improving the targets or
established targets or standards themselves. It
standards. challenges all standards and
makes continuous efforts to
better them
2. Approach Cost control locks dynamism Cost reduction is a continuous
since it aims to attain lowest process and recognizes no
possible costs under existing conditions are permanent. It
circumstances involves a continuous process
of analysis and tries to find out
new means to achieve
reduction in costs
3. Nature Cost Control is a preventive Cost reduction is a corrective
function. Under it, costs are function. It operates even
optimized before they are when an efficient cost control
incurred system exists. It pre-supposes
that there is always a room for
reduction in the achieved costs
4. Emphasis In case of Cost Control, the In case of Cost reduction, the
emphasis is on the past. It aims emphasis is on the present and
at keeping the costs within the the future. The emphasis is not
limits already set. In case the on what have been the costs
costs reach the target level, the but what could be possible
objective of cost control is improvements in the cost.
achieved Thus there is no end to cost
reduction.

5. Assumptions Cost Control assumes the Cost reduction assumes the
existence of certain standards existence of concealed
and norms which are not potential savings in the
challenged. standards or norms which are
therefore subject to constant
challenge or improvement.

Thus cost control is only a means to achieve the end of cost reduction.
ORGANIZATION FOR COST REDUCTION

Cost reduction involves a real and permanent reduction in costs. It is a continuous process. Hence,
it requires co-operation of all people at all levels. The environment in the organization should be
made so congenial that healthy discussion takes place at all levels of management. The criticisms
should be accepted in the right spirit with honesty and grace by all, so that the corrective action
may be taken in time. This requires the formation of a separate Cost Reduction cell within the
organization. The cell functions under the supervision and direction of a high powered authority
known as the Cost reduction committee. The committee consists of responsible executives from
various functions such as purchase, planning and design, production, sales, distribution, finance,
research etc. the committee should chalk out a proper cost reduction programme and fix up
responsibility of the executives to review the actual performance from time to time.

The functions of the cost cell can be enumerated as follows:

1. It collects cost data from different departments
2. It invites suggestions from different executives for improvement and reduction of costs at
the point of their occurrence
3. It creates cost reduction environment in the organization by emphasizing and explaining to
the workers the importance of cost reduction and the benefits which will accrue to them
4. It invites the employees to participate in framing the schemes for controlling the costs at
the point of their occurrence
5. It identifies areas where cost reduction is Necessary, Desirable, Possible and fixes the
priorities
6. It frames policies, guidelines and issues directives for bringing changes in the product
designs, introducing new products and new designs in consultation with technocrats for
reducing the cost of production without impairing the quality.
7. It frames policies regarding reduction of costs in administrative and distribution divisions
without adversely affecting their efficiency
COST REDUCTION PROGRAMME

Cost reduction programme aims at improvement of human efforts at all levels of the organization
which helps in reducing costs. It may be a short-term or a long-term programme. A short-term
programme is undertaken for sorting out immediate problems; e.g. a problem involving controlling
wastages and inefficiencies in a certain department which are likely to push up the cost and reduce
the profit margin. Long-term cost reduction programme involves major reduction in costs and may
also require capital expenditure. It involves setting up of the target return on capital employed and
developing a scheme for its achievement through various cost reduction measures.

The following are the essential requisites for successful implementation of a cost reduction
programme:

I. There should be a separate cost reduction cell responsible for proper planning and
implementation of the cost reduction programme.
II. There should be an efficient system of management reporting at all levels of management.
III. The programme should have support from the top management. It is a continuous process
and, therefore, should not be allowed to degenerate into a routine affair.
IV. There should be an operation and research procedure
V. There should be co operation amongst different executives concerned with the programme.
Each departmental head should be given a list of the areas where he is expected to effect
economies in cost. Moreover, he should also be encouraged to put forward his own
suggestions for improvement.
VI. There should be regular follow-up to the plan and continuous appraisal of the programme
performed with the actual cost reduction performance.
VII. The plan should not be confined only to reducing costs but should also examine whether an
expenditure is really required or not. In other words, there should be efforts to eliminate
uneconomic and unnecessary activities.

Fields covered by cost reduction programme
The following are the specific areas which are covered by a cost reduction programme:

(a) Product Design:

Designing the product is a pre-requisite to its production. It is therefore necessary that
proper care is given to designing the product to affect the economies in the cost of
materials, labour, tools and equipment. The technique of value analysis, as discussed later,
is greatly helpful in designing the product. Product should be designed in a manner that it
gives the maximum value at the minimum cost.

Product designing may be required either for introducing a new design or improvement of
the existing design. The introduction of a new design is advantageous but risky since the
new venture may or may not be successful. Hence, a careful analysis of its cost elements
(i.e. materials, labour and expenses) and its marketability is necessary. The venture
concerning improvement of the existing design is advantageous since the reputation gained
by the old product is likely to be enhanced and improved further through improved design
of the product. The improvement should be in the direction of making the product less
costly; more utility oriented, attractive and durable.

(b) Production Planning:

Production planning can also be greatly helpful in cost reduction. The location and the
layout of the factory have significant influence on cost. Of course, the factory location
cannot be changed so easily but its layout can be organized on more scientific lines so as to
reduce the cost of production.

The Charted Institute of Management Accountants, London, in its publication on cost
reduction, has laid down the following principles for developing a sound production
planning system:

1. Production planning should be based on realistic and detailed sales forecast.
2. Efficient production system requires fullest possible employment of suitable production
facilities, elimination of unnecessary movement and handling of materials provision of
adequate working instructions, drawing tools etc. and the most economical storage of
stocks.

The design of a production system is dependent on its location because the resulting
physical factors influence layout and also because of the fact that the location determines
operating and capital costs. In so far as physical factors of plant design are concerned,
location may determine the following costs:

 Whether or not power is purchased
 The extent of air conditioning and humidification required
 Whether local sub-contracting facilities for components are available or whether
provision for the manufacture of components has to be made in the factory
 Storage space requirements depending on the availability of raw material in the
vicinity.
 The type of transportation facilities available for receiving raw materials and
dispatching finished goods etc.

From the standpoint of costs, transportation costs, labour costs, cost of land, construction
cost, etc. will be influenced by the location of the factory

Even if an existing company intends to start an additional factory, the addition of a new
plant is not a matter of determining location independent of the location of the existing
plants. Establishment of a new plant may involve re-allocation of capacities so that the
combined production and distribution costs are minimized.
Plant layout aims at developing a production system that meets the requirements of the
capacity and quality in the most economical way. Under ideal conditions of manufacture,
plant and manufacturing facilities will be laid down after due consideration of all the
factors, tending to reduce waste of time, effort, material and resources to the minimum
possible level. Easily available and most suitable equipment should be obtained and
utilized to the maximum possible extent.

Any dislocation of production occasioned by change of layout may lead to increased costs.
Such dislocation can be averted by initially planning the layout in the best possible way.
The production controlled department should keep abreast of the technological
developments and recommend the use of the most suitable and economical type of plant
and equipment.

3. The assessment and coordination of equipment, labour and material requirements
demand the formulation of a complete operation sequence for all products the setting up of
material standards and the establishment of reliable process time by the use of work
measurement techniques.
4. Efficient production control and economic manufacture require careful determination of
the lot size according to nature of methods of production employed
5. Machine loading and labour requirements should be related to full capacity available.
Where the idle capacity is found to exist, efforts should be made to ensure its economics
utilization, say, by the introduction of a new product.
6. The production plan once formulated should be used as a measure of the effectiveness
of actual performance with a view to correcting the unfavorable divergencies as they occur.
It should nevertheless be flexible enough to cope with essential changes arising from
changed conditions.

(c) Direct Materials Cost Reduction:

Direct materials generally constitute 50% of the cost of a product. The following steps may
be helpful in reducing material costs:

1) Control should be exercised on purchasing of raw materials. The adoption of the
Japanese just in time (JIT) technology may greatly reduce the material costs.
2) The various inventory control techniques, viz., fixation and observation of
inventory levels, ABC Analysis, Ageing Schedule; perpetual inventory system followed
by continuous stock taking etc., should be adopted.
3) All efforts should be made to minimize/avoid losses and wastage of raw materials.

(d) Direct Labour Cost Reduction:

Direct labour constitutes second important element of the cost of a product. Cost
reduction in labour is possible through proper organization and functioning of the
personnel, works study and engineering departments. The personnel department is
concerned with finding the right man for the right job.
COST REDUCTION TECHNIQUES:

The following are some of the important cost reduction techniques:

• Budgetary control
• Standard costing
• Inventory control
• Job study, Works study and Motion study
• Job evaluation and merit rating
• Reduction in variety of products
• Value analysis
(I). BUDGETARY CONTROL:

Budgetary control is an important technique of control on business activities by management,
in which business activities are operated on the basis of pre-prepared budget and thereafter
actual results are evaluated in the light of budget estimates. In brief, budgetary control is a tool of
management control and accounting which directs and co-ordinates the working operation on
the basis of budgets. If there are variances in actual results, then either they are corrected or
budget is modified so that the objective of maximum efficiency as per the policy of management
may be achieved.

Objectives of Budgetary Control:

Budgetary control is essential for policy planning and control. It also acts as an instrument of co-
ordination. The main objectives of budgetary control are as follows:

1. To assist in policy formulation on the basis of proper and reliable data.
2. To ensure planning for future by setting up various budgets.
3. To determine short-term and long-term financial and physical targets.
4. To operate various cost centres and departments with efficiency and economy.
5. To classify expenses according to their nature such as direct and indirect expenses;
fixed, variable and semi-variable expenses, etc.
6. To help administration as under this system, executives perform their functions
according to pre-determined budgets.
7. To anticipate capital requirements and to make necessary arrangement for it.
8. To make cost accounting more reliable and systematic.
9. To promote research in order to bring down cost, to increase efficiency and to
achieve the targets of sales.
10. To develop co-ordination and co-operation among employees and executives.
11. To eliminate wastes and increase in profitability.
12. To correct the variations from the established standards.
13. To fix the responsibility of various individuals in the organization.

Imp./merits/advantages of budgeting or budgetary control:-

There are three important functions of top management—planning, co-ordination and control.
Budgetary control helps in all these functions and in this context the advantages of
budgetary control may be studied under following three heads:

1. BUDGETING AND PLANNING:

A budget is a plan of the policy to be pursued during the defined period of time to attain a given
objective. In other words, planning and budgeting are closely related with each other and in this
context following advantages may be mentioned:

• Action on the basis of Well Decided Plan: Under budgetary control all actions are guided
by well thought out plan because a budget is prepared after a careful study and research.
• Mechanism for Policy Implementation: Budgeting provides a mechanism through which
the policies of management can be implemented effectively.
• Work on the basis of best option: Various available options are considered, while preparing
budgets and efforts are made to select the best option. It improves the effectiveness
of planning.
• Communication: Budget is an important medium of communication which establishes
link between the top management and the operatives. Thus, the actual operators can
understand the policy of top management more precisely and clearly.
• Objectivity: Budgeting expresses all business activities in numerical terms and it develops
the quality of objectivity in planning.The fact is that budgeting provides a strong base
for effective planning of business activities which bring certainty in activities and
prepares an outline for proper use of available resources.

2. BUDGETING AND CO-ORDINATION:

Co-ordination is the essence of management and budgeting makes the work of co-ordination
simple and sure. Budgeting is useful in co-ordination in following manner:

• Co-ordination in budget preparation: While preparing budgets, individual goal,
problem and potentiality of all departments are given due considerations and each
departmental executive is given an opportunity to present his case. All these aspects and
view are coordinated in the budget.
• Co-ordination in working: Budgeting promotes co-ordination among policies, plans and
actual working.
• Communication and co-ordination: Budget is a media of communication and on the basis
of it each member of management is having perfect and clear-cut knowledge as ‘what is
the plan’ and ‘how, when and by whom it can be implemented’.

Thus, budgetary control helps in maintaining continuous co-ordination among administration,
management and organisation.

3. BUDGETING AND CONTROL:

• Control on cost of production: Budgetary control helps in controlling cost of
production by determining budgets of different budget centres.
• Control on Liquidity: The liquidity position of the firm can easily be controlled
according to need by the technique of cash budgeting.
• Control on capital expenditure: Capital budgeting helps in making control on capital
expenditure and having best use of available resources of capital.
• Effective utilization of resources: It ensures effective utilization of men, materials,
machines and money because production is planned according to the availability of these
resources.
• Standard for measuring performance: Budget provides standards of expected
performance, against which actual performance of departments and employees can be
compared.
• Feeling of cost consciousness: Budgetary control helps in developing a feeling of cost
consciousness and in restricting expenditure to the minimum.

Limitations of Budgetary Control

Though budgetary control is an important device of management control, it suffers from the
following limitations:

• Budgets are based on Plan Estimates: Budgets are based on estimates made for planning.
Naturally the success or failure of budget depends to a large extent upon the accuracy of
these estimates. Though it is not possible to have cent-percent accuracy in these
estimates but if they are very far from reality, the entire system of budgeting will be a
futile exercise. This aspect of budgeting should always be kept in mind while
interpreting the results thereof.
• Budgeting is not a substitute of management: Budget is not a substitute of
management; it is only a tool of management for achieving the objectives of the concern.
Hence, the success of budgeting depends on the ability and efficiency of those persons who
are responsible for budgetary system.
• Operation of the Budget plan is not automatic: Mere preparation of budget cannot ensure
the advantages of budgeting. The execution of budget is as important as its
preparation. However, its operation is not automatic. In this context it is required
that each executive must feel his responsibility and should make necessary efforts to attain
the budgeted goals.
• Time effect: It takes some time in preparing budgets and during this period many such
changes may occur due to which it becomes difficult to maintain the accuracy of
budget.
• Prohibitive cost: The installation of budgeting system involves too much time and costs.
Normally, small concerns cannot afford it. Therefore, there should be proper balance
between expected profits from budgetary system and cost of its operation.
• Effects of changing conditions: In rapidly changing conditions it may not be possible
to achieve the budgeted targets. Budgets may have to be revised from time to time but
frequent revision of targets reduces the importance of budget and involves additional
expenditure too.
• Constraints on managerial initiative: Budgetary control may serve as constraints on
managerial initiative because every executive tries to achieve the budgeted targets
only. There may be some efficient persons who can exceed the targets but they will also
feel contended by reaching the targets.
• Conflicts among functional executives: Budgetary control may lead to conflict among
functional executives because every executive may try to secure a larger share of budgetary
allocation, while the success of budgetary control depends upon the team work.
(II). STANDARD COSTING:

The CIMA, London has defined standard cost as “a predetermined cost which is calculated from
managements standards of efficient operations and the relevant necessary expenditure.” They are
the predetermined costs on technical estimate of material labor and overhead for a selected period
of time and for a prescribed set of working conditions. In other words, a standard cost is a planned
cost for a unit of product or service rendered.

The technique of using standard costs for the purposes of cost control is known as standard
costing. It is a system of cost accounting which is designed to find out how much should be the
cost of a product under the existing conditions. The actual cost can be ascertained only when
production is undertaken. The predetermined cost is compared to the actual cost and a variance
between the two enables the management to take necessary corrective measures.

Basically, standard costing is a management tool for control. In the process, we have taken
standards as parameters for measuring the performance. Cost analysis and cost control is essential
for any activity. Cost includes material labor and overheads. Sometimes, we need to revise the
standards due to change in uses, raw material, technology, method of production etc. For a proper
organization, it is required to implement this under a committee for the activity. It is a continued
activity for the optimum utilization of resources.

Advantages

Standard costing is a management control technique for every activity. It is not only useful for cost
control purposes but is also helpful in production planning and policy formulation. It allows
management by exception. In the light of various objectives of this system, some of the advantages
of this tool are given below:

• Efficiency measurement-- The comparison of actual costs with standard costs enables the
management to evaluate performance of various cost centers. In the absence of standard
costing system, actual costs of different period may be compared to measure efficiency. It
is not proper to compare costs of different period because circumstance of both the periods
may be different. Still, a decision about base period can be made with which actual
performance can be compared.
• Finding of variance-- The performance variances are determined by comparing actual
costs with standard costs. Management is able to spot out the place of inefficiencies. It can
fix responsibility for deviation in performance. It is possible to take corrective measures at
the earliest. A regular check on various expenditures is also ensured by standard cost
system.
• Management by exception-- The targets of different individuals are fixed if the
performance is according to predetermined standards. In this case, there is nothing to
worry. The attention of the management is drawn only when actual performance is less
than the budgeted performance. Management by exception means that everybody is given a
target to be achieved and management need not supervise each and everything. The
responsibilities are fixed and every body tries to achieve his/her targets.
• Cost control-- Every costing system aims at cost control and cost reduction. The standards
are being constantly analyzed and an effort is made to improve efficiency. Whenever a
variance occurs, the reasons are studied and immediate corrective measures are undertaken.
The action taken in spotting weak points enables cost control system.
• Right decisions-- It enables and provides useful information to the management in taking
important decisions. For example, the problem created by inflating, rising prices. It can also
be used to provide incentive plans for employees etc.
• Eliminating inefficiencies-- The setting of standards for different elements of cost requires
a detailed study of different aspects. The standards are set differently for manufacturing,
administrative and selling expenses. Improved methods are used for setting these standards.
The determination of manufacturing expenses will require time and motion study for labor
and effective material control devices for materials. Similar studies will be needed for
finding other expenses. All these studies will make it possible to eliminate inefficiencies at
different steps.

Limitations of Standard Costing

• It cannot be used in those organizations where non-standard products are produced. If the
production is undertaken according to the customer specifications, then each job will
involve different amount of expenditures.
• The process of setting standard is a difficult task, as it requires technical skills. The time
and motion study is required to be undertaken for this purpose. These studies require a lot
of time and money.
• There are no inset circumstances to be considered for fixing standards. The conditions
under which standards are fixed do not remain static. With the change in circumstances, if
the standards are not revised the same become impracticable.
• The fixing of responsibility is not an easy task. The variances are to be classified into
controllable and uncontrollable variances. Standard costing is applicable only for
controllable variances.

For instance, if the industry changed the technology then the system will not be suitable. In that
case, we will have to change or revise the standards. A frequent revision of standards will become
costly.

Setting Standards

Normally, setting up standards is based on the past experience. The total standard cost includes
direct materials, direct labor and overheads. Normally, all these are fixed to some extent. The
standards should be set up in a systematic way so that they are used as a tool for cost control.
Determination of Standard Costs

1. Determination of Cost Center

According to J. Betty, “A cost center is a department or part of a department or an item of
equipment or machinery or a person or a group of persons in respect of which costs are
accumulated, and one where control can be exercised.” Cost centers are necessary for determining
the costs. If the whole factory is engaged in manufacturing a product, the factory will be a cost
center. In fact, a cost center describes the product while cost is accumulated. Cost centers enable
the determination of costs and fixation of responsibility. A cost center relating to a person is called
personnel cost center, and a cost center relating to products and equipments is called impersonal
cost center.

2. Current Standards

A current standard is a standard which is established for use over a short period of time and is
related to current condition. It reflects the performance that should be attained during the current
period. The period for current standard is normally one year. It is presumed that conditions of
production will remain unchanged. In case there is any change in price or manufacturing condition,
the standards are also revised. Current standard may be ideal standard and expected standard.

3. Ideal Standard

This is the standard which represents a high level of efficiency. Ideal standard is fixed on the
assumption that favorable conditions will prevail and management will be at its best. The price
paid for materials will be lowest and wastes etc. will be minimum possible. The labor time for
making the production will be minimum and rates of wages will also be low. The overheads
expenses are also set with maximum efficiency in mind. All the conditions, both internal and
external, should be favorable and only then ideal standard will be achieved.

Ideal standard is fixed on the assumption of those conditions which may rarely exist. This standard
is not practicable and may not be achieved. Though this standard may not be achieved, even then
an effort is made. The deviation between targets and actual performance is ignorable. In practice,
ideal standard has an adverse effect on the employees. They do not try to reach the standard
because the standards are not considered realistic.

4. Basic Standards

A basic standard may be defined as a standard which is established for use for an indefinite period
which may a long period. Basic standard is established for a long period and is not adjusted to the
preset conations. The same standard remains in force for a long period. These standards are revised
only on the changes in specification of material and technology productions. It is indeed just like a
number against which subsequent process changes can be measured. Basic standard enables the
measurement of changes in costs. For example, if the basic cost for material is Rs. 20 per unit and
the current price is Rs. 25 per unit, it will show an increase of 25% in the cost of materials. The
changes in manufacturing costs can be measured by taking basic standard, as a base standard
cannot serve as a tool for cost control purpose because the standard is not revised for a long time.
The deviation between standard cost and actual cost cannot be used as a yardstick for measuring
efficiency.

5. Normal Standards

As per terminology, normal standard has been defined as a standard which, it is anticipated, can be
attained over a future period of time, preferably long enough to cover one trade cycle. This
standard is based on the conditions which will cover a future period of five years, concerning one
trade cycle. If a normal cycle of ups and downs in sales and production is 10 years, then standard
will be set on average sales and production which will cover all the years. The standard attempts to
cover variance in the production from one time to another time. An average is taken from the
periods of recession and depression. The normal standard concept is theoretical and cannot be used
for cost control purpose. Normal standard can be properly applied for absorption of overhead cost
over a long period of time.

6. Organization for Standard Costing

The success of standard costing system will depend upon the setting up of proper standards. For
the purpose of setting standards, a person or a committee should be given this job. In a big
concern, a standard costing committee is formed for this purpose. The committee includes
production manager, purchase manager, sales manager, personnel manager, chief engineer and cost
accountant. The cost accountant acts as a co-coordinator of this committee.

7. Accounting System

Classification of accounts is necessary to meet the required purpose, i.e. function, asset or revenue
item. Codes can be used to have a speedy collection of accounts. A standard is a pre-determined
measure of material, labor and overheads. It may be expressed in quality and its monetary
measurements in standard costs.
(III). INVENTORY CONTROL:
Inventory control is the delicate balance of the costs versus profits associated with having
stock on hand. Inventory control means keeping the overall costs associated with
having inventory as low as possible without creating problems. This is also sometimes
called stock control. It is an important part of any business that must have a stock of
products or items on hand. Correctly managing inventory control is a delicate balance
at all times between having too much and too little in order to maximize profits. The
costs associated with holding stock, running out of stock, and placing orders must all
be looked at and compared in order to find the right formula for a particular
business.

Inventory control is concerned with minimizing the total cost of inventory. In the U.K. the term
often used is stock control. The three main factors in inventory control decision making process
are:

• The cost of holding the stock (e.g., based on the interest rate).
• The cost of placing an order (e.g., for row material stocks) or the set-up cost of production.
• The cost of shortage, i.e., what is lost if the stock is insufficient to meet all demand.

The third element is the most difficult to measure and is often handled by establishing a "service
level" policy, e. g, certain percentage of demand will be met from stock without delay.

It is impossible to have an unlimited supply on hand, for a number of different reasons. Many
businesses simply don’t have enough money to keep excessively large inventories. There are costs
associated with purchasing the items as well as storing them, and having too many products leads
to further losses when they don’t move off of the shelves.

At the same time, there are issues with inventory control when there isn’t enough stock on hand.
One common problem is running out of inventory, which is caused by trying to reduce inventory
costs too much. This is something that no business wants to have happen, but it happens to
virtually all of them at some point. Even the largest stores run out of certain products from time to
time when they sell or use more than they expected. This can cause financial losses when
inventory is not available for customers to purchase. Part of inventory control is trying to minimize
shortages so these are rare occurrences. Most businesses expect they will have shortages on
occasion and they have calculated that the small loss is worth the money saved by not having an
overstock.

Another important element of inventory control is called reorder point. Businesses need to think
ahead and calculate the best time for reordering products. Doing so too soon may cause financial
difficulties or running out of space. On the other hand, waiting to long to reorder will result in a
shortage and running out of inventory before the next shipment arrives. When figuring out a
reorder point, it’s necessary to calculate how long it will take the shipment to arrive and the
amount of demand for a particular item. The overhead costs, fees, and shipping expenses of
ordering large versus small quantities should also be looked at.
Inventory control is an ongoing process that is rarely, if ever, executed perfectly. Experience,
expertise, and practice help people to make the best decisions regarding stock, but there are always
unknown circumstances and variables. Stores can make good estimates about how many of a
specific product they will sell, but they get things wrong from time to time. This is unavoidable.
Inventory control can break a business if it is executed poorly, because either expenses will be too
high or customers will get tired of dealing with shortages and find another place to spend their
money.
(IV). JOB EVALUATION AND MERIT RATING:

Job evaluation is a practical technique, designed to enable trained and experienced staff to judge
the size of one job relative to others. It does not directly determine pay levels, but will establish the
basis for an internal ranking of jobs.

The two most common methods of job evaluation that have been used are first, whole job ranking,
where jobs are taken as a whole and ranked against each other. The second method is one of
awarding points for various aspects of the job. In the points system various aspects or parts of the
job such as education and experience required to perform the job are assessed and a points value
awarded - the higher the educational requirements of the job the higher the points scored. The most
well known points scheme was introduced by Hay management consultants in 1951. This scheme
evaluates job responsibilities in the light of three major factors - know how, problem solving and
accountability.

Some Principles of Job Evaluation
• Clearly defined and identifiable jobs must exist. These jobs will be accurately described in
an agreed job description.
• All jobs in an organisation will be evaluated using an agreed job evaluation scheme.
• Job evaluators will need to gain a thorough understanding of the job
• Job evaluation is concerned with jobs, not people. It is not the person that is being
evaluated.
• The job is assessed as if it were being carried out in a fully competent and acceptable
manner.
• Job evaluation is based on judgement and is not scientific. However if applied correctly it
can enable objective judgements to be made.
• It is possible to make a judgement about a job's contribution relative to other jobs in an
organisation.
• The real test of the evaluation results is their acceptability to all participants.
• Job evaluation can aid organisational problem solving as it highlights duplication of tasks
and gaps between jobs and functions.

Job Evaluation - The Future

As organisations constantly evolve and new organisations emerge there will be challenges to
existing principles of job evaluation. Whether existing job evaluation techniques and
accompanying schemes remain relevant in a faster moving and constantly changing world, where
new jobs and roles are invented on a regular basis, remains to be seen. The formal points systems,
used by so many organisations is often already seen to be inflexible. Sticking rigidly to an existing
scheme may impose barriers to change. Constantly updating and writing new jobs together with
the time that has to be spent administering the job evaluation schemes may become too
cumbersome and time consuming for the benefits that are derived.

It is essentially a comparative process. Job evaluation evaluates selected job factors, which are
regarded as important for the effective performance of the job, according to one of several
alternative methods. The resulting numerical gradings can form the basis of an equitable structure
of job gradings. The job grades may or may not be used for status or payment purposes.

Job Evaluation is concerned with measuring the demands the job places on its holder. Most factors
that contribute to this job pressure, e.g. physical strength required, knowledge of mathematics
required, are assessed and the result is a numerical estimate of the total job pressure. When
evaluations are carried out on all hourly paid personnel the technique’s uses include establishing
relative wage rates for different tasks. It is possible to use it for all grades of personnel, even senior
management.

Illustration:

The Time Span of Discretion is an interesting and unusual method of job evaluation developed by
Elliot Jaques for the Glacier Metal Company. In this method the job pressure is assessed according
to the length of time over which managers decisions commit the company. A machine operative,
for example, is at any moment committing the company only for the period needed to make one
product unit or component. The manager who buys the machine is committing the company for ten
years.
(V). REDUCTION IN VARIETY OF PRODUCTS:

It is common knowledge that larger is the variety of products more is involved. A large variety of
products means more investment in terms of equipment in both fixed and working capital and
larger sales efforts which all push up the cost of production and sales. The reduction in variety of
products will lead to cost reduction because of the following reasons:

i. Standardization:
Reduction in variety of production will lead to standardization of products. The term
standardization means that the product should be a standard one i.e. made of standard
materials and components having a standard design and a standard cost. The standard in
each of the above cases has to be determined by the management.
The standardization of products will have the following advantages:
a. It will reduce investment in the inventories since only few standard products will have
to be kept in stock.
b. The products can be manufactured in larger quantities in each process as a result of
increase in the size of each batch.
c. The products will be of improved quality, greater reliability and of less cost.

ii. Simplification:
Reduction in variety of products will lead to simplification of the production process. A
simplification of the production process involves less of machine time, longer runs,
increased productivity and lower cost of inspection. As a matter of fact, standardization
will automatically lead to simplification of the production process

iii. Quality control:
Since a standard product is to be provided to the customer it implies that the quality of the
product should not be allowed to get deteriorated but rather it should continuously be
retained and, if possible, improved. This will require inspection of the product at different
stages of production so that the defects may e remedied at the earliest stage. It will bring
economy in reducing the cost in terms of reduction in the number of defective units.
(VI). VALUE ANALYSIS:

Concept of value: The term value has different meanings for different persons; however, an
industrial product may have the following concept of value:

1. Use Value

This refers to the characteristics which the product should possess to provide useful service for
which it is intended. For instance, a watch is meant for indicating time. In case it gives fairly
correct time, it is giving its full use value. The use value is measured in terms of quality of
performance. In order to decide whether the product is giving a good value, for the money
spent on it, it will be appropriate to divide its worth for the concerned person by the price paid
for it. A product may perform several functions. Accordingly, its value can be divided into
three categories:-
(a) Primary use value
(b) Secondary use value
(c) Auxiliary use value

For instance, paint has different use values. It has primary use value when it is applied to
protect some service. It has a secondary use value when it is used for marking lines on the road
for crossing by pedestrians. It has an auxiliary use value when it pleases aesthetic sense. Such a
functional classification would help one in identifying which paint one should use keeping in
mind the objective. If this is not done, perhaps one may use costly enamel paint where use of
ordinary paint would have been prudent.

2. Cost Value

The value is measured in terms of cost in case product is manufactured in the organization. It
refers to the cost of production. In case a product is procured from outside, it refers to cost of
its purchase.

3. Exchange Value

It refers to sales value which a product would fetch. It is important for the sales department
since the profit is excess of the selling price (i.e. exchange value) over the cost of the product.
Hence, the sales department must ascertain what value the product has for the customers as
compared to competitive products available in the market. It will help in advising the
management in fixing the selling rice of the product

4. Esteem value

This may also be referred to as the prestige value. Certain products or articles have value
simply because of their attractiveness or esteemed features. A watch made of gold has an
esteem value for its owner, though its utility is not more than that of an ordinary watch. For
some people purchase of a gold watch may be a waste. However, it commends a value for the
person who wishes to impress upon others and thus have a personal satisfaction.
Importance of value analysis in cost reduction:

Also termed as value engineering, the approach focuses on improvement in value by resulting to a
careful and in-depth study of products at the stage of their designing. The different components
can be redesigned or standardized. Less costly manufacturing processes or methods may also be
used. Such a study reveals the fields which involve avoidable costs and after locating there areas,
steps can be taken to eliminate or if not possible reduce such unwanted costs, of course, without in
any way compromising on quality.

Following points deserve consideration before embarking upon value analysis in order to critically
examine each and every product and its part”. These are as follows:

• Exact function of the item must be identified and its significance evaluated.
• Cost-benefit analysis of the item must be carried out.
• The aspect of standardization should be assessed in order to have durability.
• The requirement of redesigning should be assessed in order to have durability
• Economics of labour etc. should also be measured.
• Redesigning may be adopted if it results in lower costs.
• Combination of activities, items or segregation should be also be considered to reduce costs
of incentives etc.
CASE STUDY

(COST REDUCTION IN DYEING OF COTTON
WITH REACTIVE DYES)
The reactive dye business, due to its maturity, is very competitive and price sensitive. As older dye
technologies have moved out of patent, these have been taken up by manufacturers in the
developing world, driving down manpower costs and total production costs. Therefore, a large
proportion of cotton processing has also moved to the cheaper and less environmentally conscious
economies of the developing world.

In the case study, a modified process for rinsing after dyeing has been suggested for cost reduction
and environment benefits.

Reactive dyeing process
The process for reactive dyeing of cotton can be divided into three steps: the pre-treatment, the
dyeing and the rinsing after dyeing. Traditionally, the consumption of energy, chemicals and water
in rinsing is crucial; approximately half of the total energy consumption and of the total water
consumption are attributed to the rinsing process after dyeing. Therefore there is much scope for
cost reduction in rinsing operation.

Water consumption in reactive dyeing:

During the pre-treatment, the cotton fabric is scoured and bleached and washed. After some rinses,
the dyestuff is poured into the dye bath and a diffusion of the dyestuff molecules between the
cellulose fibres takes place. After some time, salt is added to obtain adsorption of the dyestuff to
the cellulose fibre. After this, adjusting temperature (50-80°C) and pH (10,5-11,5) completes the
reaction between the dyestuff and the cellulose. Some of the dyestuff will be hydrolysed during
this dyeing process, and the adsorbed hydrolysate must be removed in the succeeding rinsing after
dyeing.

The rinsing traditionally consists of several baths, as in Table 1.

TABLE 1
STEP PROCESS WATER (litres)
1 Dyeing 700
2 Overflow rinse 7300
3 Warm rinse 700
4 Neutralisation 700
5 Overflow rinse 7300
6 Hot soaping 700
7 Warm rinse 700
8 Overflow rinse 4300
9 Hot soaping 700
10 Warm rinse 700
11 Overflow rinse 4300
12 Neutralisation & Softening 700
TOTAL 20800
The large water consumption in the rinsing after dyeing is primarily caused by the large number of
baths but also by the common use of overflow rinses. Before the temperature is raised in the rinse,
the dyestuff producers recommend neutralisation to pH around 8, when dyestuffs with vinyl
sulphone reactive groups are used. This neutralisation has, however, in some dye-houses, become
usual practice for all sorts of reactive dyestuffs.

After neutralisation, the rinsing consists of a number of soaping sequences: hot soaping, warm
rinse and overflow rinse. In the hot soaping steps 6 and 9 in table1 soaping additives are used, in
the form of surface active agents (detergents), complexing agents and dispersing agents. The
reasons for the use of these auxiliary agents are protection against hardness in the water and/or the
cotton, and keep the unfixed dye in dispersed form.

The process is completed with neutralisation to pH around 7 and treatment with softening agents,
necessary for the subsequent sewing process.

Cost saving rinsing operation
New water saving, chemical free, high temperature and high speed rinsing steps are shown in
Table 2

TABLE 2
STEP PROCESS WATER (litres)
1 Dyeing 700
2 Hot rinse 700
3 Hot rinse 700
4 Hot rinse 700
5 Neutralisation & Softening 700
TOTAL 3500

50 industrial scale trials with the new recipe documented that a chemical free, high temperature
rinse, using a reduced number of rinses, and thus saving water, chemicals and process time can be
implemented in the dye house with no adverse effect on product quality. When implementing the
water saving, chemical free, high temperature and high speed rinse after reactive dyeing of cotton
in batch, the following cost reduction and cleaner production options should be considered:
A) Change from overflow rinsing to stepwise rinsing.

Rinsing by overflow, i.e. pouring clean cold water directly into the process water in the
machine while excess water is drained out of the machine, is used both for rinsing and for
cooling purposes. Overflow is quick but causes unnecessary water consumption.

TABLE 3
A Fill the machine according to liquor ratio
B 10 minutes rinsing
C Discharge rinsing water
D 5 minutes draining

B) Omit the use of detergents in the rinsing after reactive dyeing of cotton.

Surplus and un-fixed reactive dyestuffs are highly water-soluble, in spite of this, detergents are
often used during rinsing after dyeing. In international literature, it has been documented that
detergents do not improve removal of hydrolysed reactive dyestuffs from the fabric. More than
50 full-scale dyeings carried out at various dye-houses without the use of detergents. All have
successfully proven that detergents can be omitted without negative impact on product quality.

C) Omit the use of complexing agents in the rinsing

If soft water with a quality of below 5º dH is used, complexing agents can be omitted without
any negative effects on dyed fabric. However, if hardness builders e.g. calcium and magnesium
are present in the dyeing processes and in the rinsing after dyeing, they might have a negative
effect on the dyeing result, e.g. change in shade or problems with reproducibility. For that
reason, soft water is recommended as standard procedure in the dyeing processes. However,
water softening in the dyeing machine by using complexing agents, forming bonds with the
hardness-builders, are both economically and environmentally a bad solution. Water softening
can profitably be done in a separate plant by the ion-exchange technique or the membrane
filtration technique.

D) Use only neutralization after dyeing

When using Vinyl sulphone (VS) reactive dyestuffs Neutralisation in the first rinse after dyeing
can be restricted to the vinyl sulphone (VS) reactive groups. Some VS dyestuffs have poor
alkaline washing fastness (low bond stability) and thus sensitive to high pH and high
temperature simultaneously. Nevertheless, it is not uncommon that all recipes for reactive
dyeing in a dye-house include neutralisation in the first rinse after dyeing, whether VS reactive
dyestuffs are used or not.

The dyeing can be successfully carried out without the use of neutralisation in the first rinse
after dyeing. This in spite of the fact that more than half of the dyeings were carried out with
dyestuffs based on VSgroups. As it is not possible to put forward general guidelines on when
to neutralise dyestuffs based on VSgroups, it is recommended always to neutralise these. There
is no reason to neutralise in this step when all other reactive dyestuffs are used, e.g. based on
monochlorotrazine (MCT), dichlorotriazine (DCT), trichloropyrimidine (TCP) or
difluorochloropyrimidine (DFCP). In general, it is recommended to select dyestuffs with a
superior alkaline washing fastness when selecting VS-dyestuffs.

E) Chemical-free high speed rinsing after reactive dyeing of cotton

Tests have shown that rinsing is more effective and faster at elevated temperatures – e.g.
around 30% more unfixed hydrolysed reactive dyestuff is rinsed out after 10 minutes at 95°C
than at 75°C.
Tests using hot 90-95°C rinsing after reactive dyeing of cotton have proved that the technique
has no negative effects on the dyeing results. Most often the fastness of the goods were better
after the hot rinsing than after the traditional rinsing with overflow, detergents, complexing
agents and neutralisation in the first rinse. Furthermore, when using 90-95°C rinsing water, a
few stepwise rinses (table 2) can reduce the rinsing time by around 50% compared to a
standard recipe (table 1).

Main achieved cost and environmental benefits:

 Reduction in water consumption and wastewater generation.

 Cost saving in chemical consumption and reduction in pollution load of waste water

 Time and energy saving.

Applicability
1. The new process can be implemented in all types of textile companies involved in reactive
dyeing of cotton.

2. The new process can only be implemented if the company do have availability of soft
groundwater or is operating with a soft-water system (which is normally the case).

3. It is recommended always to neutralise in the first rinse when dyestuffs based on VS-
groups are used. There is no reason to neutralise in this step when all other reactive
dyestuffs based on monochlorotrazine (MCT), dichlorotriazine (DCT), trichloropyrimidine
(TCP) or difluorochloropyrimidine (DFCP).
Economics

1. The economic feasibility is obvious. 50-70% reduction in the consumption of water for
rinsing. Total savings will depend on the number of reactive dyeings at the company.

2. Omit the use of detergents, complexing agents and acetic acid. Savings will depend on the
number of reactive dyeings at the company.

Driving force for implementation

1. High costs for water and wastewater discharge and/or low availability for water of
appropriate quality.

2. High costs for chemicals and wastewater load.

3. A desire for reduced operation time per lot and increased capacity per machine.
REFERENCES

 COST ACCOUNTING- theory & problems- Maheshwari & Mittal
 www.wikipedia.org (accessed as on date)
 www.ccrba.com (accessed as on----
 www.halfcostplus.com (accessed as on-----------
 www.iata.org (accessed as on---------
 http://www.managers-net.com/job_evaluation.html (accessed as on----
 http://www.merchantos.com/articles/inventory/what-is-inventory-
control/ (accessed as on---