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BARKATULLAH UNIVERSITY BHOPAL

SUMMER TRAINING IN MADHYA PRADESH TOURISM DEPARTMENT BHOPAL

A

REPORT ON

COST REDUCTION AND CONTROL

LAXMI NARAIN INSTITUTE OF TECHNOLOGY AND SCIENCE (MBA)

COMPANY GUIDE: MR SANJAY VERMA

SUBMITTED BY: ARCHIT SAXENA

FACULTY GUIDE: PROF. SANTOSH SOLANKI

(Any reductions in costs due to changes in Government policy like reduction in taxes or duties or due to price agreements do not come into the area of cost reduction as these are not real and permanent reductions in costs). . (as palash is serving food by cutting some units can increase some profits as serving wastefull intregants is of no use )  By increasing productivity: This refers to increase in the volume of output with the expenditure remaining the same. RESEARCH METHODOLOGY COST REDUCTION AND CONTROL Cost reduction refers to the real and permanent reduction in the unit cost of the goods manufactured or services rendered. But this should not be achieved at the cost of the characteristics and quality of the product. COST REDUCTION CAN BE EFFECTED BY EITHER OF THE FOLLOWING WAYS:  By reduction in unit cost of production: This is usually brought by elimination of wasteful and non-essential elements in the design of products and from techniques and practices carried out.

00 Budget showing the plan of action of tourism of 2009-10 .(As palash is main focus is on Accommodation there main moto is to provide best facility in minimum cost possible ) COST CONTROL IS EFFECTED THROUGH:- Budgeting: A budget may be defined as a comprehensive and coordinated plan of action.00 Interest subsidy for 1.00 363. Finance Cost control is concerned with keeping the expenditure within acceptable limits.00 800.00 Service tax for investment 50.00 54. Marketing 7.00 1.00 60 60 fair Youth and adventure work 25 25 - District tourism 400.00 1326. Its major assumption is that costs are in control unless costs exceed budget or standard by an excessive amount.00 54. It is prepared and approved prior to the budget period and may show income. Product planning 4. remaing shows as a balancing figure.00 49. projected value for the plans and expenses done on those plans . expressed in monetary terms. Design 2.00 400.00 50.00 800.00 advertisement Development of roads 54. .AREAS OF COST REDUCTION: 1. Company layout and equipment 5. Utility services 6. expenditure and capital to be employed to attain the object Budget 2009-10 as on 31-01-2010 Name of plan Projected value balance Expense Tourism entertainment 60.00 10.22 Total 1400.47 development Information and 800.00 - heritage hotels Tourism training 10. Company organisation and method 3.00 1400.

20/-. nor customer satisfaction. Thus value analysis attacks costs at production stage.which have no use or say this services are lagging profits backwards such as providing contramprary food to special guest as well accommodation will raise expenses it is just like donation of no use for business. .e. should hotel accept the offer? SOLUTION: Optimal order quantity or EOQ = 2 x annual consumptio n x ordering cost per order / inventory carrying cost per unit 20 * 2000 * 50 = 20 * 0. TECHNIQUES OF COST REDUCTION 1. ) 2. If 3% discount is offered by the supplier for purchase in lots of 1000 or more. ( In palash I found many such things which have to be cut of .Standard costing: In this. VALUE ANALYSIS: Value analysis is the identification of unnecessary cost i. ECONOMIC BATCH QUANTITY: (EBQ) EBQ is that point where carrying costs equals set up cost approximately.50 = 200units. ECONOMIC ORDER QUANTITY: (EOQ) EOQ is the quantity fixed at a point where total cost of ordering and the cost of carrying the inventory will be minimum(As such EBQ and EOQ are not been practices in palash hotel so I suggest to involve this practices in financial practices of hotel for cost reduction ) ILLUSTRATION: Palash Residency as an example :- A palash residency purchases 2000 units of beer per year at a unit cost of Rs. 3. The ordering cost per order is Rs. Find the optimal order quantity and the minimal total cost including purchase cost. nor appearance. cost that neither provides quality. standards are set and actuals are compared with the standard. At this point the total cost will also be minimum.and the inventory carrying cost is 25%. nor use. Corrective measures are undertaken for any discrepancy found between the standard and actuals.50/. nor life.

25) = Rs.. Though the above goals are unlikely to be achieved in hotel . Its aim hotel to directly control the activities that cause costs. of orders to be placed for getting 2000units = 10 orders Average inventory (200units / 2) = 100 units Purchase price of 2000units @ Rs. at the precise time they are required. b.as compared to the EOQ of 200 units.50/order = Rs.100  Carrying cost for avg. = Rs.CALCULATION OF MINIMUM TOTAL COST WITHOUT DISCOUNT: No.41000 CALCULATION OF TOTAL COST WITH 3% DISCOUNT WHEN PURCHASE ORDER QUANTITY IS 1000 UNITS:  Unit cost after 3% discount (Rs. zero inventory.19. at the required quality and in the required quantities.40 * 0. ACTIVITY BASED COST MANAGEMENT ABC assumes that resource-consuming activities cause costs. zero defects.20) = Rs.325/.19. .41000/. inventory) (Rs. d. 2425 TOTAL COST Rs. c.40  Lot size = 1000 units  No.40/unit.20/unit = Rs.25) = RS 500 TOTAL COST = Rs. e. zero breakdowns. costs will be managed in the long run.40000 Ordering cost (10orders @ Rs.20*0. Counter offer of higher discount should be made if the cost is to be less than Rs. single batch ordering.41325 The above computation shows that supplier’s offer of 3% discount should NOT BE ACCEPTED because it will INCREASE COST by Rs.38800  Ordering cost for 2 orders at Rs. JUST-IN-TIME APPROACH: (JIT) The aims of JIT are to produce the required items. inventory (1000 units per order / 2) = 500 units  Purchase cost for 2000 units @ Rs. inventory (500 * 19. it represent targets and create a climate for continuous improvement and excellence.20 – 3% of Rs.50/order) = Rs 500 Carrying cost for 100uts (avg. JIT helps cost reduction of hotel by – a. rather than cost. . By managing activities that cause costs. of orders for 2000units @ 1000units / order = 2 orders  Avg. elimination of non-value-added activities.

it means taking a tougher stand on price increases and renegotiating existing supplier contracts when possible.it gives a shorter way to complete activities in given time . they are looking across the entire supply chain and their logistics operations for savings. Controllers at both large and small companies place supply management in hotel nearly at the top of the list of areas on which they need to focus.this analysis is most useful analysis for hotel as most of the time workers are spending for finding the way to done the given work. Foreign-based suppliers are able to cut most companies’ materials costs by 30% or more. It also means continuing to consolidate the supplier base. SUPPLY CHAIN MANAGEMENT: (SCM) SCM attempts to build a cost effective chain beginning with the ultimate customer and links all the previous suppliers under one platform. Most of the non-core activities are outsourced and hence fixed costs are kept minimal. etc. TQM aims hotel at a customer-oriented process of continuous improvement that focuses on delivering products or services of consistent high quality in a timely fashion. resulting in customer value enhancement and cost reduction. The supply chain in hotel is part of the service offering. At thes ame time. It helps hotel to achieve their quality goals by providing reports and measures that will improve quality. E-sourcing and e-purchasing processes are also gaining favor with purchasing managers. This reflects their response to the economy and the upturn in business conditions. . hence.TOTAL QUALITY MANAGEMENT: (TQM) TQM works on the philosophy that all business functions are involved in a process of continuous quality improvement. Specifically. most controllers increasingly recognize their dependence on their suppliers’control of their own costs. with about one in five now doing either or both for hotel . PERT ANALYSIS: Programme Evaluation Review Technique (PERT) reduces cost by giving an optimum schedule for the activities necessary to complete a project. Close interaction between the corporate R&D and the suppliers facilitates continuous improvements in product design. rework and scrapping. process methodologies. An effective SCM eliminates most of the activities in hotel between customers and raw material suppliers along with associated costs. although the supply chain Is longer and better planning is necessary. Another best practice that purchasing managers now increasingly favor is global sourcing. A rupee spent on the supply chain can give more value than a rupee spent on marketing. and shifting inventory to suppliers. TQM reduces hotel cost by producing the products correctly the first time rather than wasting resources making substandard items and incurring additional expenditure on inspection. issuing blanket purchase orders for some goods.

– Productivity-linked wage settlements – Adopting new concepts .Non-Conventional Approach  Material Cost  Manpower Cost  Cost Management Initiatives  Selling and Distribution  Funding Cost • Material cost – • Cost reduction of hotel through – E-sourcing • Discovery of new sources • Competitive pressures • Rationalization of suppliers – Thrust on Value Engineering • Re-Visiting Designs • Application oriented engineering – Product Life Cycle Management Manpower Cost – Right-sizing of Employees – VRS Schemes – Optimum utiisation of Manpower • Transition from Machine engagement time to Man-Engagement time.

These phrases that were mere clichés not too long ago. reducing input costs or bringing down finance charges. the best way for Indian companies to survive and grow is by offering better quality products at cheaper price. focus is on cost control and reduction . In a highly competitive market place increasingly populated by multinationals. which is the basic instinct of any company. it may not be an overstatement to say that the revival and subsequent boom in the corporate sector in the last couple of years was primarily driven by the conscious efforts towards controlling costs. In fact. companies typically look inward to keep afloat. As the demand cycle goes through a dip and sales begins to shrink. There have been basically two drivers behind this emergence of cost consciousness in the corporate sector. it is the second reason that is the more significant one. The old equation of COST + MARGIN = SELLING PRICE has now been turned on its head to mean that MARGIN = SELLING PRICE – COST. have now come to acquire a new meaning in the last few years. only one variable.  SALES . Cost information is for tactical decision making. The importance of cost control and reduction in a manufacturing organisation can never be overemphasized. Selling price is determined by the market forces . controlling overheads.COST = PROFIT  With more players in the market place. cost.  SALES -PROFIT = COST  Selling price is determined by market forces: Profit is determined by the risk/return profile of business with a focus on cost management to achieve the targeted results. . Corporate India has done it all in the effort to stay profitable in the new milieu. Whether it be manpower reduction. The only way to do this is by constantly chipping away at the cost structure to eliminate unproductive expenditure so that the company will have the pricing freedom in the marketplace. Of this. having locked to a level of cost . CHANGING PERSPECTIVE OF PROFIT  COST + PROFIT = SALE  In a market cost and profits are reimbursed by the customer. However. Margin therefore is a function of how efficient the company is in controlling costs. First is the compulsion to stay profitable. is under the control of the company while the market dictates selling price. And the time-tested way of doing this is by slashing at the cost structure and save money.

• Organisational structure. • Continued evolution of transport services. • Automation/integration. CHARACTERISTICS OF NEW MODELS • Focus on core activities. • Open for business 24 x 7. • Ubiquitous and real-time information.FIVE FORCES OF NEW ECONOMY • Globalisation of both markets and sources. • The rapid expansion of internet. • Service economy. • Complexity of relationship. Keys to sucess • The Supply Chain • The Balance of Power • The Competitive Landscape • Service not Product • Future Cast .

00 Beer purchase 80000 Liquor income 60000.00 Cleaning material 60000 Lodging income 150000 Cold drink 33000 Staff meal income 25000 Discount given 25000 Laundary income 30000 Laundry 22000 Transport income 400000 Liquor 450000 Miscellenous income 45000 Miscellaneous expenses 25000 Telephone income 10000 Transport 350000 W t f l bandhvgarh 72000 Water charges 50000 Hotel avantika 30000 Incentive paid 25000 Hotel payal 25000 Salary and wages 809000 Bar income 700000 Hotel bharhut (satna) 30000 Jhankar hotel 25000 Tourist motel jhabua 15000 Crockery and cutlery 60000 Furniture and fixtures 120000 Kitchen utensils 35500 Labour charges 36000 Repair and maintainace 28000 Stationary and printing 30000 Telephone expenses 40000 Net profit 521036 Total 6265170 Total 6265170 .00 Bar expenses 3260000 Colddrink income 45000. Profit and loss statement Particular Amount Particular amount Indian airlines ticket 25634 Beer income 154670.00 Guide charges 110000 Catering income 4518500.

241 Cash & bank balances 8.57.281 TOTAL .05.06.03.076 C)Capital grant in addi.97.APPLICATION OF FUNDS 55.000 B)Investment * C)Current assets .456 Sundry debtors 29.937 Loans & advances 43.862 Less-current liabilities & provision 37.29.281 2.loans & advances 13.17. Balance sheet PARTICULARS AMOUNT 1.442 Inventories 5.70.04.40.03.97.66.SOURCES OF FUNDS A)Capital 24.31.000 B)Reserve & surplus 78.73.06.214 Net current assets 10.40.90.24.479 3.99.588 A)Fixed assets 78.205 TOTAL 1.77.43.58.Profit &loss account 1.29.80.04.68.14. 70.076 6.99. From govt.

 DEPRATMENT SHOULD ESTABLISH THEIR OWN BRAND FOR MINMISING COST OF SOME PRODUCTS AND AS WELL ADVERTISMENT FOR EXAMPLE :. .SOAP. RECOMMENDATIONS  DEPARTMENT SHOULD ADOPT {SCM} SUPPPLY MANAGEMENT SYSTEM TO CONTROL THEIR COST.  DEPARTMENT SHOULD FOCU S ON EBQ FOR REDUCTION IN QUANTITY  THEY SHOULD FOCUS ON VALUE ANALYSIS ON VARIOUS FIELD  TQM IS BEST FOR QUALITY IMPROVEMENT DEPARTMENT SHOULD DO WORK ON IT.  DEPARTMENT SHOULD FOCUS ON {EOQ} FOR COST REDUCTION IN QUANTITY .

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