Cost Reduction Is Basically The Strategy Of Cutting The Cost Accounting Essay

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INTRODUCTION:

Cost reduction is basically the strategy of cutting the cost of the product to increase the profitability. It may be useful when a company is struggling. In some cases, the firm is starting a policy to remove waste and ineffectiveness. In cost reduction we are using different methods such as value analysis and value engineering; these are the process of looking throughout the supply chain for opportunities to reduce cost, improve quality and reduce waste in products and different processes. Now the value analysis and value engineering methods are implementing on our selected company named as "AHSAN SPORTS", involved in making of sports products especially cricketing products and exports their products to South Africa and Zimbabwe. In this assignment I am discussing activity based costing, total quality management and there advantages and disadvantages, so we are making a report on the foundation of these facts which includes cost reduction.

COST REDUCTION:

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According to CIWA-London "Cost Reduction is to be understood as the achievement of real and permanent reduction in the unit cost of goods manufactured or services rendered without impairing their suitability for the use intended or diminution in the quality of the profit".

A cost reduction program is used by management when the company may reduce the cost from the quality of earnings or it may be implemented when the company is having the financial problems by using this company will again on the way to enhance their profits and it is only useful in such a way when the company also maintain the quality of product because without quality company defiantly lose their customers.

WHY WE USE COST REDUCTION:

A cost reduction plan effectively gets more profit and occupies a desirable position in the industry. The shareholders get higher dividends and the employee's higher emoluments. The organization should builds up goodwill and government gets more returns due to increased taxable capacity. The customers can get good quality products in reasonable prices.

Activity Based Costing (ABC) in Cost Reduction:

The activity-based costing method (ABC) promoted by Cooper and Kaplan provides a more precise measure of cost because it traces indirect costs more closely with regard to the different types of activities consumed. Armed with knowledge of what activities are consumed by each product and the supply cost of each activity, one can budget costs for a variety of products or we can say that it is the process of calculating the cost of each individual entity used in the manufacturing process to the selling of the product these can be material cost, production cost, labour cost, engineering cost etc in this process the amount of each entity is calculated individually and the at the end all the amount can be added to find the final cost of the product.

AHSAN SPORTS AS EXAMPLE:

Now we take the data of two main products of AHSAN SPORTS as an example on which we apply the concept of cost reduction by using activity based costing.

Particulars

BATS

BALLS

TOTAL

Sales (units)

80,000

25,000

105,000

Raw Wooden sheets (units)

12

8

950,000

Direct Material Cost £

24

30

3,025,000

Direct Labour Hours

2

4

3,240,000

Machine Hours

4

4

475,000

Direct Labour Cost £

25

35

3,250,000

Number of production Runs

4

15

19

Number of deliveries

14

10

24

No. Of Receipts

40

60

100

Number of Production Orders

35

30

65

Over Head Costs:

Set Up

60,000

Machine

900,000

Receiving

800,000

Packing

550,000

Engineering

650,000

Total

2,960,000

Now we calculate the cost of production for each product by the help of cost drivers.

Set-Up O/H Rate = £ 60,000/19 = £ 3,157.89

Machine Hrs O/H Rate = £900,000/475000= £1.8947

Receiving Cost = £900,000/100hrs= £ 9,000

Packing Cost = £550,000/24 = £22,916.7

Engineering Cost = £650,000/65 = £ 10,000

Particulars

BAT

BALL

No. Of Receipts

40

60

9,000

9,000

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T. Receipt Cost

360,000

540,000

Sales & Production Units

80,000

25,000

Per Unit Cost

4.5000

21.6000

Particulars

BAT

BALL

No. Of Deliveries

14

10

22,917

22,917

320,834

229,167

Sales & Production Units

80,000

25,000

Per Unit Cost

4.0104

9.1667

Particulars

BAT

BALL

No. Of Orders

35

30

10,000

10,000

350,000

300,000

Sales & Production Units

80,000

25,000

Per Unit Cost

4.3750

12.0000

Particulars

BAT

BALL

No. Of Hours

4

4

Per Hour Rate

1.8947

1.8947

7.5788

7.5788

Particulars

BAT

BALL

No. Of Production Units

4

15

3,157.8900

3,175.8900

12,632

47,638

Sales & Production Units

80,000

25,000

Per Unit Cost

0.1579

1.9055

Preparation of Cost/Unit Sheet

Particulars

BAT

BALL

D. Material

24.0000

30.0000

D. Labour

25.0000

35.0000

Machine Hours

7.5788

7.5788

Set-UP Cost

0.1579

1.9055

Receiving Cost

4.5000

21.6000

Packing Cost

4.0104

9.1667

Engineering Cost

4.3750

12.0000

T.C of Production

69.6221

117.2510

Activity based costing provides more accurate product cost numbers for marketing decisions about pricing and about which products to keep or eliminate. It helps production managers by providing better information about how much each activity costs. ABC identifies previously unknown cost drivers. Activity based costing provides more information about product costs, but requires more record keeping.

Value Analysis and Value Engineering:

According to Sato, Y. (2005) Value Analysis is the process of looking throughout the supply chain for opportunities to reduce cost, improve quality and eliminate waste in products and various processes. Participating in Value Analysis activities ultimately results in a more competitive priced and/or improved quality product for suppliers.

(Patail, 2010) states that the value engineering and value analysis is a process used by multidisciplinary team directed to analyzing the function of project ,product, process ,system and design or the services purpose of achieving the basic function at the lowest life cycle cost consistent with required performance, reliability quality efficiency and safety.

So it is concluded that these are the methodswhich is used by the managers to know the value of the product and its functioning. Then these methods provide helps to the managers to calculate activity based budget for the product in the future.

Total Quality Management:

TQM was implemented in the company to achieve the objectives of preparing the company's products and internal processes to global standards. Enhancing quality, productivity, and total performance of the organization. Enriching the quality of work life of its employees.

TQM is based on the involvement of all members of an organization in improving processes, products, services, and the culture in which they work. Quality of a product or services is its ability to satisfy the needs and expectations of the customer.

ADVANTAGES OF TQM:

Total Quality Management offers firms several advantages which are as follows:

Image of the organisation has improved (customer goodwill)

Reduction in inventory

Shorter lead time in design, manufacturing, procurement service (safe time)

Reduction in rejections and complaints (repairing)

Customer satisfaction

Lower manufacturing cost

DISADVANTAGES OF TQM:

Initial introduction costs- training workers and disrupting current production while it is being implemented.

Benefits may not be seen for several years.

Workers may be resistant to change- may feel secure in jobs

CONCLUSION:

Activity Based Costing is better than Traditional Costing as it provides a more accurate costing of products/services, which would guide to better estimates of the company's revenues and expenses. Such accurate costing would also lead management to make better decisions in make or buy decisions as well as in deciding on whether a product should be dropped or not, if company wants to achieve its goal in better way they should have to implement the ABC by the help of this technique company can minimize the cost of product and the quality of the whole product is also good.

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