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ACCOUNTING STEP BY STEP

CLE - CREATIVE LEARNING EXERCISE

MINI-AGL – COST CONTROL

Draft for correction before final publication 2012

Dr. Bob Boland & Team FCA, CPA, DBA, ITP (Harvard)

Editions in English (UK/USA), French, German, Spanish, Italian, Portuguese, Zulu, etc.

Source: EW et aliaAudio: freely available in www.crelearning.comHelp: [email protected]: RGAB/1

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INDEX

DEDICATION

This is a fun programme, is dedicated to memory of the of all hard working accountants (and auditors), who have always been the respected traditional honest man in the tough game of business, but have been relegated to the relatively humble job of scorekeepers.

In revenge the accountants keep the score, in such a complex way, that nobody other than skilled accountants, can know what the score really is ... was ... or will be ...

We believe that the programme will provide you with confidence, humour and motivation to learn well, about the wonderful world of accounting, which started with a book on debits and credits in 1425 ... and is still progressing.

Each year accountants find new, ever more creative ways, of keeping the score, such that, a manager with an MBA from a major international business school. who was CEO of a major (bankrupt) public company in USA (which shall be nameless), confessed to a US Congressional Committee, that he had no idea what the real score was.

However we still put our trust in the Professional Accountants and Auditors who always try to serve us well, and in new increasingly powerful International Accounting Standards, as the hope of the future. See also our new book: Ethics of Business – in 2007.

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INDEX

Item Page No

PART I - EARLY MORNING

Sect. 1 - Introduction 3

Sect. 2 - Key Learning Points 4

Sect 3 - Study - Basics of Cost and Control 8

Sect. 4 - Study - Direct and Indirect Costs 12

Sect. 5 - Review 21

PART II - LATE MORNING

Sect. 1 - Study - Cost Systems and Standards 25

Sect. 2 - Case Studies 35

Sect. 3 - Study - Cost Control and Reporting 40

Sect. 4 - Key Learning Points 57

Sect. 5 - Learning Maintenance 58

APPENDICES:

A - AGL 59

B - Readme First 61

C - Glossary 63

D. CLE 74

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PART I SECTION 1 - INTRODUCTION

1. OBJECTIVES

With INTERNET. E-BUSINESSand the increasingly competitive national and international markets, Cost Control may become a key to business profitability, growth and survival. Managers throughout a company may well need some "special motivator" to encourage them to give a higher priority to Cost Control opportunities.

This intensive training programme is designed to motivate managers and to inspire "CCI's" (Cost Control Initiatives) within an organisation, by using CAI (Computer Assisted Instruction) as part of a planned multi-media learning system.

The learning objectives are to:

a. To recognise and use the language and concepts of cost accounting and cost control, and the potential for out-sourcing and continuous cost

reduction.b. To compute the cost of products, services and organisational units.c. To interpret cost data and cost accounting reports.d. To identify CCI's (Cost Control Initiatives) in the current operations of the

organisatione. To motivate further study in the future.

2. SYLLABUS

The syllabus of the program includes: cost accounting and control language and concepts; out-sourcing of materials and services; cost systems and standards; direct and indirect costs; cost, profit and investment centres; effective reporting; waste reduction audit; JIT; ABC: continuous cost reduction programs; strategic cost management; EVA and functions of the controller. INTERNET etc.

PART I SECTION 1 - INTRODUCTION

PART I - SECTION 2 – KEY LEARNING POINTS

1. COST REDUCTION AND COST CONTROL INITIATIVES

Cost reduction is a key objective of cost accounting and control, with new CCI's (Cost Control Initiatives) becoming continually evident.

Every cost can be reduced over time by: economy, technological advance, cutting operations and planning.

Every cost can be reduced over time by: technology, creativity, motivation and the INTERNET.

2. OPPORTUNITIES

Compare operations five years ago with today, to indicate the past potential for cost savings. Then treat cost saving as a normal part of management. Costs grow naturally unless controlled. Managers should not be "happy" but motivated towards cost reduction.

3. INTERNET AS A MOTIVATOR

The successful e-manager welcomes the impact of the INTERNET and e-business for cost control in terms of:

speed (of data and decision-making)flexibility (for continuous learning)collaboration (new company alliances)discipline (with new standard protocols)communication (internal and external)communication skills (for the mass of data available)customer focus (from recruitment to retention)knowledge management (ability to share)leadership (huge investment in organisation to create an e-business).

The major cost of e-business is not hardware and software, but rather CONTINUOUS MANGER AND STAFF TRAINING at every level, throughout the organisation.

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4. TEAM-WORK & OUT-SOURCING AS A MOTIVATER

Set up cost reduction teams with INERNET and IT skills, for creative problem-solving and out-sourcing.

Use INTERNET and such tools as: O & M, operations research, ABC, JIT, standard cost accounting, strategic cost management etc.

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5. ABC AS A MOTIVATER

Activity based costing (ABC) recognises that with increasing automation, direct labour may be only 10% of manufacturing cost and thus other "cost drivers" (engineering, set-up, handling, quality and waste control etc.) can be used to allocate overhead, to get a more useful product cost.

ABC motivates managers to reduce "non-value-added" activities in: design, purchasing, receiving, storage, handling, inspection, processing etc. using INTERNET for "bench-marking" and re-engineering techniques.

ABC is justified when management is not motivated by other cost control systems and there is significant variation in: product volume, mix, size, complexity, materials, set-up, parts etc. such that direct labour or machine hours are not good "cost drivers".

6. JIT AS A MOTIVATER

Just In Time (JIT) inventory control by major companies reduces inventory holding and handling charges, through managed supplier relationships. INTERNET sourcing and auctions with proven suppliers, sharing of production scheduling data, inventory reduction to "hours" instead of months etc.

7.STANDARD COSTING AS MOTIVATER

Standard cost accounting (SCA) provides engineering standards of product cost and allows variances with actual cost to be associated with price, efficiency and volume analysis. INTERNET research for comparable cost data and supply sources for both parts and whole products.

Standards used to be set by engineers ... now the market and INTERNET research tells the engineers what the standard must be!!

"Backflush accounting" uses standards to simplify accounting for work in process and finished goods, and relies heavily on physical controls of efficiency e.g. number of defective parts, waste quantities etc.

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8. WASTE REDUCTION AUDITS AS A MOTIVATER

Waste reduction audits (WRA) investigate material inputs and outputs for each process, to identify waste and achieve cost savings by waste reduction, re-use and recycling. INYERNET research and on alternative uses of waste.

INTERNET research on alternative uses of waste.

9. STRATEGIC COST CONTROL AS A MOTIVATER

Strategic cost control (SCC) starts with the cost structure of the enterprise in terms of fixed and variable costs to reinforce only those activities that "add value" to the operations of the enterprise. EVA!!! It creates environmental motivation within the organisation which motivates managers to seek higher levels of cost efficiency and effectiveness.

INTERNET research of technology alternatives in terms of creating different company units for high volume and low volume products.

10. INTERNET MARKETING OPERATIONS AS A MOTIVATOR

Creation of "dot.com" subsidiaries which compete and collaborate with the normal organisation to achieve cost savings in: advertising, customer order processing, production to order, purchasing staff, inventory levels, customer disputes, billing, rapid cash flow, lower bad debts, expense approval, budgetary control, accounting systems etc.

11. OVERALL

THE KEY TO COST REDUCTION IN THE 2000 AGE OF INTERNET FOR BOTH MATERIALS AND SERVICES … IS MANAGEMENT MOTIVATION. EVERY COST CAN BE REDUCED WITH TECHNOLOGY, TIME AND CREATIVE MANAGEMENT!

IN 2000 THE INTERNET AND E-BUSINESS, ARE THE KEYS TO COST CONTROL

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PART I - SECTION 3 – BASICS OF COST AND CONTROL

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1. FINANCIAL AND COST ACCOUNTING

Financial accounting uses "accounting concepts" to produce balance sheets and income statements for the whole business.

Cost accounting:

a. Is accounting specially for Management and has several objectives.

b. Relates to specific segments of the business.

c. Estimates the cost of products or operations or departments.

d. Always relates actual cost against a standard of performance.

NOTE: Cost is exactly what we define it to be, nothing more.

2. SPECIFIC COST ACCOUNTING OBJECTIVES

a. Estimate product cost as an aid to pricing.

b. Compute the cost of work in process for profit computation.

c. Control costs by associating them with centres of responsibility. Compare actual against planned cost and motivate responsible managers to take corrective action.

3. COST AND TENTATIVE SELLING PRICE

Product cost and tentative selling price may be simply computed as:

Amount CommentDirect labour 6 fairly definiteDirect material 18 fairly definitePrime cost 24

Manufacturing overhead say 50% of prime cost) 12 estimateManufacturing cost 36 estimate

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Selling and administrative overhead (say 33% of manufacturing cost 12 Total cost 50 estimate

Profit 20% 10 estimate Selling price 60 estimate

NOTE: Selling price depends upon the market - not merely the cost.

Excess of selling price over variable cost is the CONTRIBUTION to fixed cost s and profit.

4. CONTROL CONCEPTS

Management control if financial control of the business on systematic, rhythmic and integrated basis.

Control involves:

a. Standards of performance to quantitative and financial terms.

b. comparison of actual performance against standard.

c. Reporting systems.

d. Corrective action.

NOTE: Motivate the managers by challenge, responsibility and a sense of achievement to attain planned objectives.

5. TYPES OF COSTS - NATURE

Cost may be analysed into:

a. Direct costs:

Direct labour - conveniently associated with a unit of production.

Direct material - conveniently associated with a unit of production.

Direct expenses - conveniently associated with a unit of production.

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b. Indirect costs (overheads): -Manufacturing overhead - labour, materials and services NOT conveniently associated with a unit of production. selling, administrative and general expenses

NOTE: Overhead may be allocated to compute full cost of each product. Separate overhead rates may be used for each type of overhead However, costs are estimates based upon assumptions - there is no "true cost" of anything!

6. TYPES OF COSTS - ACTIVITY

Cost may be analysed into:

a. Direct or indirect cost.

b. Variable or fixed cost - varying in total (not per unit) with the volume of production.

c. Relevant or non-relevant cost - to a particular management decision to be taken.

d. Book or opportunity cost (value) - book cost as opposed to the real value of an opportunity missed or foregone.

e. Controllable or non-controllable cost - at the particular level of management.

f. Engineered, managed or committed cost - engineered (increasing automatically with the volume of production) or managed (discretion of management) of committed (management can do nothing about them).

g. Manufacturing, selling and administrative cost.

7. TYPES OF COST - BY RESULTS

Cost may also be analysed into:

a. Product cost - including labour, material and overhead (either direct or full cost)

b. Departmental cost - running an operation.13 13


c. Standard cost - engineering standards of labour, materials and overhead for efficient production.

d. Actual cost - labour, material and overhead actually incurred (compared against a standard or an estimate).

e. Past cost - operations completed.

f. Future cost - estimates for future periods.

g. Factory (manufacturing) - labour, material and factory overhead only (not including selling and administrative expenses).

h. Selling and administrative expense.

NOTE: The accountant cannot give you the cost, unless he knows which cost you need. Most costing systems produce actual cost which is in fact an estimate of full cost, based upon some practical assumptions.

8. TYPES OF COST - SYSTEMS

Cost systems involve cost analysis into: job, batch, contract, output, process, standard, direct cost etc. When overhead are very high in relation to direct labour, ABC (Activity based Costing) systems are being used.

9. RELEVANT COST ANALYSIS

There is no true cost, only a cost relevant for a particular purpose. For each purpose determine the relevant cost.

Variable costs are usually relevant, whereas fixed cost (which do not change with the decision are usually not relevant.

Unit costs are deceptive because they are based on assumptions of the volume which may not be relevant; try to work on total costs.

Try to use future not past costs for future decisions. Try to use opportunity costs rather than book costs. Remember all costs are based upon assumptions.

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10. APPROACH TO COST CONTROL PROBLEMS

For practical management decision-making we need a systematic approach:

a. Define carefully the problem and key relevant factors.

b. Think creatively about alternatives; there are usually seven alternatives for every cost control problem,

c. Compute quantitative data for each relevant alternative.

d. Evaluate each alternative in quantitative and non-quantitative terms (Q plus NQ = D (decision).

e. Decide and justify your decision.

f. Do a PFD (provision for disaster); decide what to do if the expected assumptions prove to be invalid.

11. OUTSOURCING - MAKE v BUY DECISIONS

a. A key area for cost control is effective purchasing (out-sourcing) of materials and services. In 1999 almost any R&D, marketing, function product, service etc. can be out-sourced. Management must frequently decide what to make (do in-house) and what to buy from suppliers.

b. Relevant costs are normally only variable costs since fixed costs may not change in the defined HORIZON (time period).

c. Estimate future costs rather than past RELEVANT costs.

d. Difference between the variable cost to make and the purchase price to buy is sometimes called the "contribution from making".

e. Decide the relative attractiveness of make v buy for a series of items/services. Tend to make those that provide the higher contributions.

f. Be sure to include "global cost to buy" including all relevant costs which may involve: R&D, production, transport, storage etc.

g. Non-quantitative factors of strategy, core competence, secrecy, quality, delivery, out-of-stock damage etc. are always relevant. Strategy and long term effects are particularly important

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PART I - SECTION 4 - DIRECT AND INDIRECT COSTS

1. DIRECT COST

Cost conveniently associated with a unit of production.a. Direct labour - which is direct operating labour. Normally excludes:

storemen, foremen, transport drivers, office clerks, salesmen, inspectors, managers, and other indirect labour etc.

b. Direct material - which forms part of the product sold. Normally excludes: oil, grease, machine repairs, rags and other indirect materials.

c. Direct services which are special costs for particular jobs e.g. hire of machines

2. INDIRECT COST

Cost not conveniently associated with a unit of production:a. Manufacturing cost - factory overhead expensesb. Selling cost - marketing, selling and distribution costc. Administrative cost - general cost of administering the business which re

not selling or manufacturing.

3. COST STRUCTURE

For cost control study the structure of cost in terms of both full and direct costing:

a. Full costing: Cost Comment

Direct labour xx fairly definite Direct material xx fairly definite

Prime cost xx

Manufacturing overhead xx very poor estimate Manufacturing cost xx

Selling and administrative Overhead xx very poor estimate

Total cost xx

NOTE: Inventory is valued at manufacturing cost only. Selling and administrative overhead is charged as expense in the income statement.

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3. COST STRUCTURE (continued)

b. Direct costing:

Cost Comment

Direct labour xx definite Direct material xx definite

overhead xx definite

variable overhead xx definite

Total direct cost xx

Indirect cost: Manufacturing , selling & administrative xx poor estimate

Total cost xx

NOTE: Inventory valued at direct manufacturing cost only.

4. INVENTORY EFFECTS ON COST

Cost must be adjusted for inventory changes.

The material cost is therefore:

Opening inventory 100, plus purchases 50, less closing inventory 20, giving material actually used in production (100 + 50 - 20) 130.

Value of inventory of raw materials, work in process and

finished goods, must be adjusted in the income statement to compute the cost of manufacturing.

Selling and administrative expenses are never charged to inventory but charged direct to the income statement for the period.

5. COST, PROFIT AND INVESTMENT CENTRES17 17


a. Cost centres may be either productive or service centres. Productive centres are concerned with operations. Service centres provide services to productive centres.The costs of service centres are allocated to productive cost centres.

b. Allocation of cost is always possible using some basis i.e. number of workers, floor areas, units produced, estimates, activity etc. However allocated costs are rough estimates which are less definite than specific and direct costs.

c. For control, associate each activity with a manager responsible. Centres of responsibility may be Cost centres - cost against standard or budget Profit centres - profit against standard or budget Investment centres - profit against assets employed (best!!!)

8. OVERHEAD RATES

a. No rate is scientific - merely an estimate on assumptions.

b. Key management decisions in overhead rates are:

Number of cost centres - not too many with similar rates

Choice of measure - labour rate, machine rate, prime

cost, sales volume etc. (labour rates over 300% are probably suspect - use machine rates or ABC systems).

c. To determine the overhead rate, estimate three things: overhead amount, measure of activity, and the appropriate volume of that measure.

d. Under or over-allocated overhead results when the actual overhead is more or less than the amount allocated to the products. The difference is due to either cost or volume and results in a loss or profit because product costs do not contain enough overhead.

e. Do not change product costs - merely take a profit or loss from over- or under-allocated overhead in the income statement of the period.

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7. OVERHEAD RATE FOR EACH COST CENTRE

a. Determine specific cost for the particular cost centre.

b. Allocate the non-specific costs on some assumed basis (number of people, floor area, units produced etc.) to the cost centre.

c. Set a volume of activity.

d. Compute an allocation rate as follows:

Overhead 100/ direct labour 50 hours = 2.00 per hour.Overhead 100/ machine 100 hours = 1.00 per machine hourOverhead 100/ labour cost $200.00 = 50% of labour cost

8. CONTROL OF FIXED AND VARIABLE OVERHEAD

a. Study the STRUCTURE of cost - how much is variable and how much fixed?

b. Fixed cost does not change in the short term and is often not relevant to short term decisions. We may ALLOCATE the fixed cost on the basis of a variable cost (say direct labour) but this does NOT change its nature as a FIXED cost. ALLOCATION SPREADS COST - IT DOES NOT CONTROL IT!!

c. Fixed cost is normally indirect and remains unchanged for volume within limits.

d. Fixed cost per unit decreases with additional volume - but is still FIXED. Variable cost per unit does not decrease (normally) with additional volume (within

e. Variable cost id normally DIRECT cost - clearly associated with a product such that each additional a unit produced always involves the same additional a variable cost per unit.

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9. CONTRIBUTION CONCEPT

Contribution is selling price less variable cost only:

a. Contribution not calculated:Selling price 2.00Total cost 1.98Profit 0.02

b. Contribution calculated:Selling price 2.00Variable cost .68Contribution 1.32Fixed cost 1.30Profit 0.02

10. BREAK-EVEN ANALYSIS

a. Useful tool for understanding and communicating the effect on profit of: volume, costs and prices. Sales and costs computed at different sales volumes. Distinguish fixed and variable costs. Break-even point - sales equals total cost - no profit.

b. Break-even analysis aids understanding of cost and profit targets:

1. Shows profit (loss) at different sales volumes.

2. For any volume indicates what must be changed to achieve profit target.

c. Not accurate - only an estimate for a limited known range of volumes.

d. Conceals real difficulty of changing assumptions i.e. it may be more difficult to reduce cost by 2% than increase selling price by 4%.

e. In the longer horizon, all costs are VARIABLE.

f. At higher volumes fixed costs may not be a straight line i.e. they may increase in steps.

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11. STANDARDS

Cost must be related to a standard i.e. engineering target or estimate or previous year or past job or competitive company.

OLD BEST standard to measure efficiency was "standard cost" based on engineering studies ... NEW BEST is the market and the policy of CONTINUING COST REDUCTION 8% every year ...

Measure actual against standard to determine a variance; associate the variance with a responsible manger or team.

DON'T REVISE STANDARDS TOO EASILY ... KEEP <THEM TOUGH BUT ACHIEVABLE.

12. MEASUREMENT OF PERFORMANCE

Management wants to know: How much was done? How well was it done? What was the cost? Are the competitors doing better? To measure performance, therefore we must have standards against which to compare actual performance.

Consider performance now - and in the future - don't cut today and destroy the market volume tomorrow. A bigger contribution may provide more profit than a lower cost. Use total cost and profit figures, not just per unit figures.

Performance also relates to working capital management of inventory and receivables which may achieve significant overhead cost-reduction. See Exhibit A for JIT.

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EXHIBIT A

JUST IN TIME (JIT) INVENTORY CONTROL

JIT inventory control seeks to reduces inventory holding and material handling charges, through managed supplier relationships. Inventory levels of four weeks supply are often been reduced to the level of four hours, with sub-contracted parts moving from transport directly to production lines.

JIT systems require stable suppliers and delivery systems to avoid shut-downs due to lack of parts. This involves special selection of major and back-up suppliers and quality control arrangements, to enable delivery within hours. Thus distant suppliers unable to deliver within fixed time limits (say 48 hours) may be excluded.

JIT may well force suppliers to hold the inventory levels formerly held by their major client companies.

JIT usually leads to simplification of parts, materials handling, packaging and quality control procedures as well as cutting inventory levels.

EXHIBIT A

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JUST IN TIME (JIT) INVENTORY CONTROL (cont.)

Write down and justify the answers to the following questions (true/false):

1. In 1998 every company should adopt some JIT systems.

2. The major cost reduction of JIT systems is savings in interest on inventory levels.

3. The major cost reduction of JIT systems is savings in material handling.

4. JIT requires a new costing system.

5. The major risk of JIT is shut-down due to lack of parts.

Answers: F F T F T

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PART SECTION 5 - REVIEW

1. CASESA. ELIZA MANUFACTURING COMPANY The 2005 financial forecasts indicate a doubling of sales but a stable

inventory and a gross profit increasing from 32 to 37%. Is this a reasonable expectation? Why?

ANSWER: No. Cannot expect inventory to remain stable when sales double. Need to justify such low inventory levels by operatIons research studies. Gross profit increase by 5% Also requires specific justification in terms of prices. costs. customers. etc. Overall financial forecast is difficult to accept without considerable explanation?

B. LYNN ONE/TWO COMPANYCompany introduced a costing system to compute "full cost" of each product for the first time in five years of successful operations as manufacturer of office furniture. Accountant now suggests that all products being sold at a loss, be dropped. What should be done? What data is relevant?ANSWER: Full costing is not appropriate for the decision to eliminate products. We need direct costing and contribution for each product. Never eliminate products making a positive contribution, which would be lost. Need to keep products with positive contribution until they can be replaced with other products to provide a better contribution. Need to forecast future costs and prices and volumes.

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C. BILLOIL COMPANYCompany buys containers but normal supplier quotes price increase of 25%. List eight cost reduction alternatives available to the company.

ANSWER: Creative thinking:1. Get alternative quotations.2. Force supplier to reduce his quote.3. Offer supplier other benefits (volume, continuity, other work etc.)4. Re-design the container.5. Eliminate the container.6. Change the container.7. Manufacture the container.8. Improve supplier's efficiency.

9. Import container from overseas. 10. Eliminate the product. 11. Re-use containers from customers.

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D. SUTHERLAND COMPANY Old established company has a problem with increased inventory investment. List ten ideas for improvement.

ANSWER: Ten suggestions for reducing inventory: 1. Ageing of the inventory. 2. Identify high value items. 3. Identify slow moving items. 4. Dispose of obsolete items. 5. Standardisation to reduce the number of parts. 6. Operations research inventory computations. 7. JIT systems. 8. Reduce production volume. 9. Benchmarking with other companies.10. Get production, marketing and finance to own the problem.

E. JOHNSON COMPANYHeating contractor used contract costing and took profit only when the contract was completed. However in 2005 most of the work was for one long term contract which would not be completed for two years; thus no profit this year. What to do?

ANSWER:Profit on contracts need not be taken only at the end. Take profit as work progresses but provide adequate reserves for possible losses.

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2. REVIEW - SUMMARY LECTURE - COST REDUCTION

Cost reduction is a key objective of cost accounting an control, with new CI's (Cost Control Initiatives) becoming continually evident.

Every cost can be reduced over time by: economy, technological advance, cutting operations and planning. Compare activity five years ago with today, to indicate the past potential for cost savings. Then treat cost saving as a normal part of management.

Costs grow "naturally" unless controlled. Managers should not be "happy" but "motivated towards increasing efficiency. Set up cost reduction teams using such tools as: O & M, operations research, ABC, JIT, standard cost accounting, strategic cost management etc.

Activity based costing (ABC) recognises that with increasing automation, direct labour may be only 10% of manufacturing cost and thus other "cost drivers" should be used to allocate overhead cost to products.

Just In Time (JIT) inventory control by major companies reduces inventory holding and handling charges, through managed supplier relationships. Standard cost accounting (SCA) provides engineering standards of product cost and allows variances with actual cost to be associated with price, efficiency and volume analysis.

"Backflush" accounting uses standards to simplify accounting for work in progress and finished goods, and relies heavily on physical controls of efficiency e.g. number of defective parts, waste quantities etc.Waste reduction audits (WRA) investigate material inputs and outputs for each process, to identify waste and achieve cost savings by reduction, re-use and recycling.

Strategic cost control (SCC) starts with the cost structure of the enterprise in terms of fixed and variable costs to reinforce only those activities that "add value" to the operations of the enterprise. It creates "environmental motivation" within the organisation which motivates managers to seek higher levels of cost efficiency and effectiveness.

The key to cost control and reduction is "management motivation".

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PART II SECTION 1 - COST SYSTEMS AND STANDARDS

1. COST SYSTEM OBJECTIVES

Difficult for a single system to achieve all objectives equally effectively:a. Compute product cost as an aid to pricingb. Value work in processc. Control costs by responsibility

Determine the volume of activity and management requirements before deciding upon the appropriate system. Relate the cost of the system (or systems) to their value to management.

2. PRODUCT COST

Product cost is exactly what we define it to be. Computed in terms of labour, material and overhead.

Direct costing defines product cost as: direct cost clearly associated with the product. Definite but fails to include all overhead costs.

Full costing defines profit cost as both direct and indirect (allocated) overhead cost. Appears to be definite but in reality includes many estimates and assumptions.

Always question the assumptions underlying product cost.

3. CONTRACT, JOB AND BATCH COSTING

a. In contract costing, the unit of cost is one contract. Labour, material and some other costs are direct contract costs. General overhead ,may be allocated on some basis. Profit on contracts may be taken during or at the end of the contract.

b. In job and batch costing the unit of cost is one job or batch of jobs. Direct and indirect costs are charged. Sometimes selling and administrative overhead charges are allocated as a percentage of manufacturing cost.

NOTE: Allocation of overhead costs on the basis of sales or previously accumulated costs is adding one estimate to an other and may not produce a useful result. Such total costs should be treated with considerable scepticism.

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c. Control of costs in contract, job and batch costing is by comparison of estimated cost against actual cost to indicate:1. Profitability2. Efficiency3. Accuracy of estimating procedures

d. Try to use standard costs and rates in computing contract, job and batch costs. Standard rates are simpler and standard costs are a better measure of efficiency. Analyse the variance between actual and standard cost into price, efficiency and volume variances. Avoid actual or average rates; they are not mire useful than standard rates.

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4. OUTPUT COSTING

With only one product we have output costing. Divide each cost by the volume of output for the period. To measure efficiency: compare actual against standard.

5. `PROCESS COSTING

Suitable for continuous production flow with final products resulting from a sequence of operations or processes. Output of one process is the input of the next.

Cost collected by period for each process and the unit of cost of each process computed by dividing the total process cost by the output (like output costing).

System is in effect output costing for each process in a series which together form a production cycle.

The measure of efficiency in process costs is the same as for output costing: actual against previous cost, standard or budget. use standard as much as possible.

6. STANDARD COSTING

The best performance target is the standard cost computed by engineering studies on a standard cost sheet - BUT DRIVEN BY MARKET FORCES TO ACHIEVE CONTINUOUS COST REDUCTION EVERY YEAR!! See Exhibit A

7. COST AND CONTROL

a. Compare actual cost against standard to determine variances; analyse the causes.

b. Determine who is responsible for the variance and take corrective action; motivate managers to achieve targets in the future.

c. Revise standards annually or every two years. Do not revise too often because of paperwork. Control variances closely.

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d. Periodically check with special case studies the actual product costs; determine the relevance of the standards to reality.

e. Do not accept the standard cost without checking regularly on variances and the reliability of the standards.

8. CHOICE OF COST SYSTEMa. Move towards standard costing and variances in terms of price,

efficiency and volume PLUS the MARKET NEED to achieve continuous cost reduction every year.

b. Choose the most appropriate cost system (with standards) by selecting the unit of production appropriate to the industry and company. BENCHMARK your costs with competitors.

c. Introduce standard rates for materials, labour and overhead - do not try to use actual rates.

d. Consider the cost of the system in relation to its value to all levels of management.

e. Renew re-think and revise the system regularly based upon INTERNAL RIGOROUS RESEARCH IN THE COMPANY , with all levels of management. The system gets rusty and efficient unless you do "Preventive Maintenance".

f. With highly automated production with little labour and high overheads (i.e. labour/overhead rates of 300% plus) consider using ABC (See Exhibit B) either in the main stream or (more economically) ONLY FOR special studies as needed, while keeping the system uncomplicated - so that managers will understand it!!

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EXHIBIT A

STANDARD COST ACCOUNTING

Standard cost accounting provides engineering standards of product cost and allows variances with actual cost to be associated with price, efficiency and volume analysis. "Backflush" accounting uses standards to simplify accounting for work in progress and finished goods.

The best performance target should be the standard cost from engineering studies on a "Standard Cost Sheet" indicating:

1. standard hours at standard labour rate2. standard material quantities at standard material costs3. standard overhead allocations

The standard cost system is only as good as the standards set each year. Product cost is standard cost. Standards are set by the engineering department together with purchasing, personnel and operating managers. They are not normally changed during the year.

Variances are developed not by products but by departments responsible for operations, in terms of:

1. price - difference in actual and standard price for the actual quantity purchased

2. efficiency - difference between actual quantity of material and labour

used

3. volume - difference in fixed overhead due to actual volume being more or less than standard.

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Do not change standards too frequently: associate variances with managers responsible; control the "material" (significant) variance very carefully.

Some multi-nationals are beginning to set revised (lower) standard costs every year, with "market" pressures for lower costs" rather than from what engineers say is "necessary"; this is to motivate engineers and managers towards continuing efforts in cost reduction, every year!

Standard cost reports show total sales, standard cost of sales, standard gross profit, variances (price, efficiency and volume), to show actual gross profit.

Departmental reports analyse operational inefficiencies in terms of price, efficiency and volume. Variances may also be due to: poor standards, poor accounting, changes in product mix.

"Backflush" cost accounting is a new development, which use simplifies accounting for work in progress and finished goods, and relies heavily on physical controls of efficiency e.g. number of defective parts, waste quantities etc. Product cost then becomes direct material plus conversion costs, to achieve the finished product

EXHIBIT A33 33


STANDARD COST ACCOUNTING(continued)

Now write down and justify the answers to the following questions (true/false):

1. Every manufacturing enterprise could have better cost accounting with standard costs.

2. Price variances are usually due to purchasing inefficiencies.

3. Standards should be changed frequently to ensure that the are accurate.

4. Standards may well tend to reflect engineering values rather than competitive market needs.

5. Standard cost accounting enables variances to be analysed into price, efficiency and volume causes.

6. Backflush accounting is more complex than normal standard cost accounting.

nswers: T F F T T F

34 34


EXHIBIT B

ACTIVITY BASED COSTING (ABC)

ABC recognises that with increasing automation, direct labour may be only 10% of manufacturing cost and thus other "cost drivers" should be used to allocate overhead cost to products.


ABC starts by defining the critical activities that "add value"; it then defines "cost categories" and "cost drivers" to allocate overhead to product cost. Product cost then changes from: direct material plus direct labour plus overhead, to material plus a series of conversion costs.

This avoids the traditional overhead allocation based on direct labour or "add value" to the product, with a series of "cost drivers e.g. number of parts, number of set-ups, automated operation per part, manual operation per part etc.

Simple example:

Labour based cost: ECU

400.00 Direct labour 100.00Manufacturing ovd. @ 250% DL 50.00Manufacturing cost per unit 750.00

Direct materials per unit 400.00Materials handling 70 parts @ ECU .30 21.00Machining 2 hours @ ECU 34.00 68.00Assembly 70 parts @ ECU 1.90 133.00Inspection unit @ ECU 20.00 20.00Manufacturing cost per unit 642.00

In highly automated manufacturing direct labour may be only 5% of manufacturing cost and thus inappropriate for overhead allocation.

35 35


Where different products and volumes require special set-ups, direct labour based cost drivers tend to:

1. Under-cost small complex runs (many different parts) and

2. Over-cost simplified (standardised parts) high volume products.

Thus ABC can provide a more useful cost, but it must always be questioned:

EXHIBIT B

ACTIVITY BASED COSTING (ABC)36 36


(continued)


1. Part No. 111 costs ECU 10 and can be used for only one product, is cheaper than part No. 112, which costs ECU 12 but can do the same job in all of the product range.

2. JIT and ABC always go together.

3. For most manufacturing enterprises ABC is now better than labour based cost accounting.

4. For relevant cost analysis ABC probably gives better data than labour based cost accounting.

5. Cost reduction is motivated by ABC.

Answers: F F F T T

37 37

PART II SECTION 2 - CASE STUDIES

1. MILLARD COMPANY

The installation of a new cost reduction program in a large textile mill is resisted by old line managers. They have resisted change for several years and have been a constant source of embarrassment to the CEO.

The informal leader of the old line managers is presently on vacation. The CEO believes this may be an opportune time to rapidly force the change through. What win-win solution?

Question: Do you agree with the CEO's strategy?

ANSWER:Yes. if the old line managers have a reputation and record for resistance to change it is unlikely that further discussion with them will be of any benefit. The absence of the informal leader presents an opportunity that may not occur for some time. If the change is forced the through now the other old line managers may give in and accept the installation.

2. PAT PIPPER COMPANY

Company manufactures industrial tools in a variety of sizes and patterns. It's "actual" costing system uses labour and manufacturing overhead rates computed each month. These rates are also used to estimate for new jobs. Costs are not available until four weeks after the month end and this delays cost reports and job estimates. Furthermore in slack months the overhead rate is very high and customers complain about widely different estimates based on "cost" for the same type of job in different months. What should be done?

ANSWER:Do not calculate monthly rates for labour and overhead. Use standard annual rates for the whole year. Eliminate changes in job estimating due to heavy or light activity in a particular month. Avoid excessively "pseudo-accurate" cost data. Speed up the monthly cost data. Use special rates for estimating on new jobs. Price should depend finally on the market not the cost.

3. DAVE RAVE COMPANY38 38


The company accountant set up a new costing system but could not decide what was "direct labour" for operating departments producing and assembling a variety of small machines.

Foremen?Inspectors?Machine operators processing parts?Assembly workers? Inventory control clerks?Storekeepers?

Is it direct labour? What do you advise?

ANSWER:Direct labour can conveniently be associated a unit of production without arbitrary allocation. Items 3 and 4 are clearly direct labour; the others are overhead. Particular production systems and a limited product range may allow other solutions.

4. BOB ACTION COMPANY

Company produced automotive parts. There was heavy competitive pressure to cut costs and prices as the manufacturing processes became more automated with great variation in product volumes, set-ups, quality control etc.

Product cost was computed for labour, materials and a general rate for manufacturing overhead based on 500% of direct labour.

As a cost reduction program, consultants were asked to classify the products on criteria of: market, quality and cost. Class I products would continue to be manufactured, Class II would be reviewed every quarter and Class III would be out-sourced.

Product X which was about 33% of the total sales, was classified as Class III.

Question: Is this a good decision? What effect on the cost of other products? What do you suggest for the future?

ANSWER:

39 39


No. Cost data based on 500% overhead rate is not valid for make v buy decisions. Need to compute the contribution of Product X before outsourcing since fixed costs will be loaded on to other products. Need ABC for better cost data. Fire the consultants!

5. BRONGOLF TRUCK COMPANY

Company manufactured truck bodies to order. Each job was similar but had differences to suit customer preferences. Job cost system used. Control by comparing actual against estimate. Main competitor was using standard costing. Why change?

ANSWER:Definitely yes! First standardise production parts and sub-assemblies as far as possible (what are competitors doing?). Then introduce standard rates for labour and materials. ducts do not have to be the same for standard costing. Work up standard cost sheets for each product before introducing the system. Standard costing provides better data for both management control and estimating. Variances between actual and standard are best analysed by: price, efficiency and volume.

6. HEAVY MAC COMPANY

Company was experiencing very heavy losses due to fall-off in the market and subsequent low production levels. Cost reduction program was instituted and each manager was asked to suggest maximum cost savings which could be conveniently made now. Managers responded with savings of about 2%. What to do about cost reduction?

ANSWER:Analyse the structure of costs to set a target of potential savings. Cost reduction in crisis situations can never be entirely "voluntary". Set cost reduction targets of 20% to 40% to indicate the kind of "cost cut" required from each manager, and then let him decide how to achieve it. Be firm. Mangers tend to allow and protect activities that are not at all absolutely necessary, due to EI (emotional investment). They need pressure to keep operations efficient. Change some managers too?

7. ALLAN SOLO COMPANY

Contract completed at far above the estimate, and the manager held the 40 40


foreman responsible. Foreman blamed material prices - responsibility of purchasing. Purchasing blamed production control for high overhead rates due to low capacity working. Production control blamed marketing due to lack of orders and low prices. Marketing blamed the Controller for the new costing system. To what extent can we hold the foreman responsible?

ANSWER:Failure to reach target may be due to: poor estimating, price variances, volume variances, efficiency variances, poor reporting, poor selling of products - foreman has only limited responsibility for efficiency - unless he operates as a profit centre.

8. KEITH COMPANY

Accountant refuses to release the monthly cost reports until four weeks after the month end, to ensure that they are "absolutely accurate", on the ground of previous criticism that his "inaccurate costs" are a dangerous. Is he right?

ANSWER:Fast rough cost figures on time within four days of the month end, are far more useful to management than "so called accurate cost reports" later. Manager must decide what he needs in terms of accuracy not the accountant - manager is the "customer" of the accountant!! There are no absolutely accurate costs; only costs that are useful for a purpose based upon assumptions.

9. LEEMAC PRODUCTION COMPANY

Accountant insists that controller department salaries are "fixed costs" and will always be fixed costs. How could you best convince him that he may not be right?

ANSWER:Fire him!!

10. OPARKO COMPANY

The CEO is anxious to make a major cost reduction and organisational 41 41


change that will affect three key departments in the organisation. Department A is the largest in the organisation. Department B while smaller than A is also a larger department. Department C is the smallest and acts as a co-ordinating and operational department between A and B. The employees in Department are young with broad operational responsibility.

Question: How should the CEO bring about change? Which department will be the most resistant? What win-win solution?

ANSWER:The small department with liaison authority is likely to be the most influential. These are the people that would normally act as change agents and would be most helpful in bringing about change. The large department with many employees will have vested interest in the existing system and will resist change. The success of the change will depends largely on the small influential department's ability to win over the other two departments.

11. ANDREMER COMPANY

Company set up a standard costing systems only three years ago and (June 2005) discovers rather high variances in price, efficiency and volume. Manager want to revise all the standards now and continue to change them each month until the year end in December 31, 2005, so that variances become insignificant. Should the Company change its standards now?

ANSWER:Do not change the standards until the end of the year. In the meantime control the variances very carefully. Changing standards involves a lot of effort and is not justified more than once a year. Maybe variances really do reveal production inefficiencies. However, when using standard costs for decision-making, remember to consider the effect of significant variances on product cost.

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PART II SECTION 3 - COST CONTROL AND REPORTING

1. CONTROL CONCEPTS

Set a clear organisational structure of cost, profit and investment responsibility centres.

Set standards in quantitative and non-quantitative terms as performance targets. Try to qualify targets but use multiple measures.

Set up a reporting system for both routine and special reporting, which is fast and accurate enough, for the purpose (but not excessively accurate) and not too slow.

Get top management support for rapid action where performance falls below target.

Set up a free-flow information system whereby information is not filtered before it reaches all levels of management, but goes directly from controller to all managers concerned.

2. REPORTING EFFECTIVENESS

Reports should be effective. They should be "marketed" to managers just like a product to customers, to ensure that they are giving consumer (manager) satisfaction.

Reports are designed for managers not controllers. Reports must be clear and include comparative and descriptive data preferably in figures and learning pattern form.

3. RESPONSIBILITY CENTRESResponsibility of managers for cost, profit and return on investment must be clearly defined. Standards of performance must be set (generally but not absolutely) in relation to authority and responsibility .

Managers must be subject to rapid follow up by top Management when they fail to meet target.

Managers must be judged not only on financial results but on the total job. Meeting the financial target is not necessarily doing the job. Operational profit/net assets employed should produce a return which is ABOVE the Cost of Capital!!

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Control actual performance against target for:a. Cost centresb. Profit centresc. Investment centres

NOTE: All are effective for cost control but b. and c. are more effective for EVA, because they motivate the managers to seek profit and to use resources effectively with a return on assets employed which is ABOVE the Cost of Capital.

4. HUMAN PROBLEMSBudget and cost targets are devices to achieve objectives in an organisation.Co-operation is the key. Willingness to participate and become involved discourages individual and group opposition to Top Management.People generally say that they do no like targets or budgets but in practice such targets help people - and give them great satisfaction.

. Motivation is vital. Help managers and workers to reconcile head office, local and personal priorities. Motivation is complex, but in the long term: challenge, responsibility and achievement are effective! Similarly trustworthiness, trust, empowerment and alignment, can provide a motivating organisational environment.NOTE: Other methods may achieve the results to survive today without developing anyone for the future! (i.e. fear, money and KITA)NOTE: All are effective for cost control but b. and c. are more effective for EVA, because they motivate the managers to seek profit and to use resources effectively with a return on assets employed which is ABOVE the Cost of Capital.

44 44


5. COST REDUCTION - CONCEPT

Every cost can be reduced over time by:

a. Economyb. Technological advancec. Cutting out operationsd. Planning

Compare activity five years ago to activity today, to indicate the past potential for cost savings. Then treat future cost saving as a normal part of management - not an exceptional operation. Costs grow naturally unless specific efforts are made to reduce them. Staff should not be "happy" but should be motivated

towards meeting their personal needs, with increasing efficiency and effectiveness.

6. COST REDUCTION ROUTINE

Develop the attitude of cost control and cost reduction every year! Budget cost reductions every year. Make critical examination to consider systematically the application of the following concepts to each area of operations:

a. Eliminationb. Combinationc. Changing sequenced. Simplification

Revise standards to enforce technical improvements every year!

Set up cost reduction teams using the tools of value analysis, O&M (Organisation & Methods), operational research, waste reduction audit, strategic cost management etc. top cut costs.

Use a creative approach to cost cutting and avoid routine blocks. Lateral thinking and brain storming are particularly useful for developing new ideas to cost control problem solving without EI (emotional investment).

45 45


7. COST REDUCTION - CRASH PROGRAMS

Financial crises lead to crash programs for "restructuring". re-engineering - cost reduction.

a. Less essential departments - eliminated as "non-value added" activities!

b. Reduction of staff by a flat 20% - forces managers to reconsider priorities.

c. Action teams with specific financial targets achieve "miracles" in cost reduction.

d. Cost reduction must be done quickly so that staff may readjust to the new situation.

e. Strategy of "cost surgery" is not to continue an insecure position too long, but to cut rapidly and clearly, so as to re-establish CONFIDENCE in the company.

8. TYPES OF REPORTS

a. Cost statements may show:

Cost of each job or unit of production or product group.Overhead cost of one section or departmentsCost of the whole businessOperating results of divisions or the whole business.

b. Timing of reports relates to ability of managers to control operations and make decisions - to actually do something with the data.

c. Reports indicate actual cost against a (one only) standard, not several different standards.

d. Reports signal significant exceptions rather than every item,.

46 46


e. Cost reports should show:

1. What is significant2. How figures compare with standard of performance3. What were the cause of significant differences4. Who is responsible5. What action should be taken.

9. DIRECT AND FULL COSTING

a. Direct costing defines product cost clearly as direct cost only. no allocation of overhead costs to product and therefor no assumptions. fixed cost all charged against the income of the year and clearly segregated for control by budgets.

b. Full costing defines product cost as direct and indirect manufacturing costs. allocation of fixed costs to products is only an estimate. but it indicates a minimum level of contribution required for the product. whereby total contribution will over total fixed costs.

c. Selling and administrative costs are not normally included but charged to income of the year.

d. For "total" cost compute: full cost plus an allocation of selling and administrate expenses.

10. FUNCTION OF THE CONTROLLER

a. Controller is the key accounting manager in the company; unless he is part of the management team he becomes a scorekeeper. Often there are two conrtrollers: an accounting (recording) controller and business (use of the darta) confroller!

b. Engineers may be better controllers than accountants because they are not prejudiced by the attitudes of auditing and accounting.

47 47


c. Controller functions include:

1. Design and planning control systems (often with consultants) with periodic RESEARCH, revision and rethinking to meet developing needs (no system works effectively forever - because the environment changes in terms of: technology, economy, policy, education, sociology, politics etc.,. therefore the strategy organisation and control systems must change).

2. Information recording, storage and retrieval.

3. Reporting

4. Aid to mangers in developing and using the data effectively - they are his "customers"!

5. Encouraging an organisational environment in which the control system functions creatively and NOT defensively.

d. Business Controller should encourage cost control and reduction as a key factor in avoiding waste of resources and achieving the objectives of EVA for ALL of the STAKEHOLDERS.

11. COST CONTROL AND REDUCTION

Cost reduction on an ad-hoc basis can be only minimally effective.

Set up a five year planning system for effective use of resources. Integrate the cost control and budgetary system.

Think of cost reduction in terms of total management control - rhythmic, continuing integrated operation.

Create an attitude of mind for cost reduction, a continual seeking for better standards of performance.

Cost reduction is not really a technical problem at all - it is a HUMAN PROBLEM!!! (Exhibit C later)

48 48


12. WASTE REDUCTION AUDIT

Waste reduction audit (WRA) investigates material inputs and outputs for each process, to identify waste and achieve cost savings by waste reduction, re-use and recycling (Exhibit A later).

13. STRATEGIC COST MANAGEMENT

Strategic cost management (SCC) starts with the cost structure of the enterprise in terms of fixed and variable costs to identify and reinforce only those activities that "add value" (EVA) to the operations of the enterprise (Exhibit C later).

It creates environmental motivation within the organisation which motivates managers to seek higher levels of cost efficiency and effectiveness.

14. EXAMPLES OF COST CONTROL THROUGH INTERNET STIMULATED CREATIVE MANAGEMENT

a. Speed (of data and decision-making)Better data handling and improved productivity, cut$7 billion of world costs by $1 billion within a year and a further $1 billion a year later (Oracle.) On line purchasing cut Inventory investment to "hours" rather than "days" (Dell)

b. Flexibility (for continuous learning), High volume of e-mail to top management with ideas and problems (Siemens). On line staff training (Arthur Andersen)

c. Collaboration (new company alliances)Open source software for collaborative work on projects sot that all global locations may be informed and contribute (IBM, VOLVO etc.). Purchasing on line with auctions for 30 tested suppliers (Dell).

d. Discipline (with new standard protocolsHuge cost savings from the purchase of indirect materials through a group based standard catalogue of suppliers (SAP).

49 49


e. Communication ( internal and external)Human resource data available to provide better promotion, recruitment and training data on line; computers given to workers to make them "on line"; all workers informed hourly on the latest company news and developments, through special web page publications (BZE, BP, CISCO, Ford etc.)

f. Data skills (for the mass of data available)Purchasing on line 75% of direct materials (Pratt & Whitney)

g. Customer focus (from recruitment to retention)Direct sales on the web coordinated with existing dealers (Ford). Design changes to "modular" which allows a fit to each customer's need (Daimler). Reduced customer complaints from e-business (Dell). Global customer analysis to determine the value of a customer to the company (Ford).

h. Knowledge management (ability to share data)Production schedule data provided to suppliers who are paid at 30 days while customers pay on order on the web, providing high cash flow (Dell).

l. Leadership (huge investment in organisation to create an e-business).

Global manufacturing plants all sold to supplier firms for coordinated low cost production controlled via INTERNET (Nortel). Create separate dot.com business (Staples). Use dot-com for distant locations (Procter). Become a dot.com company (Dell).

50 50


Exhibit A WASTE REDUCTION AUDIT

Waste reduction audit (WRA) investigates material inputs and outputs for each process, to identify waste and achieve cost savings by waste reduction, re-use and recycling.

WRA is essentially a "materials balance" conducted at an individual industrial facility, to see what comes into the plant, to see what goes out, and to make sure that resources are not being wasted.

The "materials balance" demonstrates the opportunities for reducing the use of resources: water, chemicals, materials, gases, energy etc.

Waste and cost reduction is achieved by: changes in materials, processes, products, recycling and on/off-site disposal arrangements, and above all by better "housekeeping".

WRA is a highly cost-effective technique which follows material inputs into the production process and accounts for them quantitatively, in any form (solid, liquid, air) to identify losses due to waste which can then be reduced.

The "Phases" of a WRA are described in the Exhibit which follows.

In a new area start with pilot project with five enterprises, and carefully DEMONSTRATE that WRA can be cost effective and profitable to both the "highly efficient" and "less efficient" companies.

Advantages - often immediately profitable for the enterprise and most appropriate at plant level.

Disadvantages - some changes may require excessive capital investment at high risk; not a substitute for annual external environmental compliance auditing.

51 51


Exhibit A WASTE REDUCTION AUDIT (cont.)

PHASE 1 - PRE-ASSESSMENT:

1. Audit focus and preparation. 2. Listing unit operations 3. Constructing process flow diagrams

PHASE 2 - MATERIAL BALANCE: PROCESS INPUTS AND OUTPUTS

4. Determining inputs 5. Recording water usage 6. Measuring current levels of waste reuse/recycling 7. Quantifying process outputs 8. Accounting or waste water 9. Accounting for gaseous emissions10. Accounting for off-site wastes11. Assembling input and output information for unit operations12. Deriving a preliminary material balance for unit operations13. Evaluating the material balance14. Refining the material balance

PHASE 3 - SYNTHESIS

15. Examining obvious waste reduction measures16. Targeting and characterising problem wastes17. Segregation18. Developing long term waste reduction options19. Environmental/economic evaluation of waste reduction options20. Developing and implementing an action plan: reducing wastes and

increasing production efficiency

52 52


Exhibit A

EX. 1 - WASTE REDUCTION AUDIT (cont.)

Write the answers to the following questions (true/false):

1. WRA confirms the environmental concept that pollution prevention always pays.

2. Many multi-national companies are achieving significant cost savings through continuous WRA's.

3. Cost reduction in WRA is achieved by changes in materials, processes, products, and recycling.

4. Significant waste and cost reduction can be achieved with improved "housekeeping".

5. When governments introduce PPP (polluting party pays) legislation, then WRA will be profitable both for business and environment.

Answers: F T T T T

53 53


Exhibit B STRATEGIC COST MANAGEMENT

Strategic cost management (SCC) starts with the cost structure of the enterprise in terms of fixed and variable costs to identify and reinforce only those activities that "add value" to the operations of the enterprise.

SCC seeks motivating "cost drivers" for these critical "added value" activities thereby seeking "competitive advantage" for the enterprise in the market.

Under SCC cost accounting should be action-oriented with "timely data" to support cost reduction by: score-keeping, focusing attention on critical areas and providing relevant data to assist in problem solving.

Such timely "feedback" motivates cost reduction by change of: goals, methods, forecasts, processes, rewards and it stimulates managers to find new alternatives (CCI's).

SCC sets a clear organisation structure of cost, profit and investment responsibility centres. It sets standards and reporting with a "free-flow information system" whereby information is not "filtered" before it reaches all levels of management, but goes directly from the controller to the managers concerned.

SCC creates "environmental motivation" within the organisation which motivates managers to seek higher levels of cost efficiency and effectiveness. In SCC the key to cost accounting, control and reduction is "management motivation".

54 54


Exhibit B STRATEGIC COST MANAGEMENT (cont.)

Special studies of the cost structure of a product may reveal useful data for management decision-making, such as the cost analysis which tries to associate all costs (from research to distribution) very directly with a particular product or product group:ECU Variable Fixed TotalR & D 20 60 80Design 15 35 50 Manufacture 90 30 120Marketing 30 15 45Distribution 25 10 35Total product cost 250 170 400

55 55


Exhibit B

EX. 2 - STRATEGIC COST MANAGEMENT (cont.)


1. The critical issue in strategic cost accounting is to identify the critical activities that add-value.

2. Under SCC cost control reports may have to be delayed until six weeks after the month end, to ensure that they are "absolutely accurate" because "inaccurate cost data is dangerous".

3. Company buys containers but the normal supplier quotes price increases of 25%; the company now has at least seven alternatives courses of action.

4. Under SCC the analysis of the cost structure of an enterprise, may indicate whether ABC would be more appropriate than labour based cost accounting.

5. Strategic cost accounting requires both routine cost reports and special cost analyses for particular purposes.

Answers: T F T T T

56 56


EXHIBIT C

COST REDUCTION PROGRAMMES

Every cost can be reduced over time by: economy, technological advance, cutting operations and planning. Compare activity five years ago

Then treat cost saving as a normal part of management. Costs grow "naturally" unless controlled. Managers should not be "happy" but "motivated towards increasing efficiency.

Develop attitudes for cost control and reduction every year. Budget for cost reduction every year.

Examine each area of operations for possible: elimination, combination, changing sequence and simplification. Revise standards to enforce technical improvements every year.

Set up cost reduction teams using such tools as: O & M, operations research, ABC, JIT, standard costs, strategic cost management etc. to cut costs. Use a creative approach to avoid routine blocks.

Use lateral thinking and brain storming to develop new ideas for cost control problem solving.

Other cost reduction techniques include:

1. New standard costs - related to market needs rather than engineering, thus requiring simplification and change in: materials, number of parts, number of set-ups, processes, products, packaging etc.

2. Direct labour and overhead cutting by adopting increased automation.

3. Development of profit centres for manufacturing, marketing and sales units, with transfer prices to motivate "profit and value-added orientation".

57 57


EXHIBIT C

EX. 3 - COST REDUCTION PROGRAMMES (continued.)

4. Strategic purchasing management to get benefit from "make v buy" opportunities from design to distribution of all products.

Cost reduction may use the "six C's" approach involving:

1. Controls - timely reporting of actual and against target 2. Compensation - reward and punishment systems that provide

economic incentives 3. Change process - welcome for change in materials, processes,

plant, products, marketing, distribution and disposal of products

4. Continuous education for management to stimulate new ideas and ways of thinking about problems

5. Champions - publication of results by specific units that achieve exceptional results.

6. Commitment - to cost reduction every year as a normal task of every operating manager

Cost accounting should be action-oriented with "timely data" to support cost reduction by: score-keeping, focusing attention on critical areas and providing relevant data to assist in problem solving.

Such timely "feedback" motivates cost reduction by change of: goals, methods, forecasts, processes, rewards and it stimulates managers to find new alternatives (CCI's). Managers must contiually reduce "non-value-added" activities in: design, purchasing, handling, proecessing, inspection, shipping etc. with the "Kaizen" Japanese philosophy "continuous improvement".

Financial crises may require "crash" programmes whereby: less essential departments are eliminated, staff are reduced by a flat 20% to force managers to rethink activities that "add value".

58 58


EXHIBIT C

EX. 3 - COST REDUCTION PROGRAMMES (continued.)

Action teams get specific targets to perform "miracles" of cost cutting, and a strategy of "cost surgery" cuts rapidly and clearly so as to quickly re-establish confidence in the organisation.

For cost reduction programmes the routine cost accounting reports are never adequate; thus special relevant cost studies and reports must be prepared to help with decision-making.

These will require data on costs which specifically relate to the decisions to be made, with due concern for the relevance of: standard costs, actual costs, variable costs, fixed costs, opportunity costs, sunk costs, past costs, future costs, direct costs, indirect costs, controllable costs, non-controllable costs etc.

59 59


EXHIBIT C

COST REDUCTION PROGRAMMES (continued.)

Write down and justify the answers to following questions (true/false):

1. Cost reduction is much harder in older industries.

2. Standards set by good engineers should not be changed by market considerations.

3. The five C's are: compensation, champions, change process, continuous training, controls and commitment.

4. Waste reduction benefits the environment and company profits.

5. Management training for cost reduction is "cost-effective" in all industries.

6. All fixed costs are variable over time.

7. Cost reduction under financial crisis must be perceive by management as fair.

8. All costs grow naturally over time.

Answers: F T T T F T

60 60

PART II SECTION 4 - KEY LEARNING POINTS (AGAIN!!!)

NOW PLEASE STUDY AGAIN …

PART I SECTION 1 - KEY LEARNING POINTS …

AND TRY TO RELATE EVERY POINT …

TO YOUR OWN ORGANISATIONAL ENVIRONMENT …

MAKING SPECIFIC NOTES …

ON WHAT CAN NOW BE DONE …

BASED ON THE KEY CONCEPT OF THIS LEARNING EXPERIENCE THAT …

EVERY COST CAN BE REDUCED WITH TECHNOLOGY, TIME AND CREATIVE MANAGEMENT …



61 61

PART I I SECTION 5 - LEARNING MAINTENANCE

LEARNING MAINTENANCE ROUTINE

1. Learning maintenance program

Objective - to ensure that learning from the course is both maintained and reinforced.

2. Help

Discuss problems arising with your local Controllers, and for any outstanding questions, do not hesitate to FAX us for whatever assistance may be needed.

3. Routine

a. Play the LRT (Learning Recall Tape) several times to reinforce the your learning recall, achieve deeper understanding of EVERY aspect of the course, and to identify the learning materials that will require extra study time.

b. Study the WSJ for at least 20 minutes daily. Use the special note

provided, to interpret the more difficult technical sections.

c. Do the quiz and review all course learning materials.

d. From day 15 onwards, study a text book.

e. On day 30, complete the quiz (open book) and return it to the Organiser with your mature feedback on the course content and its direct application to your area of responsibility.

56

APPENDIX A - AGL

AGL NO. 2 - COST CONTROL- A TWO OR THREE DAY TRAINING PROGRAM FOR MANAGERS

BRIEF BROCHURE

PROGRAM:

The program is designed to provide managers and directors with the opportunity to achieve a deeper understanding of cost control concepts, terminology, techniques and reports.

This broadening of knowledge, skills and attitudes, will enable them to capitalise on new business opportunities and to accelerate their professional development.

SPECIFIC OBJECTIVES:

The specific learning objectives are:

a. To recognise and use the language and concepts of cost accounting and cost control, and the potential for out.-sourcing and continuous cost reduction.

b. To compute the cost of products, services and organisational units, using job, process, standard and ABC cost/management systems.

c. To interpret cost data and cost accounting reports.

d. To identify CCI's (Cost Control Initiatives) in the current operations of the organisation

e. To motivate further study in the future.

57

APPENDIX A - AGL

SYLLABUS:

The syllabus of the program includes: cost control language and concepts; out-sourcing of materials and services, cost systems and standards; direct and indirect costs; cost, profit and investment centres; effective reporting; waste reduction audit; JIT; ABC; continuous cost reduction programs; strategic cost management; EVA and functions of the controller.

METHOD:

The AGL method is designed to achieve rapid individual learning using special material and the stimulus of group activity without formal teaching. The groups use the material to find the answers to all problems and questions. The program provides the full cycle of pre-learning, learning and learning maintenance activity.

TIME:

Two days or three days.

FACULTY:

Dr. Bob Boland of European Institute (Geneva) and Professor Andre van de Merwe of the MANCHESTER BUSINESS SCHOOL and

FURTHER INFORMATION:

Tel. 33- 450-40-89-82 Fax. 33-450-40-92-49Email. Boland @misc.hautesavoie.net

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APPENDIX B - READ-ME FIRST

README FIRST - HOW TO USE MINI-AGL PROGRAMS FOR A MORNING OF EFFICIENT AND EFFECTIVE LEARNING

WITH A GOOD PARTNER

1. CONCEPTS

The programs are developed from established AGL courses by ex-professors from INSEAD/IMD/GSB, as efficient and effective four hour learning experiences, based on new theories of conscious and non-conscious learning.

2. PRINTING FOR LEARNING MAINTENANCE

Find the file marked "LM" and print it out directly as Word Arial 12 point.

3. LEARNING

Three "learning aids" are helpful for the morning: a. A partner - the key to efficient and effective learning .

b. Text book for further study.

c. The WSJ (Wall Street Journal).

4. RUNNING THE PROGRAM

a. Use Windows and Powerpoint. Copy diskette a NEW directory on your computer (once only). Use "slide show".

b. WITH A PARTNER …do the learning routine (four hours) in one morning; otherwise do two sessions of two hours each. Do the Learning Maintenance" afterwards to reinforce the learning. Then a week later ... relax ... repeat the morning ... make it fun .. and ... surprise yourselves ...

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APPENDIX B - READ-ME FIRST

c. When running Powerpoint use slide show for ...

Part I - for the morning routine - first two hours. Part II - for the morning routine - second two hours.

NOTE: THE PROGRAM CAN WORK DIRECTLY FROM THE DISKETTE BUT WORKS MUCH FASTER ... WHEN YOU COPY IT TO YOUR HARD DISK ... IN A SPECIAL DIRECTORY

5. PROGRAMS AVAILABLE

Mini-agl (morning) programs currently becoming available at July 1, 2000, 2000 include:

AGL 1 Basic Finance for ManagersAGL 2 Cost ControlAGL 8 Communication for Effective ManagementAGL 10 EVA and Financial Management of Working CapitalAGL 20 Business Strategy 1999AGL 30 Forex and Risk ManagementAGL 40 Environmental Audit

For special clients, customised versions can be developed with company cases with about two weeks of intensive supportive efforts.

Dr. R.G.A. Boland (FCA, CPA, ITP (Harvard), MD, MPH (Johns Hopkins), DBA, Currently

professor at the European Institute (Geneva). Former visiting professor at INSEAD, UCT, IMD, Cranfield, HBS, Columbia etc. and senior research officer with the UN (ILO/WHO). In Geneva.

July 1, 2000e-mail: [email protected],netTel. 33-450-40-8982

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APPENDIX C - GLOSSARY

ABCSee Activity Based Costing

Absorbed overheadSee overhead charged

Accounting Technique of preparing accounting reports from books and other records. Based on concepts and principles such as: true and fair, money, cost, conservatism, consistency, comparability, entity, going concern, recognition of profit etc. Dependent upon IAS (International Accounting Standards).

Accounting periodPeriod of time between one balance sheet and the next. Period of the income statement. Usually a month, quarter or year.

Activity Based Cost Accounting (ABC) ABC recognises that with increasing automation, direct labour may be only 10% of manufacturing cost and thus other "cost drivers" (engineering, set-up, handling, quality and waste control etc.) can be used to allocate overhead, to get a more useful product cost.

ABC motivates managers to reduce "non-value-added" activiities in: design, purchasing, receiving, storage, handling, inspection, process ing etc. using "bench-marking" and re-engineering techniques.


Activity Based Management Using ABC to make continuous mprovement of operations using the "kaizen"

philisophy by reducing "non-value -added " activities..

Activity Cost Pool ABC grouping of overhead costs by: design, engineering, purchasing, set-up,, processing, inspection, shipping etc.

Administrative overheadCost of directing and controlling a business. Indirect cost. Administrative expense. Includes: directors fees, office salaries, office rent, legal fees, auditors fees, accounting services etc. Not research, manufacturing, sales or distribution overhead.

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Allocated overheadSee overhead charged

Balance SheetStatement of assets and how they are financed from liabilities and owners equity. Not an income statement.

BatchGroup of identical product of jobs

Batch costingCost system where the unit of cost is a batch. Similar to job costing

Benchmarking Continuous search for the most effective method of accomplishing a task, by comparing exisiing methods and performance with other organizations or+ units. The "best practrices" of other organizations may be deceptive and thus may require carefufl research before being accepted. Coconuts See Materiality.

Contract costing Cost system where the unit of cost is one contract. For long term contracts a proportion of the profit to date may be taken each year

ContributionExcess of selling price over variable cost. Contributes to fixed overhead and profit. Also used in make or buy decisions, as the excess of purchase price over relevant cost of making.

Controllable costCost for which some person may prepare a budget and he held responsible for the variance between actual cost and budget.

CostSeveral meanings:

a. Expenditure on a given thingb. To compute the cost of somethingc. Direct cost or indirect cost (indirect cost is overhead expense)

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Cost accountingRecording of cost data and preparation of cost statements. Objectives to:

a. compute the cost of a product as an aid to pricingb. value work in processc. control costsd. motivate managers

Cost allocatedCost charged. Cost analysed. (Some cost accountants use the word allocation to mean charge of whole items of cost as distinct from apportionment which covers analysis of proportions of an item of cost). *

Cost apportionedCost charged. Cost analysed (Some cost accountants use the word "apportionment" to mean analysis of proportions of items of cost. See also cost allocated)

Cost centre (poolCentre for analysis of overhead into smaller cost sections. Used to compute more precise overhead rates. Better cost control. Productive and service cost centres.

Cost chargedSee cost allocated

Cost classificationGrouping of costs by common characteristics

Cost codeSeries of alphabetical or numerical symbols to represent descriptive title in cost classification

Cost controlObjective of cost accounting. Achieved by:

a. Setting of budget or standard costb. Recording of actual costc. Comparison of standard and actual cost to computed variances

(differences)d. Investigation of cause of variancese. Action by responsible management

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Cost driverAn event, cost or activity that directly relates to overhead costs being incurred. Always an estimate based upon assumptrions to be carefully checked. Used in both manufacturing and service industries e.g. hospitals.Drivers are used to allocate overhead to product cost. Traditional cost accounting used as "drivers", direct labour or materials or prime cost for a whole factory or for each department. However with highly automated processes, direct labour may be minimal and thus a direct labour hour overhead rate may be as high as 300-1,000%, quite unrelated to the real cost of different product volume and set-up costs.

Thus ABC has been developed to use new drivers related to: design, engineering, purchasing, handling, set-ups, processing, inspection, shipping etc, which more closely "drive" costs and an provide more useful ESTIMATES of product cost. Not "true" cost. Not scientific. More useful and less misleading than traditional drivers.

As an alternative to changing a whole costing system, ABC data can sometimes be obtained ONLY when needed, by making careful estimates from a good data bank of cost Information.

Costing Two meanings: a. To estimate costs b. Cost accounting

Cost manualManual of responsibilities, routines, forms and reports in a cost system

Cost of capitalNot all real cost. It is the reward to each type of capital used by a business i.e. creditors (nil) loans (interest), preference shares (dividends), ordinary shares (dividends)

Cost of salesCost of goods actually sold. Labour, material and manufacturing overhead adjusted for changes in inventory of raw material, work in process and finished goods

Cost reductionA key objective of cost accounting an control, with new CCI's (Cost Control Initiatives) becoming continually evident. Every cost can be reduced over time by: economy, technological advance, cutting operations and planning.

Cost report70


Cost statement

Cost statementStatement of cost and/or operating results of all or part of a business. Prepared promptly with reasonable accuracy. Contains comparative data..

Cost structure Key to cost control. Analysis of product or process cost in terms of variable and fixed labour, materials and overhead , to concentrate cost control efforts on the "coconuts" NOT the peanuts!!

Cost unitUnit of cost. Unit of product chosen as focus of cost accounting. Contract, job, batch, product or process. Current costActual cost. Not estimated cost. Not standard cost.

DepreciationAllocation of the cost of a fixed asset (building, equipment, vehicles., etc.) over its working life. Measure of the cost of using the fixed asset. (Land does not normally depreciate.) Methods: straight line, diminishing balance, sum of the digits.

Direct costingCost system for variable costs only. All fixed costs charged to income statement and not to product or job cost accounts.

Direct costsCosts conveniently associated with a unit of product. Normally direct labour, direct material, direct services (e.g. hire of equipment for one specific job). All other costs are indirect costs known as overhead expenses. (Some cost accountants also use the term "direct" for specific costs. i.e. overhead expenses which are clearly identifiable with a overhead cost centre but not with a unit of product).

Direct expensesDirect costs which may be conveniently associated with unit of product. Direct services. See direct costs.

Direct labourLabour conveniently associated with a unit of product.

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Direct wagesDirect payroll. Covers all operating labour. Does not normally include inspectors wages, foreman's salary, indirect labour, wages paid to persons normally employed on production for time spent on other work, etc. See direct costs.

Direct materialDirect cost. Conveniently associated with a unit of product. Material that forms part of the product sold. Not indirect material. Not manufacturing overhead.

Direct servicesDirect expenses. Direct costs

Direct wagesDirect labour

Distribution overheadCost of packing and distributing the product. Indirect cost. Overhead. Often grouped with sales overhead and charged to jobs as a percentage of manufacturing cost.

Elements of costBasic analysis of cost to compute overhead rates: direct labour plus direct material plus direct services equals PRIME COST;prime cost plus manufacturing overhead equals MANUFACTURING COST; Manufacturing cost plus sales, distributive and administrative overhead equals TOTAL COST.

ExpenditureMoney paid for cost, expense, asset or other purposes

ExpenseIndirect cost. Overhead. Manufacturing, selling or administrative overhead. Not a direct cost. Not conveniently associated with a unit product. Fixed or variable.

Expense analysis sheetRecord of expenses for analysis

Finished goods stockInventory or stock of finished goods. Valued at lower of cost (of labour, material and manufacturing overhead) or market value. Sometimes valued at direct cost only.

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FIFO - First in first outMethod of costing material issues assuming that first goods received are first issued

Fixed assetsAssets such as land, buildings, plant and equipment acquired for long term use in the business and not for resale. Valued at costs less accumulated depreciation not at market value. Depreciation charged to overhead expense periodically. (Exception: land is not normally depreciated). Where the cost less accumulated depreciation of a fixed asset is completely unrelated to its current value, then as an exceptional operation all assets may sometimes be restated for all accounting purposes, at current values.

Fixed costCost not affected by variations in the volume of production. Not a variable cost. Overhead may be fixed or variable cost.

General manufacturing overhead service cost centreCost centre used to accumulate general manufacturing overhead item. Subsequently recharged on an arbitrary basis to all cost centres. Covers such items as the factory manager's salary and office costs.

Historical costingAccumulation of past costs. Actual not standard costs.

Income statementStatement of sales, costs, expenses and profit for an accounting period. Profit and loss account. Not a balance sheet.

Indirect costCost which cannot conveniently be associated with a unit of product. Overhead expense. Indirect expense. Not a direct cost.

Indirect expenseSee indirect cost

Indirect labourLabour that cannot be conveniently associated with a unit of production. Indirect cost. Overhead. Not a direct labour but does include the non-productive time and activity of normally direct workers.

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Indirect materialMaterial used which does not form a measurable part of the product sold. Not conveniently associated with unit of production Includes: oil, rags, factory supplies, etc. Indirect cost. Usually manufacturing overhead. Sometimes direct material for very low value is treated as indirect material to save clerical costs.

Indirect wagesIndirect labour

Inventory (stock of goods)Raw material, work in process, finished goods. Valued at the lowest of manufacturing cost or market value. Sometimes valued at direct cost only.

Investment centreUnit of organisation where the performance is measured by return on assets employed (not cost or profit alone). Motivates managers to be "investment-oriented". Dependent upon the "transfer price" for internal transactions.

JIT See "Just In Time" inventory control.

Job cardRecord of work done by direct labour

JobUnit of cost. Single job, order or contract

Job costingCost system based on one job as the unit of cost

Just in time Inventory Control (JIT)JIT inventory control seeks to reduces inventory holding and material handling charges, through managed supplier relationships. Inventory levels of two weeks supply are often been reduced to the level of four hours, with sub-contracted parts moving from transport directly to production lines.

Labour hour rateWorker rate of pay per hour

Labour time recordTime card. Clock card

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Last in first out (LIFO)Method of costing material issues assuming that the last item received is the first item issued. Conservative in time of rising prices. Little used except to avoid taxation.

Limitations of cost dataData for one purpose may not be relevant for other purposes. Costs often meaningless unless prepared quickly and presented with comparative data against which to measure performance. Cost depends upon the judgement of the cost accountant.

Machine hour rateTwo meanings:

a. Overhead rate for manufacturing overhead based on machine hours worked on each job. Suitable for machine sections. Not suitable for assembly work.

b. Rate for operating a machine for one hour

Maintenance costMaintenance and repair of machines and buildings. Overhead. Indirect cost. May be manufacturing sales or administrative.

Manufacturing overheadIndirect cost of running the factory. Includes rent, rates, lighting, power foreman, maintenance, repairs, insurance, etc. Does not include the full costs of machines, only machine depreciation.

Marginal costRelevant cost of producing one more unit

Marginal costingSee marginal cost. Sometimes variable cost only. Sometimes used to mean direct costing

Material costCost of material used. See direct material and indirect material.

Material issue analysis sheetRecord summarising and analysing material issues by jobs, contracts, products or overhead accounts.

Materiality Nothing to do with materials! Key concept in cost control. Concentrate attention on the large amounts of money ("coconuts") and leave the peanuts to the+

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monkeys! But don''t forget the effect of volume i.e. one dollar per part for a million parts, is one million dollars!!

Material requisitionStores or stock requisition. Issue ticket

Objectives of cost accountingSee cost accounting

OccupancyCost of occupying a building. Includes rent rates, lightning, heating, cleaning, maintenance, etc. Sometimes accumulated as a service cost centre and recharged to other cost centres on the basis of floor space occupied. Avoids apportionment of each individual cost to each cost centre separately.

Operating costCost of providing a service

Opportunity costNot a cost at all. The value of a particular alternative course of action.

Organisation (for cost accounting)Definition of authority and responsibility in a business in order to design the appropriate cost accounting system. Cost analysis follows the organisation plan. Manufacturing, sales and administrative costs may be analysed for the business as a whole, or for each division or product group.

Output costingCost system for a business or department with only one output of identical products.

Overhead absorbedSee overhead charged

Overhead allocatedSee overhead charged

Overhead expenseIndirect cost. Overhead. Fixed or variable with the volume of production. See manufacturing, sales, distributive and administrative overhead. Not direct cost.

OverheadIndirect cost. Cannot be conveniently associated with a unit of product. Expense. Manufacturing, sales or administrative. Not direct cost.

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Overhead chargedOverhead allocated or absorbed or recovered. Overhead charged to a contract, job or product using an overhead rate.

Overhead rateRate for charging out overhead to jobs, contracts or products. Routine:1. Compute amount of overhead2. Estimate measure of activity3. Compute overhead rateMeasures of activity may be: direct labour cost, direct labour hours, prime cost or machine hours. Overhead rate may be for the whole factory or for each cost centre.

Overhead recoveredSee overhead charged

Overhead under or over chargedOverhead under or over absorbed, allocated, recovered. Difference between overhead incurred and overhead charged to contracts or jobs using an overhead rate.

Overcharge indicates that actual activity exceeded estimated activity. Credit or profit in the income statement because job costs charged with too much overhead. Undercharge indicates that actual activity was less than estimated activity. Loss in the income statement because job costs charged with too little overhead.

Applied to manufacturing overhead. Not sales or administrative overhead.

PayrollWages sheet. Wages. Labour

Payroll allocationWages analysis

Payroll analysisWages analysis

Peanuts See Matreriality .

Pre-determined costCost estimate. Standard cost

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Primary costsAnalysis of costs into labour, material and overhead. See elements of cost.

Prime costDirect labour plus direct material plus direct services. Direct cost. Cost system for a sequence of operations where the unit of cost is one process.

Productive cost centreCost centre engaged in direct manufacturing or productive operations; machine shops, assembly shops, etc. Not a service cost centre.Product groupGroup of products classified for cost analysis.

Profit and loss accountIncome statement. Not a balance sheet.

Profit centreUnit of organisation where the performance is measured by profit (not cost) a against budget. Motivates managers to be "profit-oriented". Dependent upon the "transfer price"

Relevant costThat part of total cost that is relevant to a particular decision or course of action. Refers more to variable rather than fixed costs. May change over time.

Research costCost of research., Separate overhead or part of manufacturing overhead. Indirect cost. Not normally direct cost.

Salary costNot normally conveniently associated with a unit of product. Usually manufacturing sales or administrative overhead.

Sales overheadCost of promoting sales and retaining custom. Indirect cost. Overhead expense. Not a manufacturing or administrative overhead. Includes: advertising, sales literature, sales salaries, travelling expenses, depreciation of sales cars etc.

Service cost centreCost centre for activities not engaged in direct productive operations. Includes: power-house, maintenance, internal transport, production control. Not a productive cost centre. Manufacturing overhead. Recharged to

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appropriate cost centres.

Specific costIndirect cost clearly associated with a specific cost centre. Not direct cost. Overhead.

Standard costPredetermined standard of performance against which to measure actual t. Standard cost as opposed to actual or historical costing.

Standard rateRate which is set at the beginning of an accounting period. Not the actual rate. Simplifies clerical work in cost accounting.

StockInventory of goods on hand. Stores. Raw material, work in process or finished goods. Valued at the lower of manufacturing cost or market value.

Stock requisitionMaterial requisition

Stores requisitionMaterial requisition

StoresLocation for keeping stock or inventory. Stock. Inventory.

Straight line depreciationDepreciation method charging of the cost of a fixed asset equally over the years of its working life.

Strategic cost management (SCC)SCC starts with the cost structure of the enterprise in terms of fixed and variable costs to identify and reinforce only those activities that "add value" to the operations of the enterprise. SCC seeks motivating "cost drivers" for these critical "added value" activities thereby seeking "competitive advantage" for the enterprise in the market.

Target costingMarket based product design to motivate engineers to find creative ways to achieve "impossible" cost targets! With time, technology and motivation, they do in fact achieve these "impossible" results! Quote: "Nobody is smart enough to be pessimistic about the furture!"

Under-absorbed overhead79


See overhead undercharged

Unallocated overheadSee overhead undercharged

Uncontrollable costSee controllable cost

Unit of costUnit of production for cost accounting. Contract, job, batch, process.

Unit of productUnit of cost for cost accounting

Unit of outputUnit of product

Variable costCost which varied with the volume of production or sales.

Variable expenseVariable cost. Variable overhead

VarianceDifference between actual and the standard of performance i.e. budget, standard cost or previous cost. Sometimes analysed into: price, efficiency, seasonal and volume variances.

WagesPayroll. Pay of workers. Labour cost

Wages analysisPayroll analysis. Record analysing labour cost by contract, job, batch, process or overhead account.

Wages sheetPayroll. Record to compute gross and net pay.Waste reduction audit (WRA)Audit which investigates material inputs and outputs for each process, to identify waste and achieve cost savings by waste reduction, re-use and recycling. Highly cost effective. Improved housekeeping is a major cost reduction.

Work in processSee stock. Work partially completed. Valued at lower of manufacturing cost

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or market value.

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CREATIVE LEARNING EXERCISE (CLE)

EVERY DAY, TAKE A LITTLE TIME, FOR YOUR MENTAL AND PHYSICA HEALTH, BY GOING INTO A TRANCE WITH VERY GENTLE CLE. TELL YOURSELF HOW LONG, YOU WISH TO REMAIN IN TRANCE, E.G. 5 MINUTES,15 MINUTES ETC.

TO GO INTO A TRANCE

1. Tell yourself that you are going to do CLEs.

2. Make yourself comfortable. Begin to breath very deeply.

3. Close your eyes and pretend that you cannot open them for five minutes.

4. Relax your whole body ... by visualizing each part carefully ... from the top of your head to the tips of your toes ...

5. Begin slowly and mentally ... to count down from 10 to 0.

6. Imagine a beautiful white healing light ... coming from above your head ... relaxing and healing every part of you ... as it passes through your whole body ... and out of your toes.

7. Imagine a beautiful soothing golden fluid ... coming in from your toes ... to sooth and heal every part of your body ... right up to the top of your head ...

8. Then make simple positive suggestions to yourself ... about your body and your health ... so that you ... help yourself ... to feel better ... day by day ... and have the CONFIDENCE, CONCENTRATION and MOTIVATION ... to learn easily and remember ... instinctively, everything in the program ...

TO WAKE UP FROM THE TRANCE:

Tell yourself that when you wake up you will feel very well, very happy and very motivated to achieve what you need. Slowly and mentally count up from 0 to 10 and open your eyes. Stretch the arms and neck. Relax.

NOTES

Practice: For the first ten days, try to practice twice a day. On awakening in the morning, to plan for the day and, just before sleeping at night, to hand over one key problem to your subconscious mind. When you practice before going to sleep, do not awaken with a count of 0 to 10, simply tell yourself that it will turn into natural sleep from which you will awaken in your own time in the morning.

Suggestions: Determine what you want. Make only those suggestions that are simple and positive. Repeat them several times. Always be clear on how you want to think, feel and behave. Never suggest anything you do not want!

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BRIEF BIBLIOGRAPHY

Hartland's Medical and Dental Hypnosis (Dr. David Waxman, Bailliere Tindall1998)

Hypnosis and Hypnotherapy with Children (Dr. K. Olness and D. P. Kohen, Guilford Press, 2006)

Hypnosis for Change(Dr. J. Hadley & C. Staudacher, New Harbinger Publications 2006)

Hypnosis in the Relief of Pain (Dr. E. Hilgard and J.R. Hilgard, Briunner/Mazel 2004)

Self-Hypnosis (B.M. Alman and P. Lambrou, Brubnner/Mazel, 1992)

Trancework - An Introduction to the Practice of Clinical Hypnosis (Dr. M.D. Yapko, Brunner Mazel 1990)

Clinical and Experimental Hypnosis in Medicine, Dentistry and Psychology(Dr. W Kroger, Lippincott 1977)

Hypnotherapy (Dave Elman, Westwood Publishing, 1977)

Feeling Good (with Cognitive Therapy) (Dr. David D. Burns, Avon Books, 1999)

A fuller bibliography of several thousand books and articles is available from several societies engaged in rigorous scientific research on hypnosis, including:

The American Society of Clinical Hypnosis The Society for Clinical and Experimental Hypnosis The International Society of Hypnosis The Milton Erickson Society for Clinical Hypnosis etc.

BRIEF CV FOR DR BOB BOLAND

Formerly a FCA/CPA and consultant for Arthur Andersen; trained at Harvard Business School to become a professor of management at Cranfield, INSEAD, UCT/GSB, Columbia etc. Completed a doctorate in learning systems at Stellenbosch University. Subsequently trained in medicine and joined Johns Hopkins School of Public Health for the residency in preventive medicine and public health, with specialization in international health. Work for Baltimore Public Health Clinics, IRC in Thailand, AID, WB, APHA, WHO, Peace Corps and AID. Work for United Nations/ILO (Geneva), as senior research officer in the management development branch, engaged in: development projects for finance, environment, health and training systems; health care missions in developing countries, evaluations for ILO, WHO, World Bank, WFP etc. Current work as consultant in Geneva

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in management training and more recently, in practice and research in hypnotherapy and self-hypnosis.

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mini-agl2 · web viewwork for united nations/ilo (geneva), as senior research officer in the...

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