Importance and Benefits of Productwise/ Componentwise Costing Reports.
Benefits from costing System development & Componentwise costing Profit & loss reports
In the present competitive world where inputs cost is rising on continuous basis now it becomes necessary for management to know effect of increasing/ decreasing input cost of resources on the total cost of the component/item so that decision for sale price be taken accordingly, employer must know cost incurred at each stage of production of each and every components produced in the factory, if total costs of the component excludes any cost/expenses involves at any stage of production, it mean it will be loss to the company.
The Following are the benefits from components wise cost reports are as under :
(Material cost +labour cost+direct expenses)/ variable cost + Fixed cost/ fixed overheads ) =total cost of the components will be known. A company must recover from Customer at least variable cost of the component. As regards fixed cost Company has to bear whether there is production or not, the fixed cost is sunk cost.
Sale price and profit margin decision will be taken accordingly when total cost of components will be known which includes each and every cost/expenses incurred at each stage of production as per process flow chart/sheet.
When Company is selling many products/ components to same customer, they can decide to sell more quantity/ numbers of items in which there is more profit/ margin and sell less number of items/ quantity in which they have less profit/ margin to increase their overall profitability from a customer.
Now a days, it is buyers/customer market, the sale price decision is in hands of customer, so the manufacturer has not control over the sale price. It is only the cost incurred on components/ products, they must know and take Steps to reduce as well as control cost of components/ products. at each stage of production specially rejection, wastage of resources so that cost of components will arrive at the optimum level Besides maintaining quality of components.
Costing of new developed items can be known,the sale price decision is to be taken accordingly.
Analysis of consumption of material and production through electroplating/ furnace/ steamer is to determine cost per item incurred at that stage and cost has to be reduced and controlled accordingly.
Management can keep internal control on the cost/ expenses incurred by the at each stage of production of items and take steps reduce cost of items at reasonable cost by maintaining quality of items.
Steps to Be Taken to Know Component Cost
Depth Study of the Production cycle which includes each and every process of operation of items in depth. Verification and checking of each and every records maintained in the company related to production of items and expenses/cost incurred for production of items.
After deep study, we make format required to be maintain or do modifications in records already made in consultation with management to be filled up to preparation of components wise costing reports. The Format are related to production of items and records of expenses incurred at each stage.
Based on our past assignment experience basis, we have found the following records of expenses are not made which are directly/indirectly effect on cost of components those records must be maintained as given below.
- Daily Production reports must contain the details of no of qty produced ok, rejected, cycle time on machine/by labour Same be checked and signed by responsible person.
- Details of expenses incurred for running of diseal generator set for electric power gernation for calculation of average power cost per unit through DG SET electricity board and also its allocation, apportionment to power cost of machine run production so that machine hour rate will be known and on that basis machining cost of the component will be calculated.
- Expenses related for running of compressors.
- Calculation of machine hour rate which includes each and every expenses incurred for running of machine to know machining cost of the components which directly effects on cost of components.
- Data of consumable material used for electroplating/ furnace/ steamer/ heat treatment must be maintained and also records of itemwise quantity process must be maintained in order to know material cost per item.
- Calculation of cost incurred at each stage of production of each items whether through machine, labour and other expenses/ cost.
- Calculation of fixed cost /overheads cost includes factory overheads,selling overheads, personnel overheads, financial overheads and its allocation & apportionment to variable cost of the components in order calculation of total cost of components.
- Calculation of variance analysis of standard vs actual cost/consumption of material, labour, machines.
- Calculation of profitability on each and every items produced during the period. So that steps can be taken to increase over all profitability of the company.
The following are the steps to reduce and control the cost of components
Reduction in product cycle time in order to reduce the processing cost incurred through machine and labour.
The cost reduction programme is formulated in order to
-Reduce cost
-Increase profitability
- In order to reduce the material cost following steps must be taken new supplier are to be identified, Renegotiate with existing suppliers to have better credit terms & lower price.
- To consider to replace high cost material with low cost material of the same specification.
- The Consumption of material should to be reduced through change in manufacturing process, value engineering and reuse of waste material.
- Manpower cost should be reduced through the worker incentive scheme was restructured with the assistance of national productivity council in order to ascertain the correct productivity levels.
- Workers agreement should be negotiated on the basis of assumed increase in productivity levels.
- Energy saving instrument should be installed.
- The Machine power consumption should be reduced.
- The Other energy saving measures should be introduced.
- High cost fuel should be replaced with low cost fuel.
- Packing cost,the mode of packing should be changed from card board Packing to flexible packing.
