In any Business there are mainly two ways to increase profits
1. Either by increasing selling price per unit or
2. by reducing costs.
The first one seems a risky and totally an unwise decision in today’s competitive markets.Thus, most businesses opt for the second one. In a manufacturing business, total costs can be checked by keeping the manufacturing cost at minimum level with the help of its cost reduction and cost control strategies.
Before understanding that how we can control the cost of making a product, it is very important to understand that what is a manufacturing business and what are the various elements of production that can be controlled in order to control the overall cost of production. manufacturing industry is that business in which the first task is to produce the things and nothing can be sold if production is not there. Hence one can sale their products and earn profits only when the production is completed. E.g: Factory of Manufacturing biscuits:
Now we need to know about the various elements of production which can be reduced, Hence controlling the cost of production.These Elements may be: Direct Materials, Direct Labour and indirect expenses like manufacturing expenses, office expenses and selling expenses. These expenses are required to be controlled for controlling the cost of production.
(i)Direct material Costs
Direct material is the raw material which is basic requirement for producing any type of product. E.g: Milk is raw material/ Direct material for making dairy products.
Direct material costs consists up of a significant portion of total costs of making a product. So, controlling or reducing the cost of direct materials help significantly in controlling the total cost of production.
Direct material costs includes the purchase cost and other expenses incurred to bring the material from the place of supplier to the place of production, procurement costs, carrying costs, carriage inward, inspection costs etc. These costs may be controlled with the help of adopting following Methods:
1. Determining the various Quantitative Levels like Economic order Quantity, Reorder levels, Maximum Levels, Minimum Levels and danger levels etc.
2. Setting up of input/ Output Ratio
3. Classification of material items based on their usage and value etc
4. Physical verification
(ii) Direct labour Costs
Direct workers are those employees of a manufacturing entity who convert the raw materials into finished product.
Direct labour costs are incurred for those who are directly involved into the production process of goods. E.g: wages, Bonus, various allowances or value of anything that has been given to the direct workers either free of cost or at concessional rates but in lieu if their service to the manufacturing concern.
These costs can be controlled by increasing the productivity of its workers by giving them good training, good amount of incentives and hence decreasing the per unit cost of product.
(iii) Manufacturing/ production ExpensesManufacturing Overheads are the costs which are incurred in the factory excluding direct material cost & direct labour cost. Such overhead costs cannot be easily allocated directly to a product. They are required to be apportioned on the output or units of production on the basis of some suitable base. The overheads may be like Factory rent, power, Depreciation of plant and machinery, electricity, insurance, salaries of all employees except that of direct workers etc.
Factory Rent
Factory Building insurance
Factory building Repair and maintenance
Power For running machines
Depreciation of plant and machinery
Employees salaries etc.
The manufacturing concerns should control these costs by reducing the wastages and by increasing the productivity.
CA. Renu Lakhanpal