CU-MCOM-SEM-IV-Strategic Cost Management-Second Draft

MASTER OF COMMERCE SEMESTER-IV STRATEGIC COST MANAGEMENT

CHANDIGARH UNIVERSITY Institute of Distance and Online Learning SLM Development Committee Prof. (Dr.) H.B. Raghvendra Vice- Chancellor, Chandigarh University, Gharuan, Punjab:Chairperson Prof. (Dr.) S.S. Sehgal Registrar Prof. (Dr.) B. Priestly Shan Dean of Academic Affairs Dr. Nitya Prakash Director – IDOL Dr. Gurpreet Singh Associate Director –IDOL Advisors& Members of CIQA –IDOL Prof. (Dr.) Bharat Bhushan, Director – IGNOU Prof. (Dr.) Majulika Srivastava, Director – CIQA, IGNOU Editorial Committee Prof. (Dr) Nilesh Arora Dr. Ashita Chadha University School of Business University Institute of Liberal Arts Dr. Inderpreet Kaur Prof. Manish University Institute of Teacher Training & University Institute of Tourism & Hotel Management Research Dr. Manisha Malhotra Dr. Nitin Pathak University Institute of Computing University School of Business © No part of this publication should be reproduced, stored in a retrieval system, or transmitted in any formor by any means, electronic, mechanical, photocopying, recording and/or otherwise without the prior written permission of the authors and the publisher. SLM SPECIALLY PREPARED FOR CU IDOL STUDENTS 2 CU IDOL SELF LEARNING MATERIAL (SLM)

First Published in 2021 All rights reserved. No Part of this book may be reproduced or transmitted, in any form or by any means, without permission in writing from Chandigarh University. Any person who does any unauthorized act in relation to this book may be liable to criminal prosecution and civil claims for damages. This book is meant for educational and learning purpose. The authors of the book has/have taken all reasonable care to ensure that the contents of the book do not violate any existing copyright or other intellectual property rights of any person in any manner whatsoever. In the event, Authors has/ have been unable to track any source and if any copyright has been inadvertently infringed, please notify the publisher in writing for corrective action. 3 CU IDOL SELF LEARNING MATERIAL (SLM)

CONTENT Unit - 1: Development In Cost Management.......................................................................... 5 Unit - 2: Value Analysis ...................................................................................................... 29 Unit - 3: Cost Control And Cost Reduction ......................................................................... 42 Unit - 4: Cost Reduction Policies......................................................................................... 53 Unit - 5: Pricing Decisions And Strategies........................................................................... 64 Unit - 6: Financing Of Working Capital .............................................................................. 87 Unit - 7: Cost Pricing ........................................................................................................ 101 Unit - 8: Costing Of Service Sector ................................................................................... 112 Unit - 9: Relevant Cost Analysis ....................................................................................... 127 Unit - 10: Cost Implication................................................................................................ 135 Unit - 11: Profitability Analysis......................................................................................... 142 Unit - 12: Activity Based Cost Management...................................................................... 151 Unit - 13: Cost Of Quality And Total Quality Management ............................................... 166 Unit - 14: Corrective Actions ............................................................................................ 183 Unit - 15: Control Of Credit .............................................................................................. 191 4 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT - 1: DEVELOPMENT IN COST MANAGEMENT STRUCTURE 5 1.0 Learning Objectives 1.1 Introduction 1.2 Life Cycle Costing 1.2.1 Meaning and Phases of Life Cycle Costing 1.2.2 Product Life Cycle Phases 1.2.3 Advantages of Life Cycle Costing 1.2.4 Disadvantages of Life Cycle Costing 1.2.5 Features of Life Cycle Costing 1.2.6 Stages of Product Life Cycle 1.3Target Costing 1.3.1 Meaning of Target Costing 1.3.2 Principles of Target Costing 1.3.3 Phases of Target Costing 1.3.4 Advantages of Target Costing 1.3.5 Disadvantages of Target Costing 1.4 Kaizen Costing 1.4.1 Concept of Kaizen Costing 1.4.2 Rules of Kaizen Costing 1.4.3 Principles of Kaizen Costing: 1.4.4 Advantages of Kaizen Costing: 1.5 Summary 1.6 Keywords 1.7 Learning Activity 1.8 Unit End Questions 1.9 References CU IDOL SELF LEARNING MATERIAL (SLM)

1.0LEARNING OBJECTIVES After studying this unit, you will be able to:  Describe the characteristics of Life cycle costing  Identify the various phases involved in Life cycle costing  Identify the various phases of Product Life Cycle Costing  State the advantages and disadvantages of Life cycle costing  Identify the features of Life Cycle Costing  State the principles of Target costing  Identify the various phases involved in Target costing  State the advantages and disadvantages of Target costing  Describe the concept and rules of Kaizen costing 1.1INTRODUCTION In this Unit, we will learn how LCC (Life Cycle Costing) is an important election of options that have an impact on both current and future expenses. Target costing determines life cycle which should be sufficient to create specified functionality and quality while maintaining the product's intended profit margin. Also we will understand what rules are to be followed in kaizen process. 1.2 LIFE CYCLE COSTING Life cycle costing is also named as whole life costing. It is a procedure to decide the absolute cost of ownership. The methodology is organized one which tends to provides information to all components of cost. A combination of financial, engineering, managerial, and other disciplines is used to complete life cycle costing. Life cycle costing focuses on the complete life cycle cost to arrive at the ideal choice. 1.2.1 Meaning and Phases of Life Cycle Costing: Meaning of Life Cycle Costing: The method used to appraise the total life cycle cost of procurement is called “life cycle costing”. In other words, life cycle costing is a procurement interaction which thinks about the overall cost, i.e., amount of procurement and life cycle ownership cost of a product. 6 CU IDOL SELF LEARNING MATERIAL (SLM)

Traditional costing systems disclose cost object benefits on a calendar basis (for example, month to month, quarterly, and every year), whereas life cycle costing does not. Life cycle costing includes tracing costs and revenue of an expense object (For example, a product, a project, etc.) during the course of several months (i.e. projected life of the cost object). Phases of Life Cycle Costing: Life cycle costing is a three step process. The primary stage in life cost planning stage is Designing Life Cycle Costing Analysis, Selecting and Developing Life Cycle Costing Model, applying Life Cycle Costing Model lastly recording and exploring the Life Cycle Costing Results. The next stage is to organize Life Cost analysis followed by last stage of Implementation and Monitoring Life Cost analysis. LCC Analysis is a multi-disciplinary movement. An analysts, engaged with life cycle costing, should be completely acquainted with separate cost components associated with the life cycle of asset, derivation of cost information to be gathered and monetary standards to be applied. Planning Life Life Cost Cycle Cost Analysis Analysis Preparation Implementing and Monitoring 7 CU IDOL SELF LEARNING MATERIAL (SLM)

Fig 1.1 Phases of Life Cycle Costing: Stage 1: Planning Life Cycle Cost Analysis: The Life Cycle Costing process commences with development of an idea, which addresses the plan, and scope of the analysis. The idea should be: i) Characterize the goals in terms of outputs needed to help an administrative decision. ii) Make the definite timetable with respect to arranging of time-frame for each stage, operating, specialized and maintenancesupport needed for the resource. iii) Distinguish any hidden conditions, suppositions, limitations and difficulties (like least resource performance, accessibility necessities or most extreme capital expense limitation) that may confine the scope of worthy choices to be assessed. Recognize elective strategies to be evaluated. iv) Recognize elective approaches to be evaluated. The list of proposed choices might be refined as new choices are distinguished or as existing alternatives are found to disregard the issue limitations. v) Give an estimate of assets required and a detailing plan for the investigation to guarantee that the LCC results will be accessible to help the dynamic cycle for which they are required. Subsequent stage in LCC Analysis arranging is the determination or advancement of a LCC model that will fulfill the goals of the examination. LCC Model is fundamentally a bookkeeping structure which empowers the assessment of anasset segments cost. Stage 2: Life Cost Analysis Preparation: The Life Cost Analysis is basically an instrument, which can be utilized to control and deal with the continuous expenses of an asset or part thereof. It depends on the LCC Model created and applied during the Life Cost Planning stage with one significant contrast: it utilizes information of real expenses. 8 CU IDOL SELF LEARNING MATERIAL (SLM)

The making of the Life Cost Analysis includes audit and advancement of the LCC Model as a \"real-time\" or real cost control instrument. Estimates of capital costs will be supplanted by the original costs paid. Changes may likewise be needed to the cost breakdown and cost components to mirror the resource segments to be observed and the degree of detail required. Targets are set for the operating expenses and their recurrence of event dependent on the assessments utilized in the Life Cost Planning stage. These objectives might change with time as more exact information is obtained, from the real assetoperating expenses or from the operating expense of comparable other asset. Stage 3: Implementing and Monitoring: The Life Cost Analysis is implemented by continuously evaluating an asset's real performance during its operation and maintenance in order to identify areas where cost savings can be made and to also give feedback for future life cost planning. 1.2.2 Product Life Cycle Phases Decline Maturity Product Development Life Cycle Growth Introduction Fig 1.2 Product Life Cycle Phases Product Life Cycle has Five Phases: 1. Development– 9 CU IDOL SELF LEARNING MATERIAL (SLM)

The product is in the research and development stage, which incurs costs but generates no revenue. Target costing can be utilized in conjunction with life cycle costing in this case. 2. Introduction– The product is launched onto the market. Potential buyers will be unfamiliar with the product or service, and the company may need to spend more money on advertising to bring the product or service to the market's attention. A company may be permitted to determine its pricing strategy for a new product if it is new to the market and a competitor has not yet launched a similar product. a) If a market penetration strategy is chosen, the goal should be to offer the product at a low price as early as feasible in order to gain a substantial part of the market. As a result, this pricing strategy is predicated on cheap prices and huge volumes. b) The goal of a market skimming strategy is to sell at a high price in order to maximize gross profit per unit sold. The product will be purchased exclusively by clients willing to pay a high price for a \"one-of-a-kind\" item, and sales volumes will be minimal. The selling price will gradually decrease, albeit it will be maintained as high as feasible for as long as possible. This method is frequently employed by high-tech professionals. 3. Growth– As demand grows; the product acquires a larger market. The product begins to generate a profit as sales revenue raises. 4. Maturity– As demand for the product grows, it will eventually slow down and enter a period of relative maturity. It will continue to make money. As a means of maintaining demand, the product may be updated or improved. 10 CU IDOL SELF LEARNING MATERIAL (SLM)

5. Decline - The market will have purchased enough of the product and will thus approach saturation. Demand will begin to decline. It will eventually become a loss- maker, at which point the company should opt to stop selling the product or service. Fig 1.3 Product Life Cycle Phases 11 1.2.3Advantages of Life Cycle Costing The advantages of LCC are as below: CU IDOL SELF LEARNING MATERIAL (SLM)

i) Evaluation of purchase alternatives : Contending recommendations can be assessed based on entire life cost. Investigation is significant especially for service agreements and equipment buying choices. ii) Better expense mindfulness : The management gets knowledge into the variables driving expense and assets needed for the buying. Recognizingcost drivers is possible with the goal that administration effort is coordinated towards the purchase. Also, further developed familiarity with cost drivers features existing things which would profit from involvement of management. iii) More exact expense forecasting: Full expense related with an acquisition can be better assessed, leading to further developed dynamic at all levels. Also, the investigation prompts more precise forecasting of future consumption and capital investments. iv) Performance adjustment against cost: Cost isn't the sole factor to be considered in buying choices. Different factors, for example, generally wellness against necessity and nature of the items and levels of service to be given are additionally applicable. This analysis gives an expense adjustment against the differing attributes of buying choices. 1.2.4 Disadvantages of Life Cycle Costing The procedure of life cycle costing is, on occasion, criticized on the grounds that: i) It is considered to be exorbitant; ii) It is marked as tedious; iii) Accuracy of information is questioned; and iv) Collecting information for investigation is a hectic job. These disadvantages might apply for a small firm. In addition, cost saving advantage analysis is consistently attractive prior to executing any method at all. In nutshell, the advantages far 12 CU IDOL SELF LEARNING MATERIAL (SLM)

surpass the disadvantages and a full scale exertion should be made to apply this method deliberately. Case 1: A dip in business in noticed by a soap manufacturer in sales .The sales team meeting was conducted and certain improvement areas like more advertising, sales promotion, free gifts were suggested by the members. Bharat a sales team member was firm that the product is redundant and needs to be replaced. The taste of the consumer has changed and so the product needs to be replaced. As a team leader how can you apply the life cycle costing concept to the argument of Bharat? Solution: Bharat's arguments are centered on Life Cycle Costing Concept .The product goes through three step process. The primary stage in life cost planning stage is Designing Life Cycle Costing Analysis, Selecting and Developing Life Cycle Costing Model, applying Life Cycle Costing Model lastly recording and exploring the Life Cycle Costing Results. The next stage is to organize Life Cost analysis followed by last stage of Implementation and Monitoring Life Cost analysis. Bharat has a valid reason for discontinuing the product as no amount of marketing and promotion is going to revive the economic life of the product 1.2.5 Features of Life Cycle Costing: a. Product life cycle costing traces a product's costs and revenues over numerous calendar periods during the course of its life cycle. b. Product life cycle costing tracks research and development expenditures as well as the total magnitude of these costs for each particular product, which is then compared to revenue. C. Different threats and opportunities exist at different stages of the product life cycle, necessitating different strategic responses. d. A product's life cycle can be extended by discovering new uses or consumers, or by boosting current users' consumption. Illustration 1: A company is planning a new clothes production. We get the information from market to sell at 20,000 units at 41.00/unit. The mark-up of 40% is on product cost. 13 CU IDOL SELF LEARNING MATERIAL (SLM)

(i) Design and development costs 1, 00,000 (ii) Manufacturing costs 20/unit (iii) End of life costs 40,000 The company estimates that if it were to spend an additional 30,000 on design, manufacturing costs/ Unit could be reduced. Required (a) Calculate target cost of the product? (b) Calculate the original lifecycle cost per unit and is the product worth making on that basis? (c) What is the maximum manufacturing cost per unit, if the additional amount were spent on design?That could be tolerated to earn its required mark-up? Solution: (a) Cost + Mark-up = Selling price 100% 40% 140% 30 12 42 (b) The original life cycle cost per unit = (1, 00,000 + (20,000 x 20) + ` 40,000)/20,000 = ` 34 This cost per unit is more than the intended cost per unit, indicating that the product is not worth producing. (c) Maximum total cost per unit = 30. (1, 00,000 + 30,000 + 40,000)/20,000 = 17.00 Therefore, the maximum manufacturing cost per unit would have to fall from 20 to (30 - 17) = 13. 1.2.6 Stages of Product Life Cycle: 1. Marketing Research: It will determine what product the buyer desires, how much he is willing to pay, and how much he will purchase. 14 CU IDOL SELF LEARNING MATERIAL (SLM)

2. Specification: It will include information such as the product's projected life, maximum allowable maintenance expenses, and production costs, needed delivery date, and expected performance. 3. Design: It is necessary to define proper drawings and process timetables. 4. Prototype Manufacture: A small amount of the product will be created based on the drawings. The product will be developed using these prototypes. 5. Development: After the initial run, test and change to satisfy needs. This time of experimentation and change is referred to as development. When a product is manufactured for the first time, it rarely matches the specifications' requirements, and revisions must be made until it does. 6. Tooling: Tooling up for production can entail constructing a manufacturing line, constructing jigs, and purchasing the appropriate tools and equipment, all of which require a significant initial expenditure. 7. Production: The purchase of raw materials and components, as well as the usage of labour and manufacturing charges, go into the production of a product. 8. Selling: When a product is ready to sell and readily available, it may be necessary to invest in a marketing effort to promote it. 9. Distribution: It is necessary to distribute the product to sales outlets and clients as part of the selling process. 10. Product Support: 15 CU IDOL SELF LEARNING MATERIAL (SLM)

When a customer purchases a product, they want it to be supported. The maker or supplier must ensure that spare parts and expert service are available throughout the duration of the product's life cycle. 11. Decommissiong or Replacement: When a manufacturing product reaches the end of its useful life, the facility that produced it must be re-used, sold, or discarded in a manner that is acceptable to society. 1.3 TARGET COSTING Target costing is a cost management method. The gap between goal sales and target margin is known as target cost. It is, in this manner, the difference between assessed selling cost of a proposed item with determined usefulness and quality and the target margin. Target costing has comefrom a Japanese term “Gena Kikaku.” The technique aims to create and sell products with the desired profit margin. The company must understand what value target customers place on various attributes and aspects of product quality while designing the product. On the one hand, this pricing approach is used to suit client requests, while on the other side; the organization's profit goals are met. The focus of target costing is on cost reduction at the planning and design stages of the product life cycle, because this is where the majority of the product cost is set 1.3.1 Meaning of Target Costing Product costing is another name for target costing. It is a new technique, and today's accountants are changing from traditional costing to product costing, which takes into account original design and engineering costs, as well as manufacturing, distribution, and sales and service costs. In Japan, the concept of target costing is extensively used. CIMA – “Target cost is a product cost estimate derived from a competitive market price”. Formula used to calculate Target Costing: Selling Price – Profit Margin = Target Cost Example of Target Costing 16 CU IDOL SELF LEARNING MATERIAL (SLM)

ASM Ltd. is a big player that operates in different competitive market. It sells wrapped foods to customers. ASM can only charge 40 per unit. If the intended profit Margin of the company is 20% on the selling price, calculate the target cost per unit. Solution: Target Profit Margin = 20% of 40 = 8 per unit Target cost = Selling Price – Profit Margin = 40 – 8 = 32 per unit So, target cost is Rs. 32 per unit. 1.3.2 Principles of Target Costing Target costing is a new costing approach that requires working backwards from the selling price to the overall cost. The target costing principle is as follows: 17 CU IDOL SELF LEARNING MATERIAL (SLM)

Price-led Focus on costing Customer Focus on Cross- process and functional design Value Chain involvement Fig 1.4 Principles of Target Costing 1. Price-led costing: As shown in the formula, the cost of production varies based on the selling price. The company will have a difficult time selling the low-selling goods because the cost will be low as well. To meet the desired cost, the company must save material, labour, and overhead. 2. Focus on Customer: Customers are the most important people in the firm; otherwise, they will not buy our product. Customers want both high quality and a low price, thus the company must ensure that their price is competitive in the market while maintaining high quality. 3. Focus on process and design: The Company must reverse engineer by first defining the aim (product) and then defining the procedure. The engineering team must create products and methods that save money while minimizing quality degradation. 18 CU IDOL SELF LEARNING MATERIAL (SLM)

4. Cross-functional: To avoid disagreement during operations, all departments must work cooperatively. Furthermore, they are the person in charge of working on the product; therefore they must be aware of their aim and any potential obstacles. 5. Value Chain involvement: Other members, such as suppliers, shipping lines, distributors, and the retail store, must be considered in addition to internal departments. We must negotiate the terms and circumstances in order to locate the ideal partners to help us meet our goal. 1.3.3 Phases of Target Costing Set a selling price Set target profit Calculate target cost Calculate cost gap 19 Necessary action to close the gap Fig 1.5Phases of Target Costing CU IDOL SELF LEARNING MATERIAL (SLM)

1. Set a selling price: We must establish a precise selling price that is in line with the market and the needs of our clients. It can serve as a market and competitor benchmark. 2. Set target profit: We must adhere to our company's profit target, which is set by top management. 3. Calculate target cost: Calculate target cost by subtracting the goal profit from the selling price determined in the previous step. 4. Calculate cost gap: A cost gap exists when the actual cost exceeds the desired cost. As a result, we must compare the actual and target costs during production. 5. Necessary action to close the gap: We must examine the cost of production from beginning to end in order to determine the core reasons of the gap. The gap is frequently caused by an inefficient process that has to be improved. In this instance, we must continue to track the progress of the procedure throughout time. 1.3.4 Advantages of Target Costing (1) Favourable Influence on Profitability: Target costing has a positive impact on the organization's profitability throughout the product life cycle. (2) Company Competitive Future: Because the product is created and manufactured according to market criteria, this costing aids in the creation of a company's competitive future. (3) Top to Bottom Commitment: It aims to identify challenges and supports top-to-bottom commitment to process and product innovation. (4) Valuable Edition to Life Cycle – This costing might be an excellent addition to life cycle items. (5) Management Control System – It employs a management control system to aid manufacturing plans and find market opportunities that may be converted into real savings in order to maximise value. Some more different benefits are: 20 CU IDOL SELF LEARNING MATERIAL (SLM)

1. It helps in guaranteeing that products are better coordinated to their client's necessities. 2. It helps with adjusting cost of components to customer’s ability to pay for them. In the process quality stands improved. 3. It upholds decrease of improvement pattern of the product. 4. It is valuable for decrease of expenses of costs generously. 5. It improves teamwork among all internal organisations involved in product conception, marketing, planning, development, production, selling, and distribution. 6. It aids in the engagement of customers and suppliers in order to build the best product and integrate the complete supply chain more effectively. 1.3.5 Disadvantages of Target Costing: 1. Low Budget Design: The design team will have a difficult time completing their work due to the product's cost requirement. They must collaborate with other departments to guarantee that the product stays under budget. They must limit their innovation if it results in a cost increase. 2. Depend on market price: Because we calculate the target cost by subtracting the market price from the margin, if the market price is incorrect, the entire system will collapse. We normally have to rely on market prices obtained through market research, thus any flaws in the study will have an impact on our pricing. Because some products are comparable yet have different attributes, we cannot utilise their selling price. 3. Cheaper material or technology: Some businesses may use low-quality materials, resulting in low-quality products for their clients. The company buys obsolete equipment to save money, but it has long-term consequences because we stayed with them for a few years (fixed asset useful life). 4. Production cost unrealistic, and estimation cost is too low: The design team may come up with an extremely restrictive production budget to meet the goal cost. As a result, the production staffs are under a lot of pressure. If there is a slight negative variance, the target cost will not be met. To do the assignment flawlessly, the crew would need to erase any mistakes or errors, which would only happen on paper. 5. Failure of proper estimation of the quantity: Even if we achieve the desired cost, we may not be profitable if the sales volume falls short of the budget. This occurs when the profit margin is insufficient to pay the whole fixed costs. 21 CU IDOL SELF LEARNING MATERIAL (SLM)

Case 2: Ankita is in a startup company and ready to launch a product .The sale price of the product in the market is Rs200.Apply the concept of Target costing concept to help Ankita in her pricing of the product? Solution: CIMA – “Target cost is a product cost estimate derived from a competitive market price” Ankita should follow the following three steps to decide the product price: Through Target Costing: 1) Planning All rivals' products must be evaluated in terms of price, sales, quality, technology, and service, among other factors, before determining a target cost and determining the Market share of one of the product. (2)Development: After reviewing and studying various cost reduction techniques and Activity-based costing, the organization's cost structure must be finalized, and then an appropriate Design must be done. (2) Production: Production targets are set, and efforts are made to meet them at the lowest possible cost without compromising quality, technology design, or manufacturing procedures. 1.4 KAIZEN COSTING Kaizen costing, also known as continuous improvement costing is a cost reduction and cost- management technique. Kaizen is a Japanese phrase that refers to creating incremental continual improvements rather than huge creative improvements. The main difference between target and Kaizen costing is that target costing is used during the design stage, whereas Kaizen costing is used at the implementation stage. 1.4.1 Concept of Kaizen Costing The goal of Kaizen costing is to bring actual manufacturing costs down below the standard cost. Standard costing systems attempt to meet management's cost targets, whereas Kaizen costing systems are more concerned with lowering real costs below target. Because the items 22 CU IDOL SELF LEARNING MATERIAL (SLM)

are already in the production stage of their life cycles, a large share of costs will have gotten locked-in; the potential cost savings are smaller with Kaizen costing. Kaizen costing keeps track of cost reduction initiatives on a monthly basis. Kaizen costing goals are defined in terms of physical resources. If the leader of a group fails to meet the Kaizen costing objective by 1%, a senior review will begin. In many Japanese businesses, resource consumption is strictly regulated. 1.4.2 Rules of Kaizen Costing: While carrying out the idea of Kaizen, adhering to the following rules are necessary: i. Recognize your own issues. ii. Grade your issues like minor, troublesome and major. iii. Select the least minor issue and start with it. In the wake of handling this, continue on to next reviewed issue, etc. iv. Continuously guarantee that improvement is a piece of every day schedule. v. Never acknowledge business as usual. vi. Never reject any thought attempting it. vii. Offer the analyses with partners. viii. Take out effectively attempted yet bombed tests, while imparting the issues to your partners. ix. Never hide issues, consistently highlight them. 1.4.3 Principles of Kaizen Costing: 1. Less Wastage: This strategy focuses on reducing all types of waste, starting with product design and production and ending with after-sale services. 2. Increase Employee satisfaction: Employees are the most important people in identifying non-value-added tasks and attempting to reduce them. 3. Improve Working Commitment: All levels of personnel will be dedicated to their work since they are aware that the organization is striving for progress at all levels. If they do not improve, they will be left behind; therefore it motivates them to try harder to archive it. 23 CU IDOL SELF LEARNING MATERIAL (SLM)

4. Increase Competitiveness: It will be advantageous when we can improve the quality of our product and sell it at a reduced cost. In the long run, we will win greater market share and profit. 1.4.4 Advantages of Kaizen Costing: Defected Over- Time processing Advantages Variation Movement Fig 1.5 Advantages of kaizen costing 1. Time: We say that time is money, and that the company's personnel and workers should undertake work that adds value to the company and its clients. It is such a waste of resources if they spend time on non-value-added activities. It will make them even more ineffective when they squander their unutilized time owing to the work delay. Employees, 2. Movement: 24 CU IDOL SELF LEARNING MATERIAL (SLM)

People usually move during working hours; however, an irrational move is a waste of time. Instead of roaming around the building, we should spend our time doing useful work. 3. Variation: It's a problem in which the same job is created multiple times as a result of a request from upper management. Similar reports, for example, are created many times for different people. We may create a standard template that includes all of the information that management requires. And the report simply needs to be produced once a month to serve all of them. 4. Over processing: It turns out that the manner we work is more important than what should be done. We spend far too much time on a work that is of equal importance to the organisation. For example, if we spend an entire day planning a schedule meeting agenda while the meeting is only a few minutes long. This task should take roughly 15 minutes to complete and yields the same result. 5. Defected: There will be a cost associated with every time a problem occurs. On the defective product, there will be a waste of material. We will spend time in dealing with the defective product, and we may even spend additional time correcting it and repairing the damage. If the company fails to identify defective products before delivering them to customers, it will be an after-sale issue, requiring the company to pay compensation and damaging its reputation. 1.5SUMMARY  Life cycle costing is a procedure to decide the absolute cost of ownership.  The stages in life cost planning stage consists of designing Life Cycle Costing Analysis, Selecting and Developing Life Cycle Costing Model, applying Life Cycle Costing Model lastly recording and exploring the Life Cycle Costing Results. The next stage is to organize Life Cost analysis followed by last stage of Implementation and Monitoring Life Cost analysis. 25 CU IDOL SELF LEARNING MATERIAL (SLM)

 Kaizen is the Japanese expression for making constant upgrades in somewhat little exercises as opposed to major inventive improvement.  The goal of Kaizen costing is to diminish genuine expenses to make an item underneath the standard expense. Standard expense framework by and large intend to accomplish the expense principles set by the board while Kaizen costing frameworks are more worried about decreasing real expenses beneath standard expenses. 1.6 KEYWORD  Target Costing:A way of calculating a product's life-cycle cost is called target costing.  Kaizen Costing: Kaizen costing is a cost-reduction technique used by Japanese companies.  Phases:a distinct phase or stage in a series of occurrences, such as a transition or development process.  Variance:The truth or exceptional of being different, divergent, or inconsistent.  Involvement: The truth or situation of being concerned with or taking part in something. 1.7 LEARNING ACTIVITY 1. Define Life Cycle Costing. ___________________________________________________________________________ ___________________________________________________________________________ 2. State the principles of Target Costing. ___________________________________________________________________________ ___________________________________________________________________________ 1.8 UNIT END QUESTIONS 26 A. Descriptive Questions Short Questions 1. Define Life Cycle Costing. Explain the advantages of LCC. 2. Explain the meaning and principles of Target costing. 3. What are the phases in Target costing? CU IDOL SELF LEARNING MATERIAL (SLM)

4. Write a note on Kaizen Costing. 5. Elaborate the principle of Kaizen Costing. Long Questions 1. What is a LCC? Explain the phases of LCC? 2. Explain the advantages and disadvantages of Target Costing. 3. Explain the phases of PLC and also the stages of PLC. 4. Describe the various rules involved in Kaizen costing. 5. Explain the advantages and disadvantages of LCC. B. Multiple Choice Questions 1. Life cycle costing is also named: a. whole life costing b. pure life costing c. social costing d. profit costing 2. Life cycle costing is a ……………..step process. a. One b. Two c. Three d. Four 3. Target costing has been derived from a …………….term a. Indian b. Greek c. American d. Japanese 4. The goal of …………………………is to diminish genuine expenses to make an item underneath the standard expense a. Kaizen costing b. LCC c. Marginal Costing 27 CU IDOL SELF LEARNING MATERIAL (SLM)

d. Target Costing 5. The primary stage is life cost planning stage which consists of…………………. a. Recording and exploring the Life Cycle Costing b. Applying Life Cycle Costing Model c. Selecting and Developing Life Cycle Costing d. Designing Life Cycle Costing Analysis Answers 1-a, 2-c, 3-d. 4-a, 5-d 1.9REFERENCES References book  Charles T. Harngreen, Srikant M. Datar, George Foster, Cost Accounting,  A Management Emphasis, Pearson Education, 2008, p. 3. Managerial Accounting,  Cost Management Ibid Management Accounting,  A Strategic Approach Strategic Cost Management Cost Management,  A Strategic Emphasis Cost Management,  What is Strategy Cost Management, A Strategic Emphasis Ibid., et al., Ibid., Cost Management Ibid., et al, Ibid., et al., Ibid. Activity Accounting Textbook references  Ravi. M. Kishore, Cost Management, Taxman, Allied Services (p) Ltd.,  S. Mukherjee & A.P. Roychowdhury Advanced Cost and Management Accountancy, New Central Book Agency, Calcutta.  Keith Ward, Strategic Management Accounting, Butterworth Heirmann Pub.  John K. Shank, Cases in Cost Management: A Strategic Emphasis, South-Western Publishing, Thomson Learning. Website  https://www.accountingnotes.net/cost-accounting  https://www.yourarticlelibrary.com/accounting 28 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT - 2: VALUE ANALYSIS 29 STRUCTURE 2.0 Learning Objectives 2.1 Introduction 2.2 Value Analysis 2.2.1 Meaning and Definition of Value Analysis 2.2.2 Phases of Value Analysis 2.2.3 Advantages of Value Analysis 2.2.4 Disadvantages of Value Analysis 2.3 Socio-Economic Costing 2.3.1 Concept of Socio Economic Costing 2.3.2 Reasons for measuring Socio Economic Impact 2.3.3 Tools for measuring Socio Economic Impact 2.4 Summary 2.5 Keywords 2.6 Learning Activity 2.7 Unit End Questions 2.8 References 2.0LEARNING OBJECTIVES After studying this unit, you will be able to:  Identify the various phases of Value analysis.  State the advantages of value analysis.  List the disadvantages of value analysis.  Describe the concept of socio economic costing.  Discuss the reasons for socio economic costing.  List the tools which are used to measure socio economic impact. CU IDOL SELF LEARNING MATERIAL (SLM)

2.1INTRODUCTION In this Unit, we will learn what value analysis is. The various phases involved in the value analysis. The advantages and disadvantages of value analysis. The tools used to measure socio economic impact and the various reasons for socio economic costing. 2.2 VALUE ANALYSIS One of the most important approaches for cost reduction and control is value analysis. It's a methodical technique that ensures the required functionalities at the lowest possible cost without sacrificing quality, reliability, performance, or appearance. It's a creative way to get rid of charges that don't add to the product's quality or look. It is the systematic use of methodologies to determine a product's or component's functionalities and offer the intended function at the lowest total cost. 2.2.1 Meaning and Definition of Value Analysis Let us first learn about value before the meaning of the terms \"value analysis\" and \"value engineering.\" 'Value' is one of those words that have a lot of different meanings and even contradicting definitions. Individuals frequently use the word \"value\" without fully understanding what it means. Don't even think about the common people. Even within the same organisation, various departments have differing perspectives on the ‘value' of the products that the company produces. The sum of all costs involved in the production of a product is referred to as \"Cost Value.\" As a result, the ‘cost value' is the sum of the raw-material cost, labour cost, tool cost, and overhead costs incurred in the production of the product. The term \"exchange value\" refers to the sum of a product's attributes, qualities, and features that allow it to be swapped for another product or for money. In a traditional meaning, ‘exchange value' refers to the price that a buyer will pay for a product, with the price being determined by the product's satisfaction value. The value derived from the product is made up of two parts: (a) value derived from the product's dependability in terms of performance, and (b) value derived from the buyer's possession. The term \"use value\" refers to the combination of attributes, qualities, and features that enable a product to perform a specific task, work, or service. The price paid by the buyer or 30 CU IDOL SELF LEARNING MATERIAL (SLM)

the cost incurred by the producer to ensure that the product performs its intended purpose efficiently is referred to as use value. The most basic form of economic value is use value. There can be no exchange value or esteem value for an item that has no utility value. The term \"Esteem Value\" refers to the measure of qualities, features, beauty of graphic package, and other factors that boost sales appeal or attract buyers and make them want to acquire the goods. The price paid by the buyer or the expense incurred by the maker beyond the use value is referred to as \"estimated value.\" It's all about the perceived value. Definition: According to Society of American Value Engineers (SAVE) “Value analysis is the systematic application of recognized techniques which identify the function of a product or services establish a monetary value for the function and provide the necessary function reliability at that lowest overall cost.” As a result, value analysis is the methodical application of established procedures to identify the functions of a product or component and to offer those functions at the lowest overall cost possible. It's a unique way to cut costs that don't improve the product's quality or look. 2.2.2 Phases of Value Analysis: Phase of Phase of Phase of Origination Information Innovation Phase of Phases of Phase of Evaluation Choice Implementation Phase of Review Fig 2.1 Phases of value analysis 31 CU IDOL SELF LEARNING MATERIAL (SLM)

1. Phase of Origination: A value analysis study team is formed in the initial phase. The project has been chosen and is well-defined. The team investigates the product and its components in depth in order to fully comprehend their nature. 2. Phase of Information: After familiarization, a functional analysis is performed to determine the product's and its components' functions and applications. Each function's cost and importance are determined. For each function, a value index is calculated based on the cost-benefit ratio. The items of functions are being sorted in decreasing order of value in a list. 3. Phase of Innovation: This is the part of the process where you come up with fresh alternatives to replace or remove the old ones. 4. Phase of Evaluation: Every option is examined, and the most promising options are chosen. These options are further investigated for their economic and technical viability. The final options chosen must be capable of performing the required functions satisfactorily. These must meet certain requirements, such as precision, dependability, safety, maintenance and repairs, and environmental effects. 5. Phases of Choice: The report is written at this period. This paper includes a summary of the research, as well as conclusions and specific recommendations. The alternative is chosen by the decision makers. Then, to put the chosen option into action, programmers and action places are created. 6. Phase of Implementation: With the support of the programmers and action plans that were prepared in preparation, the chosen alternative is put into practice. 32 CU IDOL SELF LEARNING MATERIAL (SLM)

7. Phase of Review: The progress of analysis modifications is constantly evaluated and followed up on in order to provide support, clear up any misunderstandings, and guarantee that the desired outcomes are attained. 2.2.3 Advantages of Value Analysis: Value analysis is a highly effective cost reduction and quality-improvement tool. Its specific advantages are as follows: 1. Improvements in Product Design: It leads to improvements in product design, resulting in the creation of more usable products. In the case of ball points, we no longer have blockage; ink flows freely and evenly, and a rubber pad surrounds the figures, reducing fatigue. 2. Maintaining a high level of quality: a higher level of quality means a higher level of value. As a result, dry cells used to leak; now they don't; they're pen-size and have the same power. The most recent development is that they are rechargeable. 3. Wastage Elimination: Value analysis enhances overall efficiency by removing several sorts of waste 4. Cost Savings: The basic goal of value analysis is to eliminate unnecessary costs while keeping or even improving performance. There has been a lot of study and development. Milk, oils, purees, and pulp can now be packed in tetra packs if the quality is acceptable, and the tetra pack, unlike plastic packs, is biodegradable. 5. Encourages Teamwork and Morale: Value analysis is a tool that is handled by groups or teams, and an organisation is a team of people with certain responsibilities. A product is the culmination of everyone's labour. As a result, it develops team spirit and boosts employee morale as they work together to achieve greater success. 6. Neglected Areas are focused: Organizational areas that require attention and improvement are brought to the forefront, and even the weakest are given a chance to become stronger and more valuable before eventually joining the main strain. 7. Intangibles Qualification: The entire value analysis process is an exercise in turning intangibles to tangibles for decision-making purposes. Making decisions on challenges where the objects (variables) are not quantifiable is extremely tough. 33 CU IDOL SELF LEARNING MATERIAL (SLM)

Value analysis, on the other hand, accomplishes this. Decision makers are provided with qualified data on which to base their decisions. Such choices are almost always sound. 8. Value analysis principles and methodologies: It can be applied to a wide range of situations, including purchasing, hardware, goods, systems, and procedures. 9. Building and Improving Company Image: The Company’s reputation, image, and personality are greatly enhanced. Improvement in quality and cost reduction means a competitive product and a good name in the product market; it is a good paymaster because sales and profits are higher, and it has a good reputation in the labour market; in the capital market, no one hesitates to invest because it is a quality company. 2.2.4 Disadvantages of Value Analysis: The most typical disadvantages are man-made justifications that prevent these value analysis programmers from being implemented. a. A lack of motivation b. A resistance to change c. Inertia d. A lack of knowledge and patience e. \"It will not work in India\" kind of attitude. f. We are too small or too big g. This has been tried before and failed h. The difficulty of reaching a consensus in a team meeting or a team meeting. 2.3 SOCIO ECONOMIC COSTING Socioeconomists are interested in the social consequences of economic change. A plant shutting, market manipulation, the signing of international trade treaties, new natural gas regulations, and so on are examples of such changes. Such social repercussions might be large or tiny, ranging from local effects on a small group to societal changes. Companies are becoming more interested in assessing socioeconomic impact as part of preserving their operating license, enhancing the business enabling environment, strengthening their value chains, and fostering product and service innovation. 34 CU IDOL SELF LEARNING MATERIAL (SLM)

2.3.1 Concept of Socio Economic costing Socioeconomics (sometimes known as social economics) is the study of how economic activity influences and is influenced by social processes. It examines how societies advance, stagnate, or regress as a result of their local or regional economies, as well as the global economy. Socioeconomics is occasionally used as a catch-all term with a variety of meanings. The term ‘social economics' can refer to the \"application of economics to the study of society\" in a broad sense. Company is a primary generator of socioeconomic impact, and socioeconomic impact is a key indicator of long-term business success. It has an impact on whether enterprises have satisfied consumers, healthy value chains, satisfied local communities, and supportive governments and other stakeholders now and in the future. 2.3.2 Reasons for measuring Socio Economic Impact Obtaining or Strengthening retaining a license value chains to operate Improving the Fueling product business enabling and service innovation environment Fueling product and service innovation Fig 2.2Reasons for measuring Socio Economic Impact 35 CU IDOL SELF LEARNING MATERIAL (SLM)

1. Obtaining or retaining a license to operate: Measuring socio-economic effect can assist businesses demonstrate to communities, government officials, and other stakeholders, such as donors and civil society groups, that their operations have a positive impact on the economy and society in which they operate – and reduce the risk of negative press, protest, and declining government backing for present and future activities. 2.Improving the business enabling environment: Measuring socio-economic impact can help companies demonstrate to policymakers what and how profitable business activity contributes to public policy goals, allowing policymakers to develop the mix of right rules, right incentives, and public services to maximize the business contribution. 3. Strengthening value chains: Measuring socioeconomic effect can assist organizations in predicting supplier loyalty, performance, stability, and capacity for expansion – identifying vulnerabilities and chances to fix them. 4. Fueling product and service innovation: Measuring socio-economic effect can assist organizations in better understanding their consumers' requirements, aspirations, resources, and incentives, allowing them to develop winning new goods and services and enhance existing ones. 2.3.3 Tools for measuring Socio Economic Impact The following are the numerous tools accessible to the company for measuring the socioeconomic impact: 36 CU IDOL SELF LEARNING MATERIAL (SLM)

Strategic Appropri Recomm Develope Impleme Key Data fit ate endation r ntation audience needs effort level(s) s services: s of included analysis Fig: 2.3Tools for measuring Socio Economic Impact 1. Strategic fit: Many socioeconomic impact measurement tools are adaptable, and can be used to help companies obtain or maintain operating licences, engage policymakers to improve the business enabling environment, strengthen their value chains, or fuel product and service development to capture new markets and increase revenue – dependent on the user's individual design and implementation choices. The amount to which a tool delivers relevant, credible information for people who need it — whether they be company management, local community members, governments, or NGOs – is a key aspect in strategic fit. This depends on the scale of the project, the metrics used, the measurement method' reliability and speed of execution, and whether or not there are any negative consequences. Some of the strategic goals are: a. Improve the business climate by obtaining a licence to operate. b. Value chains should be strengthened. c. Boost product and service development. 2. Appropriate level(s) of analysis: Most frameworks are built to be adaptable and can be used at a variety of levels. Several frameworks, on the other hand, are designed to be applied at specific levels in order to produce better or more relevant results. 37 CU IDOL SELF LEARNING MATERIAL (SLM)

3. Recommendations included: The nature of the instruction provided by frameworks varies. Some are extremely detailed, assisting the user in determining the scope of a socioeconomic effect measuring exercise, selecting indicators/metrics, gathering and/or producing data, and interpreting the results. Others have highly precise requirements. 4. Data needs: Data requirements vary by metric. As a result, generalising about the data requirements of metrics-agnostic frameworks is unfeasible. Frameworks that focus on \"input,\" \"activity,\" and \"output\" metrics are more likely to rely on data that a company currently possesses or can quickly gather. 5. Key audiences: The type of information generated and the structure of the procedure determine whether audiences find socioeconomic impact measurement significant (including whether or not it is credible in their eyes). 6. Implementation effort: The effort required to implement frameworks varies. They each have their own set of tasks, as well as cost and time considerations. While cost and time data is sparse, factors such as the scope of the exercise and the metrics chosen; the extent to which external data must be collected from stakeholders on the ground; and the extent to which external data must be collected from stakeholders on the ground are all important considerations. 7. Developer services: While socioeconomic effect measurement frameworks provide assistance on their own, many developers provide services that augment or deepen the current guidance. They may also offer to put their frameworks in place on behalf of or in partnership with businesses, as well as to make public reports on the results. 2.4 SUMMARY  The sum of all costs involved in the production of a product is referred to as Cost Value.  The term \"exchange value\" refers to the sum of a product's attributes, qualities, and features that allow it to be swapped for another product or for money.  The most basic form of economic value is use value.  The term \"Esteem Value\" refers to the measure of qualities, features, beauty of graphic package, and other factors that boost sales appeal or attract buyers and make them want to acquire the goods. 38 CU IDOL SELF LEARNING MATERIAL (SLM)

 The basic goal of value analysis is to eliminate unnecessary costs while keeping or even improving performance.  Company is a primary generator of socioeconomic impact, and socioeconomic impact is a key indicator of long-term business success. 2.5 KEYWORD  Value: A reasonable return in products, services, or money for something exchanged.  Exchange: Exchange refers to the practise of giving up property in exchange for something else.  Exchange-value: This is the quantitative component of a commodity's price, as opposed to \"use-value,\" which is the qualitative component of worth.  Strategy: A strategy is a long-term plan for achieving a specific objective.  Economic: requiring fewer assets or costing much less money. 2.6LEARNING ACTIVITY 1. Define Value Analysis. ___________________________________________________________________________ ___________________________________________________________________________ 2. Define Socio Economic Costing. ___________________________________________________________________________ ___________________________________________________________________________ 2.7 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. Define Value Analysis. Explain the Phases of value analysis. 2. Explain the concept of Value analysis. 3. What do you mean by Cost Value and Exchange value? 4. Discuss “Company is a primary generator of socioeconomic impact, and socioeconomic impact is a key indicator of long-term business success”. 5. Write a note on “Strategic fit”- Tool used to measure socio economy impact. 39 CU IDOL SELF LEARNING MATERIAL (SLM)

Long Questions 1. Explain the advantages of Value analysis. 2. What do you mean by Value analysis? Discuss the disadvantages of Value analysis. 3. Describe the tools used for measuring socio economic impact. 4. What do you mean by Socio economic costing? Enumerate the reason for socio economic costing. 5. Explain the advantages and disadvantages of Value analysis. B. Multiple Choice Questions 1. The most basic form of economic value is use …………: a. Value b. Exchange c. Profit d. social 2. The study team of value analysis is formed in the……………. a. Phase of evaluation b. Phase of review c. Phase of Information d. Initial phase 3. Socioeconomics is also known as…………… a. Social economics b. Foreign economics c. Greek economy d. Welfare economy 4. The sum of all costs involved in the …………….of a product is referred to as Cost Value. a. Distribution b. Production c. Selling d. Decision 40 CU IDOL SELF LEARNING MATERIAL (SLM)

5. The term ………………. refers to the sum of a product's attributes, qualities, and features that allow it to be swapped for another product or for money. a. exchange value b. profit c. utility d. Socio economic Answers 1-a, 2-d, 3-a, 4-b, 5-a 2.8 REFERENCES References book  Charles T. Harngreen, Srikant M. Datar, George Foster, Cost Accounting,  A Management Emphasis, Pearson Education, 2008, p. 3. Managerial Accounting,  Cost Management Ibid Management Accounting,  A Strategic Approach Strategic Cost Management Cost Management,  A Strategic Emphasis Cost Management,  What is Strategy Cost Management, A Strategic Emphasis Ibid., et al., Ibid., Cost Management Ibid., et al, Ibid., et al., Ibid. Activity Accounting Textbook references  Ravi. M. Kishore, Cost Management, Taxman, Allied Services (p) Ltd.,  S. Mukherjee & A.P. Roychowdhury Advanced Cost and Management Accountancy, New Central Book Agency, Calcutta.  Keith Ward, Strategic Management Accounting, Butterworth Heirmann Pub.  John K. Shank, Cases in Cost Management: A Strategic Emphasis, South-Western Publishing, Thomson Learning. Website  https://www.accountingnotes.net/cost-accounting  https://www.yourarticlelibrary.com/accounting 41 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT - 3: COST CONTROL AND COST REDUCTION STRUCTURE 3.0 Learning Objectives 3.1 Introduction 3.2 Cost Control 3.2.1 Meaning of Cost Control 3.2.2 Features of Cost Control 3.2.3 Process involved in Cost Control 3.2.4 Advantages of Cost Control 3.3 Cost reduction 3.3.1 Meaning of Cost reduction 3.3.2 Advantages of Cost reduction 3.3.3 Disadvantages of Cost reduction 3.3.4 Process involved in Cost reduction 3.3.5 Cost Control V/s Cost Reduction 3.4 Summary 3.5 Keywords 3.6 Learning Activity 3.7 Unit End Questions 3.8 References 3.0LEARNING OBJECTIVES 42 After studying this unit, you will be able to:  Describe the features of cost control  List the advantages of cost control  Identify the process involved in cost control  List down the advantages of Cost reduction CU IDOL SELF LEARNING MATERIAL (SLM)

 Identify the disadvantages of Cost reduction  Describe the process involved in Cost reduction 3.1INTRODUCTION In this Unit, we will learn that Modern management is growing more cost-conscious, and it is always looking for innovative methods to reduce expenses and eliminate waste. Cost containment is one of the most basic goals of cost accounting. It is insufficient if costs are calculated and provided to management on a regular basis. More exports are stimulated by increased industry competitiveness. Thus, by lowering expenses, profit can be enhanced, which can then be used to expand the company, resulting in more jobs and general industrial prosperity. 3.2 COST CONTROL Setting standards or targets and comparing actual performance to them is how \"cost control\" is carried out, with the goal of identifying deviations from standard norms and taking corrective action to guarantee that future performance adheres to standard norms. In other words, it can be defined as a scientific management strategy for controlling and lowering corporate expenditures. 3.2.1 Meaning of Cost Control According to Eric L. Kohler, cost control is the employment of management devices in the performance of any necessary operation so that pre-established objectives of quality, quantity and time may be attained at the lowest possible outlay for goods and services. 3.2.2 Features of Cost Control a) Cost Accounting Existence: If cost accounting is to lead executive action to control expenses, an appropriate cost accounting system must first be implemented. The system that is implemented should be tailored to the task at hand. It should not be implemented simply because other companies have done it and because it is fashionable. The cost accounting system that has been deployed achieves one of cost accounting's dual purposes. 43 CU IDOL SELF LEARNING MATERIAL (SLM)

b) Predetermined Standards: Setting attainable performance targets is another requirement of cost control. The goals should be scientific in nature, taking into account all practical factors of manufacturing as well as associated expenses. Standard costing is not required for the establishment of performance targets. c) Cost Reporting: As previously stated, cost control does not happen by itself. Cost accounting should influence executive action for cost containment. If cost accounting is to guide executives, there must be a reliable system for reporting cost data. d) Corrective Action: Even the most effective and timely reporting of cost data is useless if corrective action is not performed right away. Action should also be taken to ensure that severe aberrations that have been addressed by executive action do not resurface. In other words, the goal of corrective action should be to avoid deviations from occurring again. 3.2.3 Process involved in Cost Control: Creating Appraisal norms Corrective 44 actions Fig 3.1 Process involved in Cost Control CU IDOL SELF LEARNING MATERIAL (SLM)

1. Creating norms: In order to exercise cost management, it is necessary to create norms, targets, or parameters that can be used as yardsticks to attain the end goal. Market research may be used to establish these standards, norms, or objectives. 2. Appraisal : To determine the degree of utilisation of persons, machinery, and materials, the actual outcomes are compared to the prescribed standards. The sources of the variances are investigated in order to determine what is controllable and what is not. 3. Corrective actions : The variations are examined, and remedial actions or revisions of targets, norms, and standards, among other things, are implemented. 3.2.4 Advantages of Cost Control The following are some of the benefits of cost control: 1. Maximizing or optimizing profit to achieve the desired return on capital utilized. 2. Enhancement of the available resources' productivity. 3. Customers will pay a reasonable price. 4. The workers' employment and job opportunities will be maintained. 5. Efficient utilization of finite production resources 6. Creditworthiness has improved. 7. The industry's prosperity and financial security. 3.3 COST REDUCTION Every cost reduction strategy starts with the idea that there is always room for improvement. Continuous study is conducted into numerous areas in order to determine the greatest feasible techniques of performance while keeping expenditures to a minimal. 3.3.1 Meaning of Cost reduction Cost reduction is a planned constructive approach to reducing expense is cost reduction. It is a corrective function based on a continuous process of cost, function, and other analysis for increased efficiency in the application of components of production. 45 CU IDOL SELF LEARNING MATERIAL (SLM)

In general, lowering the cost per unit of manufacturing can be accomplished in two ways: 1. by lowering expenditures while maintaining output volume. 2. By increasing output, i.e. maintaining the same level of expenditure while production activity. 3.3.2 Advantages of Cost reduction 1. It provides a foundation for higher dividends to shareholders, higher bonuses to employees, and greater profit retention for business expansion, which will result in more jobs and overall industrial prospects. 2. Cost reduction will free up funds for labor-welfare programmes, improving the men- management interaction. 3. Consumers will be able to purchase things at a lower cost if costs are reduced. This will result in increased demand for products, cost savings from large-scale production, increased employment as a result of industrialization, and an overall improvement in the level of living. 4. Cost reduction will aid in efficiently addressing competition. 5. Higher profits will result in higher tax revenue for the government. 6. As a result of lower costs, export prices may fall, thus increasing overall exports. 7. Increased productivity leads to cost reduction. As a result, a developing country with limited resources, such as India, can develop more quickly if it makes the best use of those resources by improving productivity. 8. Cost reduction emphasises a constant quest for improvement that will strengthen the firm's image in the long run. 3.3.3 Disadvantages of Cost reduction 1. To save money, quality may be steadily degraded, and this may not be noticed until it has reached alarming proportions. Quality could be lowered to the point that it is no longer acceptable in the market, and the business could be lost to competitors. 2. Employees may not like the cost reduction plan at first, and the programme may be jeopardised, because the success of any cost reduction plan is contingent on the employees' willing collaboration and active involvement. 3. It's likely that the expense decrease isn't real or long-term. It may not be based on valid reasons and may be ephemeral, with costs returning to their original levels once 46 CU IDOL SELF LEARNING MATERIAL (SLM)

temporary factors (such as lower material prices) that caused cost reductions fade away. 4. There may be a contradiction between an individual's goal and the organization's goal. It's feasible that a department head will pursue actions that save his department money but raise the cost of the organisation as a whole. 3.3.4 Process involved in Cost reduction 1. Create and communicate a cost reduction imperative: Establishing and communicating a clear imperative will aid in gaining buy-in at all levels. One strategy is to simply depict the unsustainable environment of rising costs and flat to declining revenues. 2. Early in the process, obtain senior leadership alignment and support: Senior leadership alignment and support for the cost reduction process can be achieved by holding a cost reduction planning workshop. When planning the workshop, think about the goals, as well as the outcomes and deliverables that you want to achieve. 3. Decide on a cost reduction strategy. Using parts of each of the strategies, an organization's optimal cost reduction strategy may often be constructed. A good cost reduction strategy should: • Achieve reductions with minimum impact on employee morale • Retain high-potential and high-performing individuals • Guarantee retention of organisation knowledge that may not be well-documented • Reduce work when necessary to ensure savings are sustainable • Remove bad performers 4. Write down and share your cost reduction strategy. To get people on board with the changes, it's crucial to document and convey the initiative's goals, plans, and timelines. Consider including the following aspects in your communications: • Clearly highlights organisational priorities • Describes cost reduction needs and desired outcomes • Provides clear awareness of cost reduction needs and objectives to employees, customers, and other stakeholders. Decisions Have Already Been Made 47 CU IDOL SELF LEARNING MATERIAL (SLM)

• Provides participants with clarity during the development of comprehensive design and implementation plans by communicating essential organisation, operations, and infrastructure decisions that have already been taken. • Communicates an awareness of organisational values, beliefs, and philosophies • Defines success and the principles to be followed during the cost-cutting process 5. Methodology, Procedure, and Timeline • Identifies and coordinates key corporate planning and cost reduction milestones. • Establishes the cost reduction process's pace and cadence. Priorities for implementation and key milestones • Describes leadership's expectations for implementation priorities • Identifies critical implementation milestones 6. \"Top Down\" and \"Bottom Up\" cost Cutting: You may construct the most successful and sustainable plans by providing guidance and expectations while relying on your staff to deliver on the details by using both a top-down and bottom-up strategy. 3.3.5 Cost Control V/s Cost Reduction The term \"cost control\" has been explained in this chapter. To control costs, has been pre- determined on the basis of assuming a reasonable level of efficiency of Taking into account the past, present and future is the main focus of cost control. Real attempts to be placed within the target area. Cost accounting is mainly related to cost control, so that losses and waste are eliminated as much as possible or at least although cost reduction is a promising topic. Beyond cost control, it is not a synonym for cost control now has cost control in addition to cost control, but also aims to reduce costs. Cost reduction is a process that really starts from where cost control ends. Management had to think about how to reduce the cost of Below the target level to face the fierce competition of and survive in this competitive business environment. How to permanently reduce the cost of without sacrificing quality or affecting the usefulness of products and services is the true goal of cost reduction. Therefore, the new method 3.4 SUMMARY  If a product wants to survive in the global market, it must reduce costs.  Brand loyalty is fading away fast. Consumers have been more price and quality aware in recent years. 48 CU IDOL SELF LEARNING MATERIAL (SLM)

 The firm should have a well-defined organisational strategy in order to have an effective cost-control system.  Each executive's authority and responsibilities should be clearly stated.  Each area of duty, targets for job performance as well as the cost to be incurred for the purpose should be established so that responsibility for the departure of actual cost from the predetermined cost can be assigned. 3.5 KEYWORD  Cost: It is the cost of producing a product, purchasing inventory, selling items, or preparing equipment for use in a business activity.  Control: to exert a controlling or restraining influence over  Reduction: It is a continuous decrease in the unit cost of goods created or services supplied without compromising their suitability for the intended application or lowering product quality.  Norms: a popular or pattern, mainly of social behaviour, this isusual or expected  Creditworthiness: the volume to which someone or business enterprise is taken into considerationappropriate to acquiremonetary credit, frequentlyprimarily based totally on their reliability in paying cashreturnedwithin side the past. 3.6LEARNING ACTIVITY 1. Define Cost Control. ___________________________________________________________________________ ___________________________________________________________________________ 2. What is Cost reduction? ___________________________________________________________________________ ___________________________________________________________________________ 3.7 UNIT END QUESTIONS 49 A. Descriptive Questions Short Questions 1. Define Cost Control. Explain the features of Cost Control. 2. Explain the concept of Cost Control. CU IDOL SELF LEARNING MATERIAL (SLM)

3. What do you mean by Cost reduction? 50 4. List the strategy used for Cost reduction. 5. On what basis are cost cutting decided list them. Long Questions 1. Explain the advantages of Cost Control. 2. What do you mean by Cost Control? Discuss the process of Cost Control. 3. Explain the advantages and disadvantages of Cost reduction. 4. What do you mean by Cost reduction? Explain it in detail. 5. Enumerate the process involved in Cost reduction. B. Multiple Choice Questions 1. ……………………. Is the foundation for higher dividends to shareholders? a. Cost Control b. Cost reduction c. Profit d. Loss 2. Consumers will be able to purchase things if costs are ………… a. Reduced b. Increased c. Constant d. None of these 3. …………. is not required for the establishment of performance targets. a. Marginal Costing b. Social Accounting c. Standard Costing d. Financial Costing 4. Setting standards or targets and comparing actual performance is ………………………….. a. Cost Control b. Cost reduction CU IDOL SELF LEARNING MATERIAL (SLM)