Controlling costs and budgets

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Controlling costs and budgets:

By: Ma. Louisa A. Noguerra Controlling costs and budgets

What is the difference between cost and budgets?:

What is the difference between cost and budgets? COST – is the total expenses of the company in their operation. Like doing a certain project or projects. Example: Labor, Materials, Supplies BUDGET – refers to the fund allotted for the operation or certain projects.

Accounting records:

Accounting records

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CONCEPT Effective cost control begins with accurate records of costs as they occur and an understanding of the accounting reports that document them.

Which comes first: cost control or cost reduction?:

Which comes first: cost control or cost reduction? Cost Control comes first. It is because in the life of a supervisor, keeping the cost in line with established cost standards is a big pressure. After setting-up the cost standards, it is followed by calls to reduce(improve) existing costs. The cost improvement is often used to soften the implication of the real objective: Cost Reduction.

How important is recordkeeping to Cost Control?? :

How important is recordkeeping to Cost Control?? Records of the company needs to be up-to-date for it is used as basis in controlling. And when you say CONTROL, it means “keeping within limits”. If you don’t know what the limits are (or holding costs within those limits) you can’t very well take any meaningful action.

What must you know about accounting?:

What must you know about accounting? There are three basic of costs: Unit Costs – are costs, partial or total, accumulates per unit of product or service processed or produced. Standard costs - unit costs that have been set down as “allowable costs” – for materials, for direct and indirect labor, for manufacturing, for marketing, for administration, and the like. Budgeted costs – costs guidelines (target) issued to supervisors and managers by accountants at the beginning of the accounting period.

Budgeted costs:

Budgeted costs

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Concept Budgets establish departmental cost standards and targets and are used to monitor costs performance.

How do budgets fit into the cost control picture??:

How do budgets fit into the cost control picture?? “When your costs are under or equal to budget, they are in control. When your costs are over budget, you must exert control to bring them back into the line.” Costs Variance Report – is issue by the accounting department at the end of the month, which tells whether the department has met its standards, exceeding them, or fallen below them.(Table 1.9-1)

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Flexible budget – budget option to make allowances for variations in justifiable expenses for varying levels of output. This is no necessarily absolutely proportional to the changes in output level. The concept of this is that, “when output rises, expense will also rise, and when output falls, expense will also drop. Fixed Cost – tend to remain the same regardless of output. example: utilities(rent , heat , light) and indirect labor.

Cost improvement strategies:

Cost improvement strategies

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Concept Cost reduction strategies can be either broadly focused or specific in nature, but their success depends upon carefully planned priorities

Where are the most promising cost targets to be found?:

Where are the most promising cost targets to be found? Pr oduct or service costs Process, or operations costs People costs Equipment and tool costs Material costs Utilities costs Communication costs Information costs

How should you set your cost-target priorities?:

How should you set your cost-target priorities? Targets can be picked and their priorities assigned according to ratings something like this: Most obvious Easiest Worst first Fastest payback

What do you mean by a belt-tightening program?:

What do you mean by a belt-tightening program? belt-tightening program usually refers to a short-term plan – often dictated from above – to cut the costs just as fast as you can. Here are some approaches: Stop spending Do without Postpone spending Plug leaks

Cost improvement sources:

Cost improvement sources

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Concept Costs improvement ideas may be gathered from the variety of sources, using a number of proven techniques.

Who can provide the necessary cost-cutting ideas?:

Who can provide the necessary cost-cutting ideas? There are three good sources: Yourself Your employees Staff departments

How helpful are cost reduction committees?:

How helpful are cost reduction committees? They are the forerunners of quality circle Initiate and oversee a cost reduction campaign Sustain outgoing cost improvement activities

Positive ways to improve costs?:

Positive ways to improve costs? Reduce waste Save time Increase output Spend wisely Use space more intelligently Watch your inventories

Employee reaction:

Employee reaction

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Concept Employee resistance to cost-cutting changes is likely to be high, so employees require special motivation efforts on the part of their supervisors.

Why do employees fear cost reduction?:

Why do employees fear cost reduction? Obviously, employees think that cost cutting may mean loss their work, overtime, or even their jobs. They feel that cost cutting threatens their security.

Union’s attitude in cost cutting:

Union’s attitude in cost cutting There are five reactions often heard from labor union leaders when ask to cooperate in cost reduction activities: “Layoffs are a renegotiation strategy of the company to scare us.” “These layoffs are aimed at weakening the union.” “This industry is trying to speed up operations in order to produce the same amount of amount of goods and services with more profit and fewer jobs.” “Management isn’t doing a good job in managing. Why should it tell our workers to do a better job before it mends its own fences.” “Management keeps ‘crying wolf’ about international competitions and then it tries to switch our jobs overseas.”

Best way to cut through employees resistance and build support for cost improvement.:

Best way to cut through employees resistance and build support for cost improvement. Talk to employees about cost reduction in terms of their interests. Bring the cost picture down to earth. Set specific goals Explain why and how Train for cost improvement Report cost progress