Back Cost control is firmly back in the corporate agenda
"The current economic climate has meant that cost control is firmly back in the corporate agenda," he writes, and lists three `surprising' realisations.
One, there are `hidden effects' of repeated doses of cost cutting. `Misdirected attack on white-collar overhead' threatens loyalty; more seriously, "removing middle layers of management has undermined controls and led to an increase in corporate fraud".
Two, financial managers overemphasise on labour costs, without realising that "direct labour averages only 15 per cent of total manufacturing costs today, whereas materials can constitute over 50 per cent and general overheads in excess of 30 per cent."
You'd be surprised to learn that between 1970 and 1990, labour element's share in total cost content has fallen from 30 per cent to about 10; and that more than half of purchasing dollars are spent on services from outside providers.
And the third realisation is, `failure of costing systems' when automation is implemented. "New machinery uses less direct labour but usually requires more support for programming and engineering — components not foreseen when designing and implementing new systems," writes Doyle.
As a result, "products made through automation tend not to be charged enough overhead, while products made by conventional means, for example those that are labour intensive, are charged too much."
The author exhorts that you move beyond `the incremental approach' in budgeting, and put in place an accounting system that provides "more relevant information on current costs to enable managers to measure the value added, and not just cost comparisons with the previous year."
Any discussion of cost is not complete without delving into the outsourcing debate. On this, the author has a caveat:
"Few companies consider the unanticipated loss of what has been called the `institutional or corporate memory': the in-depth knowledge and skills acquired by the longer-serving staff as to how the company built its markets and product ranges; the intricate and sometimes personalised nature of key foreign client relationships; the nuances of these overseas markets; manufacturing processes and purchasing arrangements, and so on."
The book instructs in the use of ABC or activity-based costing to trace the real costs of organisational activities, but cautions that ABC is not a general-purpose, generic tool like accounting software. Also, "the information generated by the ABC system will provide an entirely new and more transparent cost database."
Check if your management is ready for the truth! Of interest should be chapters on OVA or overhead value analysis, cost responsibility, and cost and value of information technology.
Cost knowledge of good value.
Take headcount head-on
ASHOK Gupta's A Billion is Enough from Ajanta Books International (www.ajantabooks.com) is not about Rs 100 crore but on `a way out' for our population problem. Citing published analysis, the author writes that the level of resources in 1998 could provide `good quality life' to 34 crore persons and `minimum necessary social living' to 59 crore. "As such, India could be characterised as overpopulated to the extent of 37 to 62 crore in 1998, depending upon whether we adopt the criterion of `good quality life' or `mere survival' for our judgment."
A solution that Gupta suggests is PCPAP, short for `population control and poverty alleviation programme', for below poverty line (BPL) people identified by the issue of `yellow cards'. Those who go for terminal methods get `green cards' that offer the following benefits: lifelong monthly pension, education incentive, lottery, and health insurance. The lottery has an annual budget of Rs 3,600 crore, where the eligible couple can participate in draws for `a continuous period of 10 years'! Will it work?
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