Accounting and Audit News

THE COST FACTOR Analysis – "REACTING to the UNPREDICTABLE PRICES"

What is the cost factor analyis?

Volatile and unstable global markets coupled with rising energy costs to unexpected fluctuations in raw material costs have widespread implications organizations. It is up to the organizations to either absorb additional costs, find new ways to mitigate the expenses, or pass price increases along to customers who are already reluctant to spend.Element of cost such as material, labor and overhead cost could also be strategically controlled.

We explore certain ways to control the cost as below:-

1. Add profits by not increasing sales:

Most organisations work under the model that if there is increase in sales, the net profits will increase. As an alternative to increasing sales, however cost recoveries have distinct benefits, since recovering $1 million to the pre-tax bottom line can equate to $ 10 million in sales.  Invariably, due to rising material cost, it is not uncommon in some businesses that the more they increase sales, the more the organisations loses money on a per unit level. A cost budget must be used to monitor the operation in the organization in order to make sure that money and resources are not being wasted.

2. Every process flow has a margin of error:

In a process flow of $ 100 million, a 0.1 per cent margin of error (that is, 0.001) translates into $ 100,000 in cost recoveries. This statistic is a reasonable starting point to validation of the process controls with respect to cost.

3. Contractual and Price Sheet Compliance:

Writing the best contract does no good unless it is followed in true letter and spirit. The vendor and Organisations are held to key provisions and making sure vendors are living by the terms. For example, many Organisations will sign group purchasing contracts with office supply vendors and then never buy items under the contract because it is easier to simply walk down to the local supply store. This internal compliance can be monitored and cost recoveries can be achieved.

4. Offer quick payments at lower prices:

For each and every organization the cash flows are very important; its crucial when it matters for buying the materials. It is more important than profits, when it is particularly for short term. During the stressed financial conditions organization cannot afford to sustain the excess inventory or delay in payments. Always inform the supplier as organizations are expecting low prices in return of cash payments.

5. Change of suppliers:

Organizations should change their suppliers if they are not providing the materials at low price or reduction in percentage even slightly. Find any other alternative or any other supplier who is willing to give the Organization good quality raw materials at lower cost. Company should always try to find the sourcing from different suppliers. Likewise sourcing from three or more suppliers can lower the cost of expenditure.

Eliminating the unnecessary features of products

The cost of the custom product is much higher than compared to any standard product or mass products produced in the company. Any other or non-standard feature of the product unnecessarily increases the product price as well as the production cost of that product. Organizations should attempt to know the motives' of the customers who are willing to buy the product; whether they are buying the product by its high quality, by its low price or something else and try to attack on that element to maximize the production and increase the profit margin. A unit cost sheet can help to achieve the desired result.

Given the above ways, the business model may need to be refined to address the challenge of cost control. The tone set by management team and its ability to communicate its objectives, target and decisions clearly, is the key to gaining the necessary support to successfully drive changes.