Cost Saving Ideas in Overheads Cost through Cost Records, Cost Audit and Cost Reporting System

Cost Saving Ideas in Overheads Cost through Cost Records, Cost Audit and Cost Reporting System

Overheads Cost means indirect Costs. Company has to incur considerable indirect costs to run its operations. Overheads costs vary from industry to industry. Generally, it is between 15% to 22% in manufacturing companies, it is between 22% to 30 % in Construction Industry, it is between 30% to 35% in Hotel Industry.

Overheads cannot be controlled (Misconception)

Managements of many companies calculate Direct costs like Raw material Cost, Employee Cost and Utilities costs and add for overheads decided %, thus they arrive at total cost and decide the selling price to be quoted to a potential customer. Thus it is assumed that all overheads are fixed and cannot be controlled. It is necessary that we classify the overheads in a scientific manner. There are separate strategies for controlling Variable Overheads and Fixed Overheads. With the help of modern costing tools, each element of cost can be challenged. Key to cost control lies in knowing the cost. If we do not attempt to go into details of costs and keep on treating the overheads as untouchable, it will remain always same and keep on increasing.

Cost Accounting Standards (CAS) require Proper classification of Overheads and reporting in cost records. CRA -1 (As per rule 5(1) of the Companies (Cost Records and Audit) Rules, 2014) give details of Cost Records to be maintained.

Classification of Overheads

Functional Classification

• Factory Overheads – Indirect Costs related to manufacturing product or providing service. These are also known as Production Overheads, Operation Overheads, Works Overheads and Manufacturing Overheads. Examples are Factory rent, Repairs and Maintenance etc.
• Administration Overheads- Costs related to general management and administration of company. Examples are Office rent, Office staff salaries etc.
• Selling and Distribution Overheads- Selling Overheads are Costs related to sale of products or services. Examples are Salaries of Sales personnel, Commission to Sales agents etc. Distribution Overheads are Costs incurred in handling a product or service from the time it is ready for delivery till it reaches the final consumer. Examples are Transport cost, Costs related to warehousing etc.

Benefits of above classification

1. Fixing Responsibility: Management can ask the Factory manager about the increase in Factory overheads. Similarly, Administration Manager. Sales Manager, logistics manager can be made accountable for respective overheads falling under their domain.

2. Planning and Budgeting: Above classification helps the management in preparing budgets and planning its operations.

3. Cost Control: There are various elements of cost under factory overheads and other overheads. Cost control at element level can be done. Elements are reported depending on the materiality or significance. If some elements are of very low amount, they may be merged together. Efforts can be directed towards major ones.

Behavior wise classification

• Fixed Overheads- These overheads remain fixed within a particular production or activity range and during a specific time period. Examples are Rent, Insurance etc.
• Variable Overheads- These overheads vary directly with production or activity volume. Examples are Indirect labour, Sales agent’s commission etc.
• Semi fixed or Semi Variable Overheads – These overheads are partly variable and partly fixed. They may remain fixed upto particular Production or Activity level, after that they will vary but not in direct proportion of production or activity. Examples are Depreciation of machinery, Repairs and Maintenance etc.

Benefits of above classification

1. Marginal Costing Application: The basis of technique of Marginal Costing is classification of costs into fixed and variable costs. For calculation of contribution, Material Costs, Direct Labour costs and Variable Overheads are reduced from Sales. Marginal Costing technique is useful in various important managerial decisions e.g. introduction of new product, make or buy decisions etc.

2. Cost Control: If management knows variable overheads, it can focus its efforts on variable overheads. Fixed Overheads can be controlled over a long period of time.

MIS Reports based on Cost Records and Cost Audit Report

1. Element wise Factory Overheads Cost Statement

This Statement gives element wise breakup of Factory overheads and comparison with previous two years. Depending upon the materiality elements are shown and balance are merged together and shown as other overheads. This statement can indicate the areas which need attention. Costs can be traced upto cost centre.  If company is having more than one unit, then this statement should be prepared for each unit separately.

Similar type of statement can also be prepared for Administrative Overheads.

2. Statement of Product wise Overheads cost per Unit of Production

This statement is extracted from product wise cost sheets prepared for Cost Audit. This shows load of Overheads on each product in total and on per unit basis. Overheads which are high can be analyzed element wise and Cost Centrewise and corrective action can be taken.

Many Overheads Cost control ideas can come out of the analysis of Overheads as discussed above.

Few are given below.

1. Regular maintenance of Plant & Machinery can help in reducing Repairs & Maintenance cost and Cost of Consumable Stores & Spares.

2. Spare parts can be standardized, wherever possible. Quality of Spares purchased should be monitored specially of high value spares.

3. Increasing the capacity utilization can help in reducing the fixed overheads on per unit basis.

4. Application of lean manufacturing methods.

5. Outsourcing part of the work.

6. Work from home may be given to employees whose presence is not required on day to day basis in office.

7. Entering into long term contract for supply of stationary for printers to get favorable rates.

8. Formulating clear policy for sales commission after checking the performance of sales agents.

9. Formulating transport policy after proper study of various modes of transport available.

10. Transfer of indirect employees from one unit to another based on the availability of work will help in optimum utilization of resources.

Conclusions

Above discussed points are only few points. Many more cost saving ideas can emerge. Classification of Overheads and MIS Reports based on Cost Records as discussed above can be very useful. Monitoring on regular basis is required. Comparison with budgets on regular basis will also help in analysis and control of cost in time.