Cost Saving Ideas in Material Cost through Cost Records, Cost Audit and Cost Reporting System.
Material Cost is a significant cost in manufacturing companies. Generally, it is between 50 to 60% of Sales but in some companies it can be very high up to 75% of Sales. Proper Cost Records maintained for Cost Audit or otherwise, Good Cost Reporting System and Other measures can help the manufacturing companies in significant cost savings in material cost.
Material Cost can be controlled at three stages.
- Procurement Stage
- Storage and Handling Stage
- Usage Stage
Below given points can help in significant cost savings in Material Cost.
1. Use of Standard Costing
Standard Costing is very useful in Cost Control. Two reports for Material Cost Control are discussed below.
Usage Variance Report
Company can set the standards of Raw Materials required for each of its manufactured products after consultation with its technical personnel. Usage report can be prepared periodically say on monthly basis. Standard Material consumption is compared with Actual Consumption and then variance is calculated. Variance is analysed. Reasons are given by the plant people and corrective action is taken. It is very good report for controlling material cost through usage.
Usage Variance Report is explained below.
| Usage Variance Report for the —————-(Period) | ||||||
| Name of Product | X | Production | 100 | KGS | ||
| Name of R.M. | SQ per Kg. | Total SQ | Total AQ | SP | Usage Variance | Remarks |
| A | 5 | 500 | 520 | 40 | -800 | |
| B | 2 | 200 | 198 | 35 | 70 | |
| C | 1.2 | 120 | 130 | 27 | -270 | |
| D | 1.3 | 130 | 134 | 60 | -240 | |
| E | 4 | 400 | 415 | 50 | -750 | |
| F | 2 | 200 | 198 | 32 | 64 | |
| G | 3 | 300 | 305 | 22 | -110 | |
| Total | -2036 | |||||
| Abbreviations used: SQ-Standard Quantity, AQ-Actual Quantity, SP-Standard Price | ||||||
Above Report indicates Total Adverse or Negative usage variance of Rs.2036-Usage Variance of each item is also indicated. Plant staff has to give reasons for significant item in the Remarks column. Report is discussed by the management with the Plant Staff. Generally this report is prepared for Key Raw Materials only.
Price Variance Report
Company can set the standard prices for its raw materials. Price variance report can be prepared periodically say on monthly basis. Standard Price is compared with Actual Price and then variance is calculated. Variance is analysed.Reasons are given by the Purchase department and corrective action is taken. It is very good report for controlling material cost through Price control.
Price Variance Report is explained below.
| Price Variance Report for the ————-(Period) | ||||||
| Name of R.M. | SP | AP | AQ | Price Variance | Remarks | |
| A | 40 | 38 | 700 | 1400 | ||
| B | 35 | 39 | 250 | -1000 | ||
| C | 27 | 30 | 150 | -450 | ||
| D | 60 | 58 | 120 | 240 | ||
| E | 50 | 51 | 110 | -110 | ||
| F | 32 | 33 | 200 | -200 | ||
| G | 22 | 24 | 310 | -620 | ||
| Total | -740 | |||||
| Abbreviations used: SP-Standard Price, AP-Actual Price,AQ-Actual Quantity | ||||||
Above Report indicates Total Adverse or Negative variance of Rs.740- Remarks Column contains reasons given by the Purchase Department. Generally this report is prepared for Key Raw Materials only.
Useful ideas which may emerge out of above reports
Material Substitution: Plant staff can give suggestions on how alternative material which may have lower price can be used by maintaining same yield.
Imported Vs. Indigenous: If Company gets the same yield by using Indigenous in place of Imported material or vice versa, significant savings are possible.
Machinery Defect: Sometimes due to machinery defect, Usage variance may come negative. This can be solved by repairing of machine.
Quality of Material: Sometimes due to bad quality of material, Usage variance may come negative. Example. In Steel Melting Shop, Iron & Steel Scrap is the main raw material which is used for making Ingots. This scrap contains Magnetic Dust (MD) and Non Magnetic Dust (NMD), Oil, slag etc. If these impurities are more than tolerance limit then production of ingots will suffer even though Price of Scarp may be little less.
Many more such ideas can emerge. Ideas will vary from company to company.
2. Purchase Policy
Company can have Centralized Purchase department which can place order for all the units. Major items can be purchased centrally and Small items may be purchased locally by units. By doing so, Company can negotiate better terms of purchase. It can avail the bulk quantity discounts and ultimately the purchase rate will go down.
3. Transport Cost
Transport Cost is a significant cost in case of many companies. Transport cost borne by the company is added in landed cost of material. Proper planning, Coordination with suppliers, Comparing different modes of transportation, Considering godown options etc. can help the company in reducing transport cost and ultimately Material Cost. Proper Supply Chain management can help a lot.
4. Use of Cost Audit Report and Cost Records
Cost Sheet of each product gives material cost and other elements of cost in total and also cost per unit of production. Para 2A gives details of Material Consumed in Amount, Quantity and Rate per unit for top 10 items. Both these statements give information for current year and previous year. CRA 1 asks the companies to maintain record of transportation cost. These statements can help the management in reducing the material Cost.
Above given points are generally applicable to most of the manufacturing companies. There may be differences in transport cost due to location and weight of materials. If company focuses on these points and uses techniques mentioned above along with other tested methods, if any, consistently , it can save a lot in material cost over a period of time.
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