Question

what is inefficient cost management

Answer 1

Answer: Inefficient cost management is the excess money spent to get the same results. This means that whenever business is spending excess cost on any aspect of production, distribution, selling and administrative activities of business to get the results that could be achieved at lesser cost if managed efficiently. Budgets are also prepared for the same purpose of monitoring any inefficiencies in the costing of business. Variance analysis is best example to detect cost inefficiency. There could be several reasons for inefficiencies, some of them are illustrated below:

- Production downtime: This inefficiency results from production downtime i.e., breakage of machinery. This occurs when business does not invest in preventive maintenance costs. If preventive maintenance is undertaken on regular basis, production downtime can be reduced to minimum resulting in saving of labour idle time cost.

- Excessive wastage: Wastage resulting from production process needs to be checked and compared with normal wastage in same production process. This could be possible from various sources like industry average wastage, competitor wastage percentage, etc. Businesses needs to compare and check this wastage from time to time, to avoid any unnecessary wastage resulting from production process.

- Unreasonable expenses: There are many expenses that management needs to check whether they are reasonable in terms of benefits offered by them. Like commission on sales is reasonable compared to contribution margin provided on sales. Excess commission would result in erosion of operating profits of business.

- Excess inventory: Inventory also holds carrying costs. So, excess inventory would result in unnecessary cost to business in terms of holding costs. Besides funds are also blocked on purchasing inventory in business. Thus, excess inventory can also involve inefficient cost management.