Question

a manager faces a problem of increasing cost in his company. This problem is specific to him. It might so happen that similar problems are faced by others in the industry. He tries to find the reasons for the rising cost and falling profit that might involve different areas of research. which types of research or mode will be necessary to solve the problem?

Answer 1

Cost analysis is a comparison of costs. Total cost is the relationship between production quantity and costs, expressed as:

Total cost = Fixed Cost + Variable Cost * Output

So Manager needs to find out first which component of cost has increased in the year by doing followings -

1. He should use the standard costing approach where he can analyse that the increase in cost is due to which component of cost such as Raw material/labour or overhead. by using this approach, he would come to know that in the year, which cost component has increased as compared to standard cost or previous year cost numbers. After getting to know the same, the manager has to further analyse that rise in cost is due to company specific issues or industry level issues. for an example, the manager found out that there are mismatch/variances between Raw material cost that is this year raw material cost has increased significantly, he need to further analyse which type of raw material has highest variance and is that raw material has increased in price globally. This will help the manager to find out the reasons for increasing cost within the company as well with respect to the industry.
2. Also, Manage has to do Market research to find out the reason for falling profit - for example if overall demand of the product has decreased in particular year or company market share has decreased - these will lead to under- utilisation of the plant capacity or less utilisation of the company’s plant capacity, which will reduce the benefit of economies of scale and hence rising cost. Also need to look industry wise utilisation of the plant and comparing the same with the actual utilisation of the company.

3. Also, Manager need to check the accounting policy or cost policies of the other competitor to find out if there are any mismatches in them in recording and reporting the financial statements. Costs used to prepare financial statements are not the same as those used to control operations.