Management accounting
Introduction
Every business objective is to make profits and reduce costs as much as possible. Most business owners believe that to realize high profits, they need to increase their sales. However, for the sales to increase there must be corresponding increase in the costs since there will be increased amount of work. Increased costs however can be curtailed. Another way that the costs can be reduced is by controlling them.
Controlling variable costs
Variable costs change with the number of products that are produced for sale. Example of these costs includes wages of production, electricity power to run machines, raw materials and the cost of maintaining inventory. These costs fluctuate depending on the activity of the business and should be controlled for the business to accrue profits. Various strategies can be employed to control variable costs (Bragg, 2011). Products and service provided need to be scrutinized in order to find out the most cost effective one. The costs can be reduced by reducing the production of products that provide least profits while at the same time investing in products that are more lucrative. For example, raw material can be scrutinized to find out the best sources that will be more cost effective in the production of various products.
Another way to control the costs is to cut expenditure on fluctuating costs such as employee salaries and advertising costs before targeting the fixed costs like utilities and rent. Reducing fixed costs can put strain on the operational and financial status of the business compared to when variable costs are cut. This control strategy may be challenging especially in the case where there is stiff competition. For instance, to be able to compete favorably in such an environment, it requires carrying out extensive advertisement in order to reach many customers (McEachern, 2012). Therefore, it will depend on the circumstances that the business is facing. Employee salaries are also some of the variable costs that can be regulated to ensure that variable costs do not escalate. In adjusting the salaries, various factors need to be considered to ensure that, the process does not impact on the level of commitment and productivity of the employees. The variable costs can also be controlled through continuous monitoring of how the business is operating. Through monitoring then appropriate decisions may be taken to ensure that the inventory is well managed and controlled to impact on the level of profits that the business accrues.
Controlling fixed production overhead costs
Controlling fixed production overhead cost is also important in ensuring that the business achieves its objective of accruing profits. Fixed production overheads are costs that do not vary as a result of changes in activity. These costs are required for the business to operate smoothly. Therefore, management have the responsibility of ensuring that they generate enough amount of contribution margin through the sale of products and service for them to offset the costs of fixed production overhead costs. These costs are related to the production and they include factory rent, utilities, normal scrap, production supervisory salaries, deprecation on production equipment and insurance of production equipment, inventory and facilities among others.
Fixed production overheads costs by their nature are fixed and only fluctuate after a long duration of time. Therefore, for such cost to be controlled, they require proper management skills. The manager of a company should have adequate skills and knowledge to ensure that these costs are well managed. This can be achieved through adapting to best practices in management, standardization of compensation plans and ensuring that there is controlled oversight and accountability. The processing systems should also be centralized to ensure that all decisions are made at one point. Centralized processing system will also ensure that all-important decisions pertaining to any production overhead costs is received and acted upon from one point. Accountability is also important in ensuring that fixed production overhead costs are well controlled.
Production overhead costs related to production supervisory salaries should be controlled by ensuring that the supervisors have standardized salaries to ensure that they are not increased without putting into consideration other important issues. Facility rent is also one of the fixed productions overhead costs that should be well controlled to ensure that the operating expenses are minimized (Schwartz, 2010). The facility should be well maintained to reduce costs of renovations. The choice of the premise should also factor in the cost to ensure that they are not highly charged.
In conclusion, operating costs must be incurred to ensure that the business achieves its goals. However, it is important for the business to put in place appropriate mechanisms to ensure that they reduce the costs of the production and operating the business to maximize on the profits. Various measures as discussed above are essential in ensuring that both variable and fixed production overhead costs are controlled. Such strategies include proper management practices, accountability and continuous monitoring.
References
Bragg, S. (2011). “What is a discretionary cost?”. Accounting Tools. Retrieved 10 March 2012.
McEachern, W. (2012). Economics: A Contemporary Introduction. Mason, Ohio: South-Western Cengage Learning. p. 158.
Schwartz, R. (2010). Micro Markets: A Market Structure Approach to Microeconomic Analysis. Hoboken, New Jersey: John Wiley & Sons, 2010. p. 202.
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