A business must be profitable, otherwise it need not exist. Accounts are maintained, balance sheets, profit & loss and cash flow statements are made. This is called 'Financial Accounting'. Financial accounting has its limitations. A business must maintain optimum efficiency, minimum wastage and losses. Financial accounting does not indicate these crucial aspects of a business. It indicates whether the business has made a profit or loss over a certain period. It does not indicate where the losses are made or where the efficiencies are poor. A business engaged in multi products or a conglomerate operating in a multi business environment must focus on these critical aspects. Cost Accounting is a branch of accountancy which establishes these figures and points to a business, the areas where efficiencies have to be improved, wastage and losses minimized. Most modern companies prepare reports on a regular basis on 'Variances' and such reports are referred to as 'Management Accounting'. Unfortunately, Cost Accountants and Internal Auditors, are not given due importance in many companies.
A garment manufacturer in the SME category was engaged in multi products and nearly 60 to 70% of the sales was coming from a single low cost, but popular range. They also had high priced, premium products and were making profits, overall as a company. Suddenly, the TMT had a bright idea. They thought why make expensive products and switched over to manufacturing and marketing the low cost, but high demand product to utilize 100% of the sewing machines capacity. It would also save them changing the product mix in batches, inventories and enable an uninterrupted production run. A large portion of this low cost product was being exported under a fixed price contract. They ended up with a big loss in that year, because their profit was coming from the premium products and their costing of low priced product had some errors, as they were following historical costs.
A cost accountant has a very important place in management and must have some superior qualities like meticulousness, foresight and courage. Most of the costing was being done by the financial accountants in SMEs. This leads to conflict of interests. They were too conservative and allocated or apportion all sorts of costs and in some cases hid the inefficiencies into costs. I have never had problems with finance people, but one area where I always had a big fight with them was in Costing. There is no denying the fact that the Cost Accountants have a very important role to play in a business and should get proper recognition. Most companies do not employ trained Cost Accountants to save on manpower costs. This is equivalent to being penny wise pound foolish.
The importance of Costing in commercial enterprises needs no repetition. In the case of Governmental, NGOs and not for profit organizations, it is all the more important. They may be serving the public and just recovering their costs by charging nominal fees for the services rendered. However, if the costing is not right, it results in losses, which ultimately has to
be met by the tax payer or the donor. Even a donor of charity would like the beneficiary to minimize losses and inefficiencies to the barest minimum. At the end of the day, there is no free lunch for anyone. There is always an indirect price tag.
© Copyright, Dec-07 . www.madgopes.com . Without prejudice. All rights reserved
Why a business must understand Costing ? - To learn more about this author, visit Madhavan T Gopalachary's Website.
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Madhavan T Gopalachary
(Visit Madhavan's Website)
Madhavan Gopalachary, nick name "madgopes"
(g pronounced as in go) given by IIT
classmates, is a Mechanical Engineer and
an alumnus of Indian Institute of
Technology, Madras having passed out
specializing in IC Engines &
Thermodynamics.
He has nearly 35 years of experience in
the Corporate World. He started off as a
trainee and handled sales, marketing,
manufacturing, product management, profit
center management, strategic planning and
corporate development including R & D in
various organizations and at various
levels before becoming a CEO. His last two
professional assignments were at CEO level
before embarking to start management
consultancy business on January 01, 1998.
He has worked for British, Swedish MNCs as
well as very large Indian business houses.
He has spent a large portion of his time
from June 1998 till date in East African
Countries practicing as an independent
Management Consultant.
More details can be obtained at the
following web sites:
mmg.name
/mtg.html;
mmgconsu
lting.biz/
Madhavan's articles can be accessed at www.madgopes.com
.
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