This text is an excerpt from a management accounting textbook designed for the FIA and ACCA exams. It covers various cost accounting topics, including cost classification, standard costing, variance analysis, and budgeting. The text also explains performance measurement, using both financial and non-financial indicators, and discusses methods for forecasting sales and managing inventory. Finally, it details investment appraisal techniques such as net present value and payback period calculations.

Management Accounting Study Guide

Short-Answer Quiz

Instructions: Answer the following questions in 2-3 sentences each.

1. What are the three main purposes of management accounting information?
2. What is the difference between a group classification code and a faceted code for inventory?
3. Describe two types of cost behavior patterns and provide an example of each.
4. Explain the high-low method for estimating costs.
5. What is the purpose of a scatter diagram in cost analysis?
6. What are the key guidelines for presenting information in tabular form?
7. Distinguish between FIFO and LIFO inventory valuation methods.
8. Explain the concept of over- and under-absorbed overhead.
9. What is the main difference between marginal costing and absorption costing?
10. Describe two common cost units used in service industries and provide examples.

Answer Key

1. The three main purposes of management accounting information are planning, control, and decision-making. Planning involves setting objectives and outlining actions to achieve them. Control involves monitoring actual results against plans and taking corrective action where needed. Decision-making uses information to choose among alternative courses of action.
2. A group classification code uses a single digit to indicate the classification of an item (e.g., all nails start with “4”). A faceted code uses each digit to provide specific information about the item (e.g., the first digit represents material, the second represents size).
3. Two types of cost behavior patterns are fixed costs and variable costs. Fixed costs remain constant regardless of output (e.g., rent). Variable costs change in proportion to output (e.g., raw materials).
4. The high-low method estimates costs by comparing the total costs at the highest and lowest activity levels. It assumes a linear relationship between activity and cost and uses the slope of the line to estimate variable cost per unit.
5. A scatter diagram plots pairs of data points to visually analyze the correlation between two variables. This helps to identify potential relationships and trends in cost behavior.
6. Key guidelines for tabular presentation include a clear title, labelled columns, sub-totals, a total column, an overall total, and an easy-to-read format.
7. FIFO (First-In, First-Out) assumes that the oldest inventory items are sold first, while LIFO (Last-In, First-Out) assumes that the newest inventory items are sold first. This affects the valuation of inventory and the cost of goods sold.
8. Over-absorbed overhead occurs when the applied overhead exceeds the actual overhead incurred. Under-absorbed overhead occurs when the applied overhead is less than the actual overhead incurred.
9. Marginal costing treats fixed production costs as period costs, while absorption costing includes fixed production costs in the product cost. This leads to different profit figures under each method.
10. Two common cost units in service industries are occupied bed-night (used in hotels) and passenger-mile (used in transportation). These units quantify the service delivered and allow for cost analysis on a per-unit basis.

Essay Questions

1. Discuss the importance of assessing the value of information in management accounting. Consider both tangible and intangible benefits.
2. Compare and contrast different methods of inventory valuation, such as FIFO, LIFO, and weighted average. Explain the impact of each method on reported profits and inventory values in a period of inflation.
3. Discuss the advantages and disadvantages of both marginal costing and absorption costing. In what situations might one method be preferred over the other?
4. Explain the concept of a responsibility centre and describe the different types of responsibility centres. How does responsibility accounting contribute to effective performance measurement and control within an organization?
5. Discuss the various techniques used for capital investment appraisal, including payback period, net present value (NPV), and internal rate of return (IRR). Evaluate the strengths and weaknesses of each method and explain the factors that should be considered when choosing an appropriate appraisal technique.

Glossary of Key Terms

• Absorption Costing: A costing method that includes fixed production costs in the product cost.
• Activity-Based Costing: A costing method that identifies activities in an organization and assigns the cost of each activity to all products and services according to the actual consumption by each.
• Budget: A financial plan for a future period, typically covering one year.
• Cost Behavior: The way in which costs change in relation to changes in activity level.
• Cost Centre: A unit of an organization for which costs are collected and analyzed.
• Cost Control: The process of monitoring costs and taking corrective action to ensure that they remain within budgeted limits.
• Cost Unit: A unit of measurement for costs, such as a unit of product, a labour hour, or a machine hour.
• FIFO: First-In, First-Out inventory valuation method.
• Fixed Costs: Costs that remain constant regardless of changes in activity level.
• High-Low Method: A technique for estimating costs by comparing the total costs at the highest and lowest activity levels.
• Inventory Control: The process of managing inventory levels to ensure that adequate stocks are available to meet demand while minimizing inventory holding costs.
• Investment Centre: A unit of an organization that is responsible for both revenues and costs, and therefore for generating a profit.
• IRR: Internal Rate of Return, a capital investment appraisal technique.
• Job Costing: A costing method used when each product or service is unique.
• LIFO: Last-In, First-Out inventory valuation method.
• Marginal Costing: A costing method that treats fixed production costs as period costs.
• Mission Statement: A statement of an organization’s overall purpose and objectives.
• NPV: Net Present Value, a capital investment appraisal technique.
• Over-Absorbed Overhead: When applied overhead exceeds actual overhead incurred.
• Overhead: Indirect costs that cannot be directly traced to a particular product or service.
• Performance Measurement: The process of evaluating how well an organization or individual is performing against set targets or standards.
• Responsibility Centre: A unit of an organization for which a manager is held accountable for performance.
• Scatter Diagram: A graph that plots pairs of data points to visually analyze the correlation between two variables.
• Standard Cost: A predetermined cost that is used as a benchmark for measuring performance.
• SWOT Analysis: A strategic planning tool that identifies an organization’s strengths, weaknesses, opportunities, and threats.
• Variable Costs: Costs that change in proportion to changes in activity level.
• Variance: The difference between an actual result and a budgeted or standard amount.
• Weighted Average: An inventory valuation method that uses an average cost based on the total cost of goods available for sale divided by the total quantity available for sale.

Briefing Doc: Management Accounting Concepts and Techniques

This document reviews key themes and insights from provided excerpts of “021-FIA FMA, ACCA paper F2 _ management accounting _ interactive text _ for exams from December 2011 to December 2012”.

1. Information Value and Cost

Effective management accounting requires careful consideration of the value and cost of information. The text emphasizes the need to assess information’s utility before acquisition:

“An assessment of the value of information can be derived in this way, and the cost of obtaining it should then be compared against this value. On the basis of this comparison, it can be decided whether certain items of information are worth having. It should be remembered that there may also be intangible benefits which may be harder to quantify.”

2. Key Management Accounting Functions

The primary functions of management accounting are outlined as:

• Planning: Defining objectives and developing strategies to achieve them.
• Control: Monitoring performance against plans and taking corrective actions.
• Decision-making: Utilizing information to make informed choices among alternatives.

3. Cost Classification and Behavior

Understanding cost behavior is crucial for effective management decision-making. The text categorizes costs into various types, including:

• Fixed Costs: Costs that remain relatively constant regardless of production volume.

“A fixed cost is a cost which tends to be unaffected by increases or decreases in the volume of output.”

• Variable Costs: Costs that fluctuate directly with production volume.
• Step Costs: Costs that remain fixed within specific activity ranges but change abruptly at certain thresholds.

“Step costs are tyre replacement costs, which are $300 at the end of every 30,000 miles.”

The text provides graphical representations of cost behavior patterns and illustrates the calculation of cost per unit at varying production levels.

4. Inventory Management

Effective inventory management aims to minimize costs while ensuring sufficient stock to meet demand. The document covers:

• Inventory Coding Systems: Different coding methods like group classification, faceted, significant digit, and hierarchical codes are presented, emphasizing efficient inventory tracking and classification.
• Economic Order Quantity (EOQ): The optimal order size that minimizes total inventory costs, including ordering and holding costs, is explained through detailed examples.
• Bulk Discounts: The text explores the decision-making process involved in considering bulk discounts, weighing potential savings against increased holding costs.
• Inventory Valuation Methods: Different methods for valuing inventory, such as FIFO (First-In, First-Out), LIFO (Last-In, First-Out), and weighted average, are discussed with illustrative examples.

5. Overhead Allocation and Absorption

The document explains the allocation and absorption of overheads:

• Overhead Allocation: Assigning overhead costs to specific cost centers.
• Overhead Apportionment: Distributing service department costs to production departments.
• Overhead Absorption: Applying overhead costs to products based on predetermined absorption rates.

6. Marginal Costing

The concept of marginal costing, where only variable costs are considered in product costing, is contrasted with absorption costing. The document explores:

• Marginal Costing Principles: Fixed costs are treated as period costs, and inventory valuation includes only variable costs.
• Reconciling Profits: Differences in profit figures between marginal and absorption costing are explained.
• Advantages and Disadvantages: The pros and cons of both costing methods are presented.

7. Service Costing

The text covers service costing in various contexts:

• Cost Units: Identifying appropriate cost units for different services, including transport, education, and healthcare.
• Internal Service Situations: Analyzing the costs of internal services like canteen, maintenance, and IT support to evaluate efficiency and potential for outsourcing.
• Service Industry Situations: Applying service costing concepts to distribution and other service industry activities.

8. Data Presentation and Interpretation

Effective communication of information is emphasized through:

• Tabulation: Guidelines for presenting data in tabular form, including clear titles, labeled columns, and sub-totals for enhanced readability.
• Charts: Utilizing charts like scatter diagrams to visually analyze the relationship between variables.
• Trend Analysis: Applying techniques like moving averages and regression analysis to identify trends and make forecasts.

9. Performance Measurement

The document explores the importance of performance measurement in the planning and control cycle:

• Goals and Objectives: Defining SMART (Specific, Measurable, Achievable, Relevant, Time-bound) goals and objectives that cascade down from the mission statement to provide targets for the budgeting process.
• Financial Ratios: Using ratios like profitability, liquidity, and activity ratios to analyze financial performance.
• Responsibility Centers: Assigning responsibility for specific activities and resources to individual managers or departments.
• Performance Evaluation: Comparing actual results with targets, budgets, or standards to identify variances and take corrective actions.

10. Cost Reduction

Strategies for cost reduction are discussed, including:

• Planning for Cost Reduction: Setting specific cost reduction objectives and developing action plans.
• Improving Efficiency: Identifying and eliminating waste in processes.
• Material Cost Reduction: Negotiating better prices, exploring alternative materials, and optimizing inventory management.
• Labor Cost Reduction: Improving productivity through training, process redesign, and automation.

Conclusion:

This management accounting text provides a comprehensive overview of essential concepts and techniques, emphasizing the importance of understanding cost behavior, effectively managing inventory, allocating overheads accurately, and utilizing data analysis and performance measurement for informed decision-making and continuous improvement.

FAQ: Management Accounting Concepts and Techniques

1. What is the purpose of information in management accounting?

Information in management accounting is vital for planning, control, and decision-making. It helps organizations set objectives, monitor progress, identify variances, and make informed choices.

The value of information is assessed by comparing the benefits it provides (tangible and intangible) against the cost of obtaining it. Information should be relevant, timely, and accurate to be truly useful.

2. How do fixed and variable costs behave with changes in output?

Fixed costs remain relatively constant regardless of output volume, at least within a specific range. Examples include rent and salaries.

Variable costs, on the other hand, change proportionally with output volume. Examples include direct materials and direct labor.

3. What are the different methods of inventory valuation and how do they impact profit calculations?

Common methods include:

• FIFO (First-In, First-Out): Assumes the oldest inventory is sold first.
• LIFO (Last-In, First-Out): Assumes the newest inventory is sold first.
• Weighted Average: Averages the cost of all inventory.

In periods of inflation, FIFO generally results in lower cost of goods sold and higher profits. LIFO, in contrast, results in higher cost of goods sold and lower profits. The weighted average method produces a result between FIFO and LIFO.

4. How are overheads allocated and absorbed in a manufacturing environment?

Overhead allocation assigns costs directly to specific departments. Overhead absorption applies these costs to products or services based on a predetermined rate, such as per labor hour or machine hour.

Over-absorption occurs when absorbed overhead exceeds actual overhead. Under-absorption occurs when absorbed overhead is less than actual overhead. These differences need to be adjusted in the cost of goods sold.

5. What are the key differences between absorption costing and marginal costing?

Absorption costing includes both fixed and variable production costs in the cost of a unit, while marginal costing only includes variable costs. This difference leads to varying profit figures under each method, especially when inventory levels fluctuate.

6. How can cost-volume-profit analysis (CVP) be used to aid decision-making?

CVP analysis helps businesses understand the relationship between costs, volume, and profit. It’s useful for:

• Break-even analysis: Determining the sales level required to cover all costs.
• Profit planning: Projecting profits at different sales levels and cost structures.
• Sensitivity analysis: Assessing the impact of changes in variables like selling price or variable costs on profit.

7. What are the limitations of using regression analysis for forecasting?

• Assumption of linearity: It presumes a linear relationship between variables, which might not always hold true.
• Reliance on historical data: Past trends may not accurately predict future events.
• Impact of outliers: Extreme data points can skew the results and reduce accuracy.
• External factors: It often fails to account for unforeseen external events like economic shifts.

8. What are the steps involved in a cost reduction program?

1. Planning: Establish clear objectives and identify areas for potential cost savings.
2. Investigation: Analyze existing cost structures and identify inefficient processes.
3. Action: Implement specific cost reduction measures, focusing on areas like materials, labor, and overheads.
4. Monitoring: Track progress, measure results, and make adjustments as needed.

It is crucial to ensure that cost reduction efforts do not compromise product quality or long-term sustainability.

Management Accounting Timeline

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Management Accounting Systems

Management accounting is a system that provides information specifically for the use of managers within an organization. [1] This is in contrast to financial accounting systems, which ensure that the assets and liabilities of a business are properly accounted for, and provide information about profits to shareholders and other interested parties. [1] Though both systems use the same data, financial accounts are prepared for individuals external to an organization while management accounts are prepared for internal managers. [2] As such, the data is analyzed differently and there are no strict rules governing the way management accounts are prepared or presented. [3] Each organization can devise its own management accounting system and reports. [3] While most financial accounting information is monetary in nature, management accounts can incorporate non-monetary measures such as tons of aluminum produced or miles traveled by salespeople. [4] Financial accounts present an essentially historic picture of past operations, but management accounts can be both an historical record and a future planning tool. [4]

Management accounting systems allow managers to record, plan, and control the organization’s activities. [5] This information is also used to aid in decision-making. [6] According to Anthony, a leading writer on organizational control, management activities can be divided into three types: [7]

• Strategic planning: “the process of deciding on objectives of the organization, on changes in these objectives, on the resources used to attain these objectives, and on the policies that are to govern the acquisition, use and disposition of these resources” [7]
• Tactical (or management) control: “the process by which managers assure that resources are obtained and used effectively and efficiently in the accomplishment of the organization’s objectives” [8]
• Operational control: “the process of assuring that specific tasks are carried out effectively and efficiently” [8]

Good management information is important for effective planning, control, and decision-making. [9, 10] Good information should be: [10]

• Relevant
• Complete
• Accurate
• Clear
• Confidence-inspiring
• Appropriately communicated
• Manageable in volume
• Timely
• Cost less than the benefits it provides

Information within an organization can be analyzed into three levels that correspond with Anthony’s hierarchy: strategic, tactical, and operational. [11] Strategic information, used by senior managers to plan objectives and assess whether those objectives are being met, has the following features: [12]

• Derived from internal and external sources
• Summarized at a high level
• Relevant to the long term
• Deals with the whole organization
• Often prepared on an ad hoc basis
• Both quantitative and qualitative
• Cannot provide complete certainty

Tactical information is used by middle management to decide how resources should be employed and to monitor how they are being and have been employed. [13] The following are features of tactical information: [13]

• Primarily generated internally
• Summarized at a lower level
• Relevant to the short and medium term
• Describes or analyses activities or departments
• Prepared routinely and regularly
• Based on quantitative measures

Operational information is used by “front-line” managers to ensure that specific tasks are properly planned and carried out. [14] It has the following features: [1]

• Derived almost entirely from internal sources
• Highly detailed
• Relates to the immediate term and is prepared constantly
• Task-specific and largely quantitative

Cost accounting is part of management accounting. [15] It provides a bank of data for the management accountant to use. [15] Cost accounting is the gathering of cost information and its attachment to cost objects, the establishment of budgets, standard costs and actual costs of operations, processes, activities or products, and the analysis of variances, profitability or the social use of funds. [16] Management accounting is the application of the principles of accounting and financial management to create, protect, preserve and increase value for shareholders of for-profit and not-for-profit enterprises. [17] Cost accounting information is generally unsuitable for decision making because it does not incorporate uncertainty. [18]

Cost Accounting: Principles and Limitations

Cost accounting is a subset of management accounting that provides a bank of data for the management accountant to use [1]. Cost accounting is the process of gathering cost information and attaching it to cost objects. It also includes establishing budgets and standard costs, determining actual costs of operations, processes, activities or products, and analyzing variances, profitability, or the social use of funds [2].

The aims of cost accounting are to determine:

• The cost of goods produced or services provided [3]
• The cost of a department or work section [3]
• Current revenues [3]
• The profitability of a product, a service, a department, or the whole organization [3]
• Selling prices [4]
• The value of inventories of goods [4]
• Future costs of goods and services [4]
• The differences between actual costs and budgeted costs [4]
• The type of information management needs to make sound decisions about profits and costs [5]

Cost accounting systems are most fully developed in manufacturing operations but are also used by service industries, government departments, and welfare activities [5]. Within a manufacturing organization, the system should be applied to manufacturing as well as administration, selling and distribution, research and development, and all other departments [5].

While cost accounting systems are useful for recording and analyzing cost data, the information they provide is generally unsuitable for decision making. This is because the information provided by conventional cost accounts does not incorporate uncertainty [6, 7]. All decision-making is concerned with the future and therefore subject to some degree of uncertainty surrounding the possible outcomes of a decision [6].

Performance Measurement: Financial and Non-Financial Indicators

Performance measurement is a vital part of the control process in which actual performance is compared with a standard or target that was established earlier. [1] For machines, processes, departments, and individuals, targets are laid down by the budgetary process and published in the budget itself. [1] At a higher level, when attempting to control an entire organization, a more complex process is required. [1] For example, in order to be successful, organizations have to perform well across a range of key processes. [2] Therefore, critical success factors (CSFs) and key performance indicators (KPIs) should focus on key operational processes and not solely on financial performance. [2]

Performance measurement aims to establish how well something or somebody is doing in relation to a planned activity. [3] The ‘thing’ may be a machine, a factory, or an entire organization. [3] The ‘somebody’ may be an individual employee, a manager, or a group of people. [1]

Performance measures can be divided into two groups: financial and non-financial. [4] Financial performance measures include profit, revenue, costs, share price, and cash flow. [4] Non-financial performance measures include product quality, reliability, and customer satisfaction. [4] Performance measures can also be quantitative (capable of being expressed in numbers) or qualitative (not numeric). [5]

Financial performance is fundamental to businesses. [6] However, the use of non-financial performance measures has increased in recent years. [7] Non-financial performance measures are considered to be leading indicators of financial performance, while financial performance measures are considered lagging indicators. [7] For example, if customer satisfaction is low, this could imply a future fall in profits due to decreased sales demand. [7] The non-financial measure of poor customer satisfaction has given an indication that the financial measure of future sales may change. [7]

Changes in cost structures, the competitive environment, and the manufacturing environment have led to an increased use of non-financial indicators (NFIs). [8, 9]

• Changes in cost structures: Modern technology requires massive investment, and product life cycles have become shorter. [10] A greater proportion of costs are sunk, and a large proportion of costs are planned, engineered, or designed into a product/service before production/delivery. [10] At the time the product/service is produced/delivered, it is therefore too late to control costs. [10]
• Changes in the competitive environment: Financial measures do not convey the full picture of a company’s performance, especially in a modern business environment. [11] For example, companies today compete in terms of product quality, delivery, reliability, after-sales service, and customer satisfaction–none of which are directly measured by the traditional responsibility accounting system. [11]
• Changes in the manufacturing environment: New manufacturing techniques and technologies focus on minimizing throughput times, inventory levels, and set-up times. [12] However, managers can reduce the costs for which they are responsible by increasing inventory levels through maximizing output. [12] If a performance measurement system focuses principally on costs, managers may concentrate on cost reduction and ignore other important strategic manufacturing goals. [12]

Ratios are also a useful performance measurement technique because they can be easily compared. [13] Percentages are also frequently used to express one number as a proportion of another and give meaning to absolute numbers. [14] For example, market share, capacity levels, wastage, and staff turnover are often expressed using percentages. [14]

Economy, efficiency, and effectiveness are all generally desirable features of organizational performance. [14]

• Economy lies in operating at minimum cost. [14] However, an over-parsimonious approach will reduce effectiveness. [14]
• Effectiveness is achieving established objectives. [14] There are usually several ways to achieve objectives, some more costly than others. [14]
• Efficiency consists of attaining desired results at minimum cost. [15] It therefore combines effectiveness with economy. [15]

The assessment of economy, efficiency, and effectiveness should be part of the normal management process of any organization. [16]

Flexible Budgeting for Management Control

Budgetary control is the practice of establishing budgets that identify areas of responsibility for individual managers (e.g., production, purchasing) and regularly comparing actual results against the expected results. The differences between actual results and expected results are called variances, which are used to provide a guideline for control action by individual managers [1]. Individual managers are responsible for investigating differences between budgeted and actual results. They are then expected to take corrective action or amend the plan based on actual events [2].

The wrong approach to budgetary control is to compare actual results against a fixed budget. A fixed budget is a budget that is designed to remain unchanged regardless of the volume of output or sales achieved [3]. Flexible budgets should be used for budgetary control because they recognize different cost behavior patterns and are designed to change as volumes of output change [3]. Flexible budgets are normally prepared on a marginal cost basis [3]. The correct approach to budgetary control is:

• Identify fixed and variable costs.
• Produce a flexible budget using marginal costing techniques [4].

Flexible budgets assist management control by providing more dynamic and comparable information. Using fixed budgets for control purposes can result in massive variances because it is very unlikely that the forecast volume will be matched [5].

There are several advantages to using flexible budgets [6, 7]:

• Prospective Advantages:Flexible budgets allow management to know in advance the costs of layoffs, idle time, etc. if output falls short of budget.
• Management can use flexible budgets to decide whether it would be possible to find alternative uses for spare capacity if output falls short of budget.
• Flexible budgets can estimate the cost of overtime, subcontracting work, or extra machine hire if sales volume exceeds the fixed budget. This allows management to determine if there is a limiting factor that would prevent high volumes of output and sales from being achieved.
• Retrospective Advantages:Flexible budgets can be used to compare actual results achieved with what the results should have been under the circumstances.
• They provide a measure of performance by providing a yardstick (budget or standard) against which actual performance can be measured.
• For useful control information, flexible budgets allow the comparison of actual results at the actual level of activity achieved against the results that should have been expected at this level of activity.

When preparing flexible budgets, there are several practical considerations [8]:

• Separating costs into their fixed and variable elements is not always straightforward.
• Fixed costs may behave in a step-line fashion as activity levels increase or decrease.
• The assumptions on which the original fixed budget was based must be taken into account. Such assumptions might include the constraint posed by limiting factors, the rate of inflation, judgments about future uncertainty, and the demand for the organization’s products.

Budgeting is a key syllabus area and you should be able to explain why budget variances should be based upon flexed budget figures [9].

Strategic Cost Reduction

Cost reduction is a planned and positive approach to reducing expenditure. It should not be confused with cost control, which is concerned with regulating the costs of operating a business and keeping costs within acceptable limits. [1] Cost control aims to reduce costs to budget or standard level, while cost reduction aims to reduce costs to below budget or standard levels. [2]

There are two basic approaches to cost reduction:

• Crash programs to cut spending levels are immediate programs to reduce spending that may be implemented when an organization is having problems with its profitability or cash flow. [2] However, the absence of careful planning might make such crash programs look like panic measures. [2]
• Planned programs to reduce costs involve continual assessments of the organization’s products, production methods, services, and internal administration systems to identify opportunities for cost reduction. [3]

Cost reduction exercises should preferably be continuous and long-term. [3] Cost reduction does not happen on its own; managers must make positive decisions to reduce costs. [4]

There are a number of difficulties that can arise when introducing cost reduction programs, such as resistance from employees and limitations in the scope of the program. [5] Cost reduction campaigns are often introduced as rushed, desperate measures, rather than as carefully organized, well-thought-out exercises. [5]

The scope of a cost reduction campaign should embrace the activities of the entire company. [6] In the short term, only variable costs are susceptible to cost reduction efforts. [6] In the long term, most costs can be either reduced or avoided, including fixed costs. [7]

One way of reducing costs is to improve the efficiency of materials usage, the productivity of labor, or the efficiency of machinery or other equipment. [7] This can be done by reducing levels of wastage, where wastage is currently high. [8] It is also important to improve labor productivity by implementing initiatives such as pay incentives and work study programs. [9] Once improved standards of efficiency have been set as a means of reducing costs, it is important that cost control be applied by management. [10]

Another way to reduce costs is to reduce material costs. [10] This can be achieved by obtaining lower prices for purchases of materials and components, improving stores control, and using alternative materials. [10]

Labor costs can also be reduced through measures such as work study and organization and methods (O&M) programs. [11] These techniques can help to raise production efficiency by reorganizing work and identifying more efficient methods. [12]

Finance costs can offer some scope for savings by, for example, taking advantage of discounts for early payment from suppliers. [13] Rationalization is another form of cost reduction that involves eliminating unnecessary duplication and concentrating resources to reduce costs through greater efficiency. [14]

Finally, expense items, other than materials and labor, may be a significant part of total costs, and these too should be controlled. [15]

It is important to note that information from outside the sources provided suggests that there are additional techniques for cost reduction beyond those listed in the sources.

By Amjad Izhar
Contact: amjad.izhar@gmail.com
https://amjadizhar.blog

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