Organizational Cost Pressure and Restructuring

 

Organizations in the today world continuously looking for and working on, to reduce its operational, financial, labors & plant & machinery cost. Pressure from competitor and global firms have forced many firms to close facilities, use outsourcing and adopt new method work practice to increase productivity to decrease labours cost in order to become more competitive. Organizational cost depends on its nature of business. To understand better about organization costing, there is given below cost classifications.

General cost classification

1. Manufacturing and Non-Manufacturing cost

 Manufacturing cost: 

Direct material is integral part of finished product.

Indirect Material is associated with finished product like solder for electric equipment.

Direct labours are who directly involves in production.

Indirect labours are like security guard and watchman at site.

Manufacturing overhead is the third element of manufacturing cost like indirect labours & indirect materials for repairing production equipment, lighting, depreciation, property tax etc.

Non- manufacturing cost- Administrative cost and selling cost

Administrative cost include all cost associated with general management of an organization rather than with manufacturing and selling. For example – Executive compensation, managers salary, staff salary, stationery more etc.

Selling cost includes all the cost that are incurred to secure customer orders and get finished product to customers.

2. Product cost and Period cost: product cost is associated with acquiring or making a product like, direct material, direct labour and manufacturing overhead. While all selling and administrative expenses to be considered as period cost.

3. Prime cost and Conversion cost: prime cost is the sum of direct material and direct     labours while conversion cost is sum of direct labour cost and manufacturing overhead.

4. Direct cost and Indirect cost: Direct cost is a cost that can be easily and conveniently traced a specified cost object. While indirect cost cannot be easily and conveniently traced cost object.

5. Fixed cost and Variable cost; A fixed cost is a cost that remains constant in total subject to changes in activity, while variable cost is that varies in total in other words we can say that it can be increased or decreased as proportion to changes in activity.

Organizations calculated the cost and do the cost analysis to find head to costing and try to reduce the cost as much as possible. Organization cost can be view in financial statement. End of every financial year companies prepare the final account. There are two statements in a final account. 

Profit and loss account(Income Statement)

Balance Sheet(Position statement)

Profit and loss account show all expenses, income and gains during financial year. Balance sheet show all the assets and liabilities of the organizations.

Organizational cost.

Prime cost (Indirect material, Indirect labours, factory rent, power and fuel, factory lighting, factory water supply, factory insurance, factory stationary, factory cleaning , Wages and salary and other factory expenses.

Works Cost(Office rent, office lighting, office stationery, Salary wages, Employees incentive, training and development, Depreciation and repairing of office furniture, telephone & postage charges, office cleaning, Audit fees, office insurance, Consultant fees, Application(ERP. HRM) charges. Many More etc.

Benefit to Directors and CEO.

Employees benefits( Security benefit-Workers compensation, unemployment compensation, Retirement benefit-Pension plans, Provident fund, Heath care  benefit- Medical care, Financial benefit- Life insurance, Educational assistance, Time off benefit- Lunch and  rest break, Holiday and vacation, Family leaves, medical and sick leave, Paid time off.

Cost of production of good sold (Salesman salary, salesman commission, showroom expenses, showroom rent, Advertisement, sales office rent, travelling expenses, carriage outward, warehouse rent, many more etc.

Below reasons increase additional cost for organizations which lead to organizational cost pressure.

Increasing medical compensation due to worker illness.

Decrease in production/ Unit labor cost

More rework in produced good or more wastage in production

More Accident/Incident or increased LTI and increased medical compensation

More layer of managers & higher paid to managers

Idle manpower

Staff/workers more absenteeism.

No classification of worker as trade wise.

More wastage of material

No proper planning of work leads to wastage of manpower, hence this way labour cost will increase.

Project delay

Remedial Actions to minimize the organizational cost pressure.

Every organization always try to reduce the cost and increase the productivity and always be competitive in the market. When company faces additional cost increases the n take the actions to minimize the cost. At first company check out the reason for increased cost. Mostly when company has to reduce the cost then first of all company focus on employees benefit and reduce it. For second Option Company goes for salary reduction and manpower power reduce or send employees on long leave and terminating the manpower.

To reduce the cost companies focus its processor and system, company alter it or change or adopt new system or processor for reduce the costing.

Company those build different –different product use Job order costing. Through this, it can be found actual cost for product.

ABC (Activity based Costing) it is a tool to aid decision making. Activity based costing is designed to for internal decision making, it is differ from traditional costing.

Activity based costing is divided in five levels

Unit Level Activity

Batch Level Activity

Customer level Activity

Product Level Activity

Organization Sustaining Activity.