Unit 2: Managing Financial Resources and Decisions - Budgeting decisions
Analysis and monitoring of cash and other budgets
Cost Control: cost reduction; value enhancement: analysis by cost centre
Needs
- Financial Information
- revenue
- costs
- profit
- revenue
- Non-Financial Information
- units of output
- number of employees
- items in stock
- units of output
Cost Reduction
- crash programmes to cut spending levels
- problems with profitability or cash flow
- planned programmes to reduce costs
- continual assessment of costs and efficiency savings
Difficulties
- threat perception by employees
- erodes confidence in established systems for estimating material usage and labour efficiency
- rushed and desperate
- may have no effect on whole organisation
Cost Reduction
Cost reduction makes the assumptions that:
- costs can be saved
- unnecessary costs can be identified
- proposals can be agreed
- proposals will work and result in cost reduction
Methodology
- improved material usage
- minimise wastage
- use cheaper materials
- labour productivity
- change method of working
- substitute
- machinery
- cheap labour
- equipment usage
- preventative action
- 24 hour working
- maximise equipment usage
Value Analysis
Value Analysis is a planned scientific approach to cost reduction which reviews the material composition of a product and production design so that modifications and improvements can be made which do not reduce the value of the product to the customer or user.
Aspects of Value
- Cost Value is the cost of producing and selling an item
- Exchange Value is the market value of the product
- Use Value is what it does, purpose it fulfils, provision of same value product but lower cost
- Esteem Value is the prestige a customer attaches to the product
Stages of Value Analysis
- select a product
- obtain information about it
- evaluate the product
- consider alternatives
- select least-cost alternative
- make a recommendation
- implement recommendation
- after a time, evaluate outcome and measure cost savings
Cost Centres
A cost centre is a production or service location, function, activity or item of equipment for which costs are accumulated.