CHAPTER-1

INTRODUCTION

The survival triplet today for any company is how to manage its product / service Cost, quality
and performance. The customers are continuously demanding high quality and better
performance products/services and at the same time, they want the prices to fall. The
shareholders are also demanding a required rate of return on their investment with the company.
Thus, cost has become a residual.

The challenge is being able to manufacture or provide service within the stipulated cost
framework. Thus, cost management has to be an ongoing continuous improvement
programmed. Today the market leaders are even pursuing cost-reduction as a strategic
Imperative.

They want to stay ahead of the market by continuously widening the gap between their cost
and that of their competitors and re-deploy the resources for profitable growth. The paper will
focus on impact of cost control and cost reduction techniques in present scenario.

A business enterprise must survive, grow, and prosper. Cost Control and Cost Reduction both
are the activities necessary for ensuring that these objectives are fulfilled. With the
liberalization of the Indian Economy and Globalization, there is now a cut throat competition
from various concerns of the world.

As a result there is now a race to secure a place for survival. This has increased the importance
of Cost Control and Cost Reduction. Hence it is required to study the different tools and
techniques used for the Cost Control and Cost Reduction. For the same we need to start with
understanding deeply the concept of cost.

Once we understand the meaning of cost, its controllability, main areas where cost arises, then
we can think of how to control or reduce the cost.

We can classify the cost according to their nature, behavior then we can easily know the cost
which can be controlled or reduced. Here more emphasis is on the Controllable and Non-
Controllable cost, because this classification of the costs helps us understanding what and how
we can control.
If the cost can be controlled then what steps should be taken for controlling purpose; if cannot
be controlled, what should be done. It is totally depends upon the managerial decisions, and it
is the activity of Management Accounting. With the given type of industry the cost element
varies for the industry.

Cotton world Pvt. Ltd. is a manufacturing industry engaged in producing “Kids Wear”.
Manufacturing industries are engaged in transforming raw material into finished product with
the help of machines and manpower.

The contribution of material cost in the total cost is more than 70%. Hence the main focus is
on raw material for this industry. Therefore, more emphasis should be given to the material
cost and need to find out the possible outcomes to control & reduce the material cost.

1.1 INTRODUCTIONS TO COST

Cost is a branch of accounting and has been developed due to limitations of financial reporting.
Cost plays an important role in an organization. Whatever, the goods manufactured in a
business that incurs a cost. It is a basis for fixing a price of a products and the price includes
cost and profit.

The cost incurs from a process of manufacturing up to the finishing a product. In each and
every stage or process the cost will be incurred. The different cost incurred in different stages.

The main aim of an organization is to minimize the cost and maximize the profit. The small
scale or large scale organization, whatever it is, their main intention is to reduces, the cost.

Different types of costs incurred while manufacturing a product that is absorption cost,
prevention cost, direct cost and indirect cost etc,. Therefore in every organization, they as
much as possible avoiding unnecessary expenditures while manufacture a product.

1.2 MEANING AND DEFINITION OF COST:

MEANING:

Cost is an amount of expenditure, actual or notional, relating to a specific thing or activity. The
specific thing or activity may be a product, job, service, process or any other activity. Cost
means expenditure incurred for manufacturing a product.
In accounting, the term cost refers to the monetary value of expenditures for raw materials,
equipment, supplies, services, Labour, products, etc. It is an amount that is recorded as an
expense in bookkeeping records.

DEFINITION:

ICMA terminology defines cost as resource sacrificed or forgone to achieve a specific

objective. A cost (such as direct materials or advertising) is usually measured as monitory
amount that must be acquire, goods or service. An actual cost is the cost incurred, as
distinguished from a budgeted cost.
In business and accounting, cost is the monetary value that a company has spent in order to
produce something. Cost denotes the amount of money that a company spent on the creation
or production of goods or services. It does not include the mark-up for profit.
From a seller’s point of view, cost is the amount of money that is spent to produce a good or
a product. If a seller sold his products at the production price, he would break even, meaning
that he would not lose money on his sales.
From a buyer’s point of view the cost of a product can be called the price. This is the amount
that the seller charges for a product, and it includes both the production cost and the mark-up
cost, which is added by the seller in order for him to make a profit.

1.3 COSTING:
Costing is a technique consisting of principles and rules, which govern the procedure of
ascertaining the cost of products and services.
Costing is a technique and process of ascertaining cost. The procedure of costing includes
routine of ascertaining costs by historical or conventional costing, standard costing or marginal
costing.

1.4 COST ACCOUNTING:

Cost accounting is the process of classifying and recording of the expenditure in a systematic
manner with the intention of ascertaining the cost of a cost center with the intention of
controlling the cost. Cost accounting is the specialized branch of accounting, which involves
the classification, accumulation, assignment and control of cost. The use of the cost accounting
concepts and practices is required for a company to be successful.
The information concerning the business enterprise is helpful to management to control in a
general way the major functions of business vise, finance, administration, production and
distribution but details regarding operating efficiency of this division are lacking.

1.5 SOURCES OF COST SAVINGS:

1. COST CONTROL

2. COST REDUCTION

COST CONTROL:

Cost control can be defined as the comparative analysis of actual cost with appropriate
standards or budgets to facilitate performance evaluation and formulation of corrective
measures.

It aims at accomplishing conformity between actual result and standards or budgets. Cost
control is keeping expenditures within prescribed limits.

Cost control is the practice of identifying and reducing business expenses to increase profits,
and it starts with the budgeting process.

A business owner compares actual results to the budget expectations, and if actual costs are
higher than planned, management takes action. As an example, a company can obtain bids from
other vendors that provide the same product or service, which can lower costs.

Cost control is an important factor for maintaining and growing profitability. Outsourcing is
used frequently to control costs because many businesses find it cheaper to pay a third party to
perform a task than to take on the work within the company. Corporate payroll, for example,
is often outsourced because payroll tax laws change constantly, and employee turnover requires
frequent changes to payroll records. A payroll company can calculate the net pay and tax
withholdings for each worker, which saves the employer time and expense.

Factoring in Target Net Income Controlling costs is one way to plan for a target net income,
which is computed using the formula: (Sales - fixed costs - variable costs = target net income).
Assume, for example, a retail shop wants to earn Rs.10,000 in net income on Rs.100,000 in
sales for the month.
To reach the goal, management reviews both fixed and variable costs, and attempts to reduce
the expenses. Inventory is a variable cost that can be reduced by finding other suppliers to offer
more competitive prices.

It may take longer to reduce fixed costs, such as a lease payment, because these costs are
usually fixed in a contract. Reaching a target net income is particularly important for a public
company since investors purchase the issuer’s common stock based on the expectation of
earnings growth.

Cost control, also known as cost management or cost containment, is a broad set of cost
accounting methods and management techniques with the common goal of improving business
cost-efficiency by reducing costs, or at least restricting their rate of growth.

Businesses use cost control methods to monitor, evaluate, and ultimately enhance the efficiency
of specific areas, such as departments, divisions, or product lines, within their operations.

1.6 COST CONTROL APPLICATIONS A complex business requires frequent

information about operations in order to plan for the future, to control present activities, and to
evaluate the past performance of managers, employees, and related business segments.

To be successful, management guides the activities of its people in the operations of the
business according to pre-established goals and objectives. Management's guidance takes two
forms of control:

(1) The management and supervision of behavior, and

(2) The evaluation of performance.

Behavioral management deals with the attitudes and actions of employees. While employee
behavior ultimately impacts on success, behavioral management involves certain issues and
assumptions not applicable to accounting's control function.

On the other hand, performance evaluation measures outcomes of employee's actions by

comparing the actual results of business outcomes to predetermined standards of success.

In this way management identifies the strengths it needs to maximize, and the weaknesses it
seeks to rectify. This process of evaluation and remedy is called cost control.
Cost control is a continuous process that begins with the proposed annual budget. The budget
helps:

(1) To organize and coordinate production, and the selling, distribution, service, and
administrative functions; and

(2) To take maximum advantage of available opportunities. As the fiscal year progresses,
management compares actual results with those projected in the budget and incorporates into
the new plan the lessons learned from its evaluation of current operations.
Control refers to management's effort to influence the actions of individuals who are
responsible for performing tasks, incurring costs, and generating revenues.

Management is a two-phased process: planning refers to the way that management plans and
wants people to perform, while control refers to the procedures employed to determine whether
actual performance complies with these plans. Through the budget process and accounting
control, management establishes overall company objectives, defines the centers of
responsibility, and determines specific objectives for each responsibility center, and designs
procedures and standards for reporting and evaluation.

1.7 CONTROL REPORTS

Control reports are informational reports that tell management about an entity's activities. A
management request control reports only for internal use, and, therefore, directs the accounting
department to develop tailor-made reporting formats.

Accounting provides management with a format designed to detect variations that need
investigating. In addition, management also refers to conventional reports such as the income
statement and funds statement, and external reports on the general economy and the specific
industry.

STRATEGIC COST CONTROLS

Management relies on such accounting data and analysis to choose from several cost control
alternatives, or management may direct accounting to prepare reports specifically for
evaluating such options. As the Chainsaw Al episode indicated, all costs may not be viable
targets for cost-cutting measures.
For instance, in mass layoffs, the company may lose a significant share of its man capital by
releasing veteran employees who are experts in their fields, not to mention by creating a decline
in morale among those who remain. Thus management must identify which costs have strategic
significance and which do not.
One trend in cost control has been toward narrowing the focus of corporate responsibility
centers, and thereby shifting some of the cost control function to day-to-day managers who
have the most knowledge of and influence over how their areas spend money. This practice is
intended to promote bottom-up cost control measures and encourage a widespread consensus
over cost management strategies.

1.8 ESSENTIAL FEATURES OF COST CONTROL:

The main essential features of cost control are:
1. Cost accounting:
The company should have an effective cost accounting system, which will instruct the
necessary information to control the costs in organization.

2. Cost planning:
The company should aim to achieve cost targets. That is, the company should have the proper
planning and budgetary system. The targets are set after taking into consideration of relevant
factors.

3. Cost reporting:
No company can function unless there is a perfect monitoring. Costs can be controlled only
when there is proper management reporting system.

4. Corrective actions:
On the basis of reported variances, the management takes corrective action. This will involve
identifying the cause of variances and reasons. It is necessary the management may review the
standard of company.

1.9 ADVANTAGES OF COST CONTROL:

The main advantages of cost control are:
1. Better and economic use of men, machines and money.
2. Optimum level of productivity and quality.
3. Increases profitability position of the organization.
4. Reasonable price for the customers.
5. Better standing in competitive market.
6. Increased exports more foreign earnings.
7. Optimum use of return on capital employed and return on shareholders’ funds.
8. Creates confidence in investors.
9. Better chance for expansion.
10. Continued employment for the workers.

IMPORTANCE OF COST CONTROL

 It enables the firm to achieve its defined objectives.
 It leads to proper utilization of the firm's resources
 It ensures the survival and growth of a firm by preserving its competitive capability

1.9 TECHNIQUES OF COST CONTROL:

Among the techniques which have become popular for insuring cost control are:

1) Material control:
The regulation of the functions of an organization relating to the procurement, storage and
usage of material in such a way as to maintain an even flow of production without excessive
investment in material stock.

2) Labour control:
Like material control, cost accountant has also genuine interest to control over the Labour
cost, but he cannot control labor like material control. Both decreasing the number of
labourers and wages will increase the cost of labourers because less no. of worker with
fewer wages will produce less output and its cost will be more.

3) Overhead control:
Overhead cost control is a method to control the fixed costs required to operate a business.
Fixed costs don’t change regardless of the volume of products or services sold and
produced. Examples of fixed costs include building rental and general and administrative
expenses. The key functions of overhead cost control included planning costs, allocating
those costs to specific areas of a business and monitoring overhead costs so that they are
controlled.

4) Budgetary control:
The establishment of the budgets relating to the responsibility of executives to the
requirement of the policy and the continuous comparison of actual with the budgeted result
either to secure by individual action the objectives of policy or to provide a firm basis for
its revision.

5) Standard costing:
It is the preparation of standard cost and applying them to measure the variations from
actual costs and analyzing the causes of variations with a view to maintain maximum
efficiency in production. It is a technique which uses standards for costs and revenues for
the purpose of control through variance analysis.

6) Responsibility accounting:
It is not yet another branch of accounting like financial or cost accounting. It is only a
control system of accounting and reporting. The organization structure is split into a
number of sub-units.

7) Productivity accounting ratios:

Productivity ratio is the ratio of outputs to inputs. The closer the ratio is to 1.0, the higher
the productivity; the closer the ratio is to 0.0, the lower the productivity.
Productivity is important because it relates to an organizations ability to compete, and to

1.10 COSTING SYSTEM AND COST CONTROL:

Cost control and costing system are synonymous with common characteristics of
organization’s control. Plans and structures which has three phases i.e. the setting; the operation
and feedback phases:
 The setting phase: in setting a control system, establishment of standards is a criterion for
performance and can be stated in quantitative terms: in units of products, unit of service,
man hour, speed, volume or expressed in value such as volume of sales, cost of capital
expenditure or profits etc;
 The operation phase: this is the part of the organization in which the prevailing technology
is applied to raw material inputs which are converted into finished output which the
organization provides as a service or a product.
 The feedback phase: this phase provides information for decision that adjusts the system.
As plans are implemented the system is monitored in order to ascertain whether or not
performance is on the right target and whether objectives are being met.

1.11 CONDITIONS FOR EFFECTIVE COST CONTROL

Cost control system to be adequately administered, the following must be taken into
consideration:
Data collection
Data Analysis
Budget and control administration

1.12 STEPS OF COST CONTROL:

Organizing a system of cost control and making it works successfully requires the
following 5 steps:
1. Setup the targets
2. Measure the actual
3. Compare the actual with targets
4. Localize the cause for the variation between the targets and the actual.
5. Take such actions as necessary to eliminate these variations.

1.13 COST REDUCTION:

Cost reduction may be defined as an attempt to bring costs down. Cost reduction implies real
and permanent reduction in the unit of cost of goods manufactured or service rendered without
impairing their (products or goods) suitability for the use intended.
It is the reducing of cost in order to increase the profits and the strategies to reduce the cost

may vary from product and services of the company using independent contractors instead of

hiring employees is one of the efficient cost reduction techniques that businesses can employ.

Here, costs are reduced by not having to pay for their payroll expenses, office space, and

extensive trainings. Cash-back credit cards are effective too since it allows the company to

regain some percentage of the money being spent based on the volume of purchases made. The

other cost reduction techniques include purchasing alternatives such as considering the lease

of office equipment or opting for reconditioned ones instead of buying new devices.

Finally, learning the negotiation skills can also be an asset to further reduce the pricing cost.

1.14 TOOLS AND TECHNIQUES OF COST REDUCTION:

Generally speaking, the following tools and techniques are used for the purpose of cost
reduction:

1. Value analysis and value engineering

2. Work study

3. Job evaluation and merit rating

4. Production planning and control

5. Organization and method study

6. Operations and method study

7. Rationalization

8. Quality control

9. Economic ordering quantity

10. Use of better technology

11. Mechanization and automotive

12. Standardization

13. Simplification

14. Classification and codification

15. Variety reduction

16. Improvement in the design of a product

17. Market Research

18. Budgetary Control

19. Standard Costing

20. Simplification and Variety Reduction

21. Planning and Control of Finance

22. Cost Benefit Analysis
23. Value Analysis
24. Contribution Analysis
25. Job Evaluation and Merit Rating
26. Improvement in Design
27. Material Control
28. Labour Control
29. Overhead Control
30. Inventory management and control

COST REDUCTION PROGRAM:

Followings are the essentials of a cost reduction program:

 Cost reduction program should be according to requirement of the company.

 Cost reduction program is a continuous activity that cannot be treated as one time or
short term activity. Success of any cost reduction program may lie in only continuous
improvement of efforts.

 Cost reduction program should be real and permanent.

 Example setter of cost reduction program should be top management employee.
Success of this program depends on co-operation of all employees and department of
an organization.

 Employees should be rewarded for their participation in cost reduction program and
for giving innovative ideas related to this program.

Opportunities for cost reduction can be overlooked without careful, systematic analysis.

Preparation Step 1: Gather the Data:

The first step in systematically evaluating cost should be to gather up all the relevant data.

Relevant data at a minimum includes the cost of every part in the product.

In addition, the data should include all bills of material (BOM), standard costs, tooling

agreements and where used on quantity lists and quotes.

This data enables you to answer questions about BOM/part, quantity errors or about vendor

quote quantities/price breaks. Without the baseline data, it is often impossible to get the root of

why parts costs are the way they are and when they can be reduced.

This data should be gathered and placed into a well-organized database and should be archived
as the ‘base case’. Costs tend to be dynamic.

Component costs, BOMs and product attributes change. If possible, the best time to capture
data that is considered to be a ‘base case’ is after a program review or when the major standards
for a product have been set.

This helps to minimize problems with stale prices or obsolete components creeping into the
analysis. It also minimizes the problem of data synchronization errors creeping into the
analysis. Care should be taken to avoid this.

If fact, prior to implementing your cost savings ideas, good practice suggests that you should
run a second dataset in order to be certain the cost savings you propose are still valid and cost
effective. Finally, after implementing your cost savings ideas, a third dataset should be created
to document the savings.
Preparation Step 2: Check for Errors:

Consider the typical part count for a high-end server, over 14,000 parts representing over 700
distinct part types. Tracking all the parts, quantities, costs and auxiliary information can lead
to numerous small errors that magnify with product volume.

With today’s leaner organizations, and automated systems, fewer eyes look at the cost data.
Fortunately, Electronic Document Interchange (EDI), automated material systems like SAP1
and MRP/ERP2 help reduce total error rates by assuring correct translation of data between the
various enterprise entities. Unfortunately, if bad data makes it through the input filters, it has a
tendency to acquire a life of its own.

Most of the data errors we have encountered were due to obsolete or stale cost data and system
errors. For instance, common errors include:

• The latest BOM is not on file.

• The vendor quotes were based off the wrong revision.

• Cost data had not been updated on the system.

• A change to a lower level part or its cost has not rippled through the analysis.

• Incorrect part costs were the result of an automated cost system that replaced a zero by a rote
algorithm because the system cannot function with a zero.

• ERP software that could only handle whole numbers.

Since the advent of enterprise level information systems, we have seen such errors reduced by
about 70%. Many remaining errors occur because of a lag between a lower level change and
its reflection on the bottom line.

Currently, we find a small but consistent level of errors ranging from 0.5-1% for volume
production product and up to 5% for a new product. Once these errors invade the system, they
tend to persist. Careful checking for data errors is a crucial step in establishing baseline data.
Careful proofing can eliminate many of these errors.
We prefer to group together like parts and their costs and then identify those that appear out of
line. We have also found that checking for cost differences against previous databases or
catalogs on the net3 can also be fruitful.

Our experience has shown that the effect of error correction on the bottom line is somewhat
mixed. In the volume production phase, both over and under estimates of cost occur and have
a tendency to cancel one another out on the bottom line. Highlighting the occasional egregious
error makes this exercise worthwhile.

On the other hand, in the new product phase, with its higher reliance on estimated and initial
quotes, error elimination exercises yield better results.

Preparation Step 3: Identify the Product Cost Drivers:

The best place to find cost savings is where the most cost is being consumed. This statement
appears to be obvious and yet many organizations do not know where most of the cost of a
product occurs. The most expensive part is not necessarily the cost driver of a product. The
most cost correlates with the highest extended cost.

Extended cost considers not only a part unit’s cost but the part quantity being employed.
Extended Cost = Part Unit Cost x Quantity Used Our experience has been that a fairly low cost
part can end up being one of the largest cost contributors to a product because so many units
were used in the design.

For example, a grommet costing less than a dollar would normally not be thought of as a major
cost driver. However, in a server rack design, this part appeared 28 times. By using an injection-
molded plastic part instead, not only was part cost reduced, but assembly time was cut as well.

The total savings was quite large.4 In addition, the replacement was so successful that other
products began using the part, increasing savings further. In addition to extended cost, it is
important to understand the cost environment of the part. A structured, indented BOM should
be constructed and expanded down to the lowest practical level.

Performing this analysis identifies what costs roll up under each subassembly. Magnify this by
the number of times that a subassembly is used and you may find effective cost savings.
Preparation Step 4: Understand the wider cost environment:

As a corollary to the product cost analysis, one should also fully understand the cost
environment for the product. The final product cost to a business unit is the sum of the direct
product cost and a large number of indirect costs and allocations, i.e. overhead.

Except for the highest volume producers and product, direct product cost is a small fraction of
the sales price or even the internal business unit product cost.

The problem with indirect costs, such as sales & marketing expenses and R&D expenses or
general allocations, is that most of them are fixed and/or period expenses that are charged back
to the product on a per unit basis. In a perfect world, cost accretion and expensing to an
appropriate product cost would be tightly coupled.

The reality is there are many grey areas, subject to interpretation. Expenses common to more
than one product or business unit have to be apportioned. That apportionment is usually done
according to rules that meet the reporting/information needs of the organization.

COST REDUCTION STRAGIES

 Supplier consolidation
 Component consolidations
 Low-cost country sourcing
 Request for quotations (RFQ)
 Supplier cost breakdown analysis
 Function cost analysis / Value analysis / Value engineering
 Design for manufacture / Design for assembly
 Reverse costing
 Cost driver analysis
 Product benchmarking
 Design to cost
 Design workshops with suppliers
 Competitor benchmarking
Advantages of Cost Reduction:
There are many advantages of cost reduction. Some of these are;
 Cost reduction will help in making goods available to the consumers at cheaper rates.

 As a result of reduction in cost, export price may be lowered which may increase total
export.

 Cost reduction is obtained by increasing productivity, so as a developing country like India,

which suffers from shortage of resources, can develop faster if it makes the best use of
resources by increasing productivity.

 Higher profit will provide more revenue to the government by way of taxation.

 Cost reduction will provide more money for labor welfare scheme and thus improve men-
management relationship.

Importance of cost reduction:

 Facilities for better utilization of resources.
 It helps to supply goods at a reasonable price for the customers.
 It improves the rate of return on investment.
 Improves the image of company for long term benefits.
 To prepare for meeting a future position.
 To eliminate unnecessary expenses or wasteful spending.
 To increase competitive advantage.

Objectives of cost reduction:

The purposes of cost reduction are:
 Create cash reserve for reinvestment in research and development.
 Reduce cost as non-profit so able to serve more people.
 To become more efficient.
 To prevent employee lay-offs.
 Reduce manufacturing costs to stay competitive.
 Lower costs of service in order to provide additional service.
 To prevent reduction in employee benefits.
1.14 AREAS OF COST REDUCTION:

Some of the important cost reduction areas are as follows:

1. PRODUCT IMPROVEMENT: Product improvement and the level of efficiency determine the
costs incurred. Important factors in product improvement are:

(a) Quality of the product

(b) Unnecessary weight, material content, machine or labor operations.

(c) Waste and losses to be eliminated.

(d) Proper designing of the product.

2. PRODUCTION METHODS AND LAYOUT:

The area of the production method and organizations is important for the purpose of cost
reduction. There are many vital activities relating to production and production planning
where a cost reduction program may be applied, e.g.

Material control, labor control, production layout, system analysis, time and motion study,
work measurement, standardization of methods, designing of tools, equipment and
machinery, modernization of plant and equipment, use of incentive scheme, etc.

3. MARKETING AREAS: In marketing, the following are the cost reduction areas:
channels of distribution sales promotion scheme, marketing research plan, territorial
responsibilities, methods of remunerating sales men, advertising methods, after sales
service costs, packaging methods, materials handlings, transport arrangement, etc.

4. ADMINISTRATIVE AREAS: Administrative function includes personnel, purchase and

general administration.
Management should attempt to remove difficulties generally found in cost reduction
program. Some such difficulties are as follows:

(a) Workers and employees may not welcome cost reduction programs and may resist their
implementations.

(b) Cost reduction programs are generally carried out on and an ad hoc basis.

(c) The scheme may be applied in some areas but it should cover all activities.

(d) Cost reduction programs may be implemented horridly. Whereas, they should be carried
out after careful thought and in a planned manner.

Cost Reduction aims at cutting off the unnecessary expenses which occur during the
production, storing, selling and distribution of the product. To identify cost reduction, the
following are the major elements:

1. Savings in per unit cost.

2. No compromise with the quality of the product.
3. Savings are non-volatile in nature.

Tools of cost reduction are Quality operation and research, Improvement in product design, Job
Evaluation & merit rating, variety reduction, etc.

KEY DIFFERENCES BETWEEN COST CONTROL AND COST

REDUCTION
The following are the major differences between Cost Control and Cost Reduction:

1. The activity of maintaining cost as per the established norms is known as cost control. The
activity of decreasing per unit cost by applying new methods of production in such a way that
it does not affect the quality of the product is known as cost reduction.

2. Cost Control focuses on decreasing the total cost while cost reduction focuses on decreasing
per unit cost of a product.

3. Cost Control is temporary in nature. Unlike Cost Reduction which is permanent.

4. The process of cost control is completed when the specified target is achieved. Conversely, the
process of cost reduction has no visible end as it is a continuous process that targets for
eliminating wasteful expenses.

5. Cost Control does not guarantee quality maintenance. However, 100% quality maintenance is
assured in case of cost reduction.

6. Cost Control is a preventive function as it ascertains the cost before its occurrence. Cost
Reduction is a corrective action.
CHAPTER - 2

RESEARCH DESIGN

2.1 Introduction:

The research design is the conceptual structure which research is conducted. It constitutes the
blue print for the collection and measurement and analysis of data. A research design is a basic
plan, which guides the data collection and analysis of the phases of the project.

It is the framework, which specifies the type of information to collect the source of data
collection procedure. Data was collected from primary and secondary source.

2.2 TITLE OF THE STUDY:

“A STUDY ON COST CONTROL AND COST REDUCTION

TECHNIQUES EMPLOYED AT COTTON WORLD PVT LTD”

2.3 REVIEW OF LITERATURE:

Literature is reviewed to explore the historical and current scenario of project contracts as a
whole. Over and above, the purpose of the literature review is to understand in totality the
foundation of the research problem, understand the data that has been gathered in the field of
study and to make new findings on the problem statement.

A literature review is a text of a scholarly paper, which includes the current knowledge
including substantive findings, as well as theoretical and methodological contributions to a
particular topic.

Literature reviews use secondary sources, and do not report new or original experimental work.
The abstract in the following are some of the key literature reviewed in this project.

Abstract
Full cost accounting has been applied in many industrial settings that include the oil and gas,
energy, chemical and waste management industries, cotton & textile industries. Presently, it is
not known how it can be applied in cotton & textile industry context. Therefore, the objective
of this paper is to review existing full cost accounting methods and identify an appropriate
approach for the automotive sector. This literature review of 4381 papers extracted ten full cost
accounting methods with a diverse level of development and consistency in application.
Based on a careful examination and critical analysis of each approach and existing automotive
sustainability measures, the Sustainability Assessment Model developed by British Petroleum
and Aberdeen University has been proposed as a well-developed and potentially practical tool
for automotive applications. The Sustainability Assessment Model can be used by both
academics and practitioners to translate a range of conflicting sustainability information into a
monetary unit score.
This is an effective way of communicating trade-offs and outcomes for complex and multi-
disciplinary sustainable decisions in the automotive sector. It measures a broad range of
economic, environmental, resource and social effects (internal and external), which is currently
lacking in existing automotive systems.
Its other strengths are the ability to provide both monetary and physical metrics for
sustainability assessment, its flexibility and the ability to combine multiple sustainability
dimensions. Furthermore, this paper provides helpful clues for researchers interested in
exploring full cost accounting in the future by reviewing, analyzing and synthesizing the broad
range of relevant sources from diverse fields in this topic area.

2.4 STATEMENT OF THE PROBLEM:

In a highly competitive environment, a firm may choose to pass the cost savings entirely to the
client. In a less hostile environment, the client may retain some of these cost savings. The
problem statement of this research is to find out what are the different elements that determine
their bargaining power that in turn allow them to share the cost savings in a certain proportion
and what are the parameters that allow a firm to perform cost savings for the firm and the client.

2.5 OBJECTIVE OF THE STUDY:

 The objective of the study is to identify sources of cost savings in Fixed Price Projects
(FPP) and also to study how these savings are shared between the firm and the client.

 We look in particular at fixed priced projects and analyze the parameters that allow the firm
to perform cost savings for firms/clients.

 It is also an objective of this project to understand how these cost savings are shared
between the client and the firm.
 In a highly competitive environment, a firm may choose to pass the cost savings entirely to
the client.

2.6 SCOPE OF THE STUDY:

The study is restricted to fixed price contracts only. We look in particular at fired price projects
and analyze the parameters that allow the firm to perform cost savings for firms/clients.

2.7 METHODOLOGY:

a. Type of research

The project employs systematic, formal and descriptive research techniques. This is primarily
a qualitative research. The study is based on the data collected through structured questionnaire
and in-depth, unstructured and informal interview with key personnel.

b. Sampling technique

The sampling techniques used judgment sampling which is one of the purposive sampling
techniques. The respondents for the study have been selected based on the experience and
expertise for the given role.

Using these selected respondents further contracts were established and converted into
respondents.

c. Sample size

The composition of the study sample consisted of project leads, team leads. The respondents
were from seven firms.

d. Sample description

Respondents have been selected from across a cross section of software product and Services
Company. The respondents taken were project leads and team leads with some experience and
expertise.
e. Instrumental techniques

The primary data has been collected through structured Questionnaire, which was administered
to the respondents. One set of Questionnaire has been developed to identify client and firm
characteristics and their relationship and reasons for overruns.

Secondary data will be collected from various sources which include articles published in
magazines, journals, internet and publications.

f. Tools used for testing of hypothesis

Since our research topic is highly qualitative in nature, we are prompted to use simple
percentages so as to enable the data to be more succinct and amenable for easy interpretation.
We believe that simple treatment of data will be more useful in drawing inferences from data.

2.8 SOURCES OF DATA:

1) Primary data:

An investigator originally collects the data or agency for the first time for any statistic
investigation and used by them in the statistical analysis are termed as primary data.

 Information collected through discussion with different departmental managers of the

organization to get the general information about the company.

 Personal interview- There were interview sessions with each of the functional heads and
there was a questionnaire that was followed as also questions which were asked depending
upon the situations.

 Observation done- There was a keen sense of observation followed during the study period
to follow the entire production and process functions very well.

2) Secondary data:

The data published or unpublished, which have been collected and processed by some agencies
for their statistical work, work termed as secondary data as far as second agency is concerned.
The second agency if and when it publishes and files such data source to anyone later uses the
data.
Internal data- These are the companies own data which they provided like organization
structures, balance sheet, annual reports etc.

2.9 OPERATIONAL DEFINITION:

Cost: The amount of expenditure (actual or notional) incurred on attributable to a given thing.

Variable cost: The variable cost is cost that tends to vary in accordance with the level of
activity within the relevant range and within a given period.

Fixed cost: The fixed cost that tends to unaffected by the changes in the level of activity
during a given period of time the fixed costs remains constant in total regardless of changes in
volume up to a level of output.

Cost accounting: Cost accounting is a process of classifying, recording the expenditures in

a systematic manner and ascertaining the cost and cost center to control the cost.

Cost management: It is a process of planning and controlling the budget of a business.

Cost management is a form of management accounting that allows a business to predict
impending expenditure to help reduce the chance of going over budget.

Cost saving: The amount of money saved as a result of chance to plans or policies that reduce
the expense associated with a business activity.

Cost control: Cost control is simply the prevention of waste within the existing environment.
This environment is made-up of the agreed operating methods for which standards have been
developed. Cost control is the process of utilizing the available resources economically.

Cost reduction: Cost reduction is the improvement of the environment. This involves the
examination of the purposes for which costs are incurred and, by a variety of means, eliminates
or reduces the reasons for spending.

Standard costing: standard costing is defined as the preparation and use of the standard
cost, their comparison with actual costs and the measurement and analysis of variances to their
causes and points of incidence. Standard costs should be obtained under efficient operations.
Cost containment: the process of maintaining organization costs within a specified budget;
restraining expenditures to meet organizational or project financial targets.

Profit: represent the excess of revenue over applicable costs of performance and is associated
with fixed-price type contract.

Fee: represents a flat charge paid as compensation for services or suppliers provided and is
associated with the cost reimbursement contracts.

Indirect cost: any cost that cannot be directly identified with a single final cost objective
but can be identified with two or more final cost objectives or an intermediate cost objective.

Overhead: indirect cost related to specific operations. Such as general product lines,
organizational groups of contracts. Overhead is a type of indirect cost pool that is related to the
specific operations of the firm. The three major types of overhead are material, labour & fringe
benefit.

Cost objective: Anything to which costs are attached or related.

Resource: An economic element that is applied used in the performance of activities

Eg. Labour, technology, Facilities etc.

2.10 LIMITATIONS OF THE STUDY:

i. The study is confined to only one company.

ii. Due to limited time, in depth study could not be made.

iii. Analysis in the study will be dependent on the information supplied by the company.

iv. Limited area the study is only limited to cotton world pvt ltd and not applicable to any
other manufacture company.
2.11 CHAPTER SCHEME:

CHAPTER 1: INTRODUCTION

 Introduction to cost

 Meaning and definition of cost

 Meaning of costing, cost accounting, cost management

 Cost control

 Techniques of cost control

 Steps of cost control

 Cost reduction

 Tools and techniques of cost reduction

 Areas of cost reduction

 Key difference between cost control and cost reduction

CHAPTER 2- RESEARCH DESIGN

 Introduction of Research

 Title of the study

 Review of literature

 Statement of the problem

 Objectives and scope of the study

 Methodology

 Sources of data

 Limitations of the study

 Chapter scheme
CHAPTER 3- COMPANY PROFILE

In this chapter we discuss company profile and background.

 Background of the company

 Nature of business

 Vision

 Mission

 Quality policy

 Board of directors

 Objectives

 Area of operation

 Product profile

 SWOC analysis

CHAPTER 4-DATA ANALYSIS AND INTERPRETATION

 Analysis and interpretation of financial statements

 Tables and Graphs

CHAPTER 5-SUMMERY OF FINDINGS, SUGGESTIONS AND

CONCLUSIONS

Summary of findings

Suggestions for the research topic

Conclusions of study

 BIBLIOGRAPHY
 ANNEXURES
CHAPTER-3

COMPANY PROFILE

3.1 INTRODUCTION

Cotton world has established its name as a reputed manufacturer and exporters of garments
since 1994. In this journey of 18 years the company has gradually grown its capacity and
capabilities.

This sustained growth has earned trust & goodwill of many reputed brands, which we are
proud to cater as our customers. The company has a turnover of 20millions USD and further
plans of expansions are unfolded

COTTON WORLD UNIT -6

COMPANY PROFILE

Sl Descriptions No’s
No

1 Total Site Area 2 Acres (approx.)

Ground Floor/ Production Area 27.346sft(approx.)

Finishing section &Kaja section 3260sft(approx.)

Office, Store <&Go down 3418sft(approx.)

Total Factory Area 34024sft(approx.)

2 Power House Capacity 200 K V

3 DG Capacity 82.5 k v

4 Water Sump under Ground Capacity 35000 Ltr

Drinking Water Under Ground Capacity 5000 Ltr

Overhead Tank Capacity 6000 Ltr

Over Head Tank Drinking Water Capacity 1000 Ltr

5 ETP Plant Area 500Sft(approx.)

6 Fire Extinguishers 26

7 No, Of First aid Boxes 7

8 No of Suggestions Boxes 2

9 No of fire Evacuation board 5

10 No of Fire alarms 8

11 Exit 2

12 Emergency Exit 4

13 MACHINERY DETAILS

S/N UBT M/C 167

S/N ORDENARY M/C 99

S/N EDGE CUT M/C 14

D/N M/C 20

O/L/ M/C 42

KAJA M/C 4

BARTAK M/C 2

STRAIGHT KINFE M/C 2

SMOKING M/C 1
BAND KNIFE M/C 2

END CUTTER 1

FUSSING M/C HBP 700 1

FUSSING M/C 450JS 1

NEEDLE DIDECTOR M/C 1

THREAD SUCKING M/C 1

TOTAL M/C 357

8 AIR COMPRESSIOR 5 HP 1 NO’S

9 OIL BALER 1 NO’S

10 IRON BOXES 25 NO’S

11 IRON TABLE 10 NO’S

12 REST ROOM NILL

13 CREECHE ROOM 1 NO’S

14 AMBULANE ROOM 1 NO’S

15 CC CAMERA 3 NO’S

16 COMPUTR SYSTEM 3 NO’S

17 PRINTER 1 NO’S

18 LIGHT BOX 1 NO’S

19 SACNER 1

20 UPS BOX 2KV 1

21 WEING SCALE( SMALL) 1

22 CANTEEN FUNTIONIONG

TOILETS ROOM

LADIES TOILETS 32

GENTS TOILETS 3+6

AMBULANCE ROOM 1
CREECH ROOM 1

STAFF TOILETS 2

TOTAL 45

3.2 OUR VISION:

Our aim is to be the most innovative and reliable garment manufacturer and partner

In the endeavor of growth, we always think about our base values.

TO SUSTAIN, TO INNOVATE, TO LIVE UP

 To Sustain - our goal is to always ensure on quality, price, delivery & compliance. This
makes us dependable and consistent organization.

 To Innovate - we believe that there is always a scope of improvement in everything we do.

Be it - new technology and process or designing & product development or sourcing and value
addition.

Hunger for improvement is our strength.

 To Live Up – we do not forget to take along our workers, employees and suppliers.

3.3 OUR MISSION:

Cotton world is the serve the customer. It deserves the best quality and presentation at a worth
of the price. We must have world class quality, at the lowest production & distribution cost.
This will make us an unbeatable leader and will have satisfied loyal customers.

 Expanding product profile

 By increasing market growth

 By gaining investor confidence

3.5 DIRECTORS AND KEY MAAGEMENT PERSONNEL

CHIEF EXCECUTIVES

Sl Names Designation
No

1 Sri Shyla Factory Manager

2 Shiva Kumar Production Manager

3 Surya Narayan General Manager

4 Basavaraj Floor in charger

A Department

Mohan Kumar Supervisors

Anjinappa Supervisors

Manjunath K Supervisors

Gopal Supervisors

Nagesh Supervisors

Mahesh Kumar Supervisors

Manjunath Supervisors

Subadramma Supervisors

QUALITY CONTROLL

1 A B Patel Quality In charger

QUALITY CHECKER

Anandkumar

Veerendrakumar

Arunkumar

Balachandar
Sampathkumar

Cutting Quality Checker

Shivanna

Cutting In charge

Nagesh

Maintenance Department

1 Head Mechanic Kanakaraju

2 Mechanic Anand &purushottam

3 Electrician Nagaraju

HR DEPARTMENT

Kishan HRD

Manjunath HRD

WELFARE OFFICER

Ramya

3.6 DESIGN TEAM:

We have a full-fledged in-house design team creating and developing exciting collections for
the customers. Our core strength is Design & Product Development.

Our design team follows the latest fashion trends around the world to make collections and
presentations.
This team is closely associated with their counterpart in the buying to understand the needs and
the mood of the buyer.

The team does not leave any stone unturned to offer the buyer with the best designs.

Whereas they follow various website, forecast services and magazines.

We believe that design developments are the real way to become partners in progress with our
customers.

3.7 GROWTH AND DEVELOPMENT OF THE COMPANY

Presently we are exporting 100% of our garments. However we supply to the domestic garment
exports we have positioned ourselves as a single product garment export trade and international
market. Our manufacturing facilities are spread across six locations at Unit-1 Barton center
MG Road (Bangalore)

Unit-3 White field (Bangalore) Unit-4 Penya (Bangalore) Unit-5 Yelahanka (Bangalore) Unit-
7 Hindhupura (Andhra Pradesh)

Unit-6 Doddaballapura (first Phase Apparel Park Bangalore Rural)

3.8 OVERSEAS OF BUSINESS

H& M COUNTRIES BASE ONLINE EXTRA LABEL&

ORDER TAG

 SWEDEN (SE)

 NORWAY (NO) (on)

 DENMARK (DK)

 BRITAN (GB) (OG)

 SWITCHERLAND (CH)

 GERMANY (DE)

 BELGIUM (BE)

 UNITED STATES (USA) (OU) LABEL

AMERICA
 ESPAIN (ES)

 POLAND (PL) (OE)

 CHINA (CN) (OB) CIT(TAG)

 CANADA (CA) LABEL

 HONG KONG (HK)

 TURKIO (TR) TRIT(TAG)

 JAPAN (JP)

 RUSSIA (RU) RIT(TAG)

 KOREA (KR) WARNING (TAG)

 CROTIA (HR)

 SINGAPORE (SG)

 MEXICO (MX) MXIT(TAG)

 MALASIA (MY)

 UNITED URAB (AE) LABEL

EMIRATES
 THAILAND (TH)

 CHILE (CZ) ZZIT(TA)

 AUSTRALIA (AU)

 SARBIA (RS) RSIT)TAG)

 ISREL (IX-65) LABEL

 INDONASIA (ID) STCKER

 PHILIPHINES (PH) PPIT(TAG)

 PERU (PE) TTIT(TAG)

 INDIA (IN) INIT(TAG)

 ITALY (------) (OF/A3)

 SOUTH AFRICA (ZA)

 TIWAN (TW) TWIT(TAG)

3.18 PRODUCT PLANNING AND DEVELOPMENT

Product planning and development is the process of searching ideas for new products,
screening them systematically, converting them into tangible products and introducing the new
products into markets. It is also involves formulation of product strategies. And polices. It
includes improvement in existing product as well as new development products.

Product Planning included all activities starting from the concepts of product ideas and ending
up with full scale production and introduction of product in the target market.

3.19 Embroidery unit

Our embroidery unit is equipped with a total of 80 heads of computerized embroidery machines
from Barudan & Tajima.

This unit is known for its neatly finished embroidery.

Value edition & handwork embroidery is undertaken depending upon customer requirements.
3.21 SWOC ANALYSIS OF THE ORGANIZATION

A Seen of the Internal and external environment is an important part of the strategic planning

process. Environmental factors internal to the firm usually can be classified as the strength or

weakness and those external to the firm can be classified as the opportunities are threats. Such

as analysis of the strategic environment is referred as SWOT Analysis.

 STRENGTH:

 Has a good texture.

 Quality is good.
 Different flavors.
 Rates are reasonable.
 High Productivity
 Economize of sale
 Low labour cost.
 Designing Capabilities
 Flexibility in manufactures
 Experience of our promoters.
 Sampling Capabilities.
 Quality Assurance.
 Lower turnaround time.

 WEAKNESS:

 There are less retail outlets.

 Government policies
 Liberalization and dumping tendency of other firms especially from foreign

country.

 Unstable market finance.

 Relatively lower volume of production leading to higher cost of production

 OPPORTUNITIES:

 It is having the opportunities to tap marketing.

 In carrying out their duties and responsibilities board member and senior

management personal should avoid.

 Huge market potential in domestic.

 Continuous increase in demand.

 Develop local skills based through increases training.

 Using company property or information or their position Has board member or

senior management personal for personal gain.

 CHALLENGES:

 More politically influenced.

 Continuous change in government policies.

 The threat of Industrial unrest.

 Change in Customer Demand.

 Unexpected price fluctuation

CHAPTER -4

DATA ANALYSIS AND INTERPRETATION

4.1 Introduction to data analysis and interpretation:

The process of evaluating data using analytical and logical reasoning to examine each
component of the data provided. This form of analysis is just one of the many steps that must
be completed when conducting a research experiment.

Data from various sources is gathered, reviewed, and then analyzed to form some sort of
finding or conclusion. There are a variety of specific data analysis method, some of which
including data mining, text analytics, business intelligence and data visualizations.

4.2 Meaning of data analysis and interpretation:

It is the technique of interpretation of financial statements with the help of the accounting
ratio derived from the financial statement. The drawing of validity authentic references from
the scientifically analyzed data and presenting these inferences unwisely is known as
interpretation of data.

According to Wallis and Roberts, “statistical data in the raw simply furnish facts for someone to do
the reason from. They can be extremely useful when carefully collected and critically interpreted.
But handled with care, skill and above all objectivity statistical data may seem to prove things which
are not at all true”.
Table no 1
TABLE SHOWING THE TARGET COST AND ACTUAL COST

Particular Target cost Actual cost Difference profit

Sales Required Target Sales Actual Actual Amount %

profit cost profit cost

2016 9984.48 3.4 9981.08 7987.58 2.72 7984.06 0.68 25%

2017 9449.09 19.36 9429.73 7559.27 15.49 7543.78 3.87 24.98%

2018 9132.48 (68.15) 9200.63 7305.98 (54.52) 7359.52 (13.63) (20)

total 28566.05 (45.39) 28611.44 22852.83 (36.31) 22887.36 (9.08) 25%

Analysis:
 The above table shows the Target cost and Actual cost for 3 years from 2014 to 2016.
 The above table shows the difference of profit for 3 years from 2014 to 2016 as the
difference of profit is fluctuating from one year to another year.
 In 2016 the target cost is 9200.63 and the actual cost is 22887.36 so the difference of
cost is 1841.11

Graph no 1

GRAPHSHOWING THE TARGET COST AND ACTUAL COST

35000

30000
Sales
25000 Required profit

20000 Target cost

Sales 2
15000
Actual profit
10000 Actual cost
5000 amount
%
0
2016 2017 2018 total
-5000
INTERPRITATION
 The above graph shows the Target cost and Actual cost for 3 years from 2016 to 2018.
 The above graph shows the difference of profit for 3 years from 2016 to 2018 as the
difference of profit is fluctuating from one year to another year.
 In 2018 the target cost is 9200.63 and the actual cost is 22887.36 so the difference of
cost is 1841.11.

TABLE NO 2

TABLE SHOWING THE MARGINAL COSTING STATEMENT

Rs. In lakhs

YEARS 2018(1900) 2017(1750) 2016(1300)

CPU TOTAL CPU TOTAL CPU TOTAL

PARTICULARS

sales (value @ M 4.20 7987.58 4.32 7559.27 5.62 7305.98

C)

(-) variable 2.55 4848.78 2.59 4530.06 2.88 3749.04

cost(value @ M
C)

CONTRIBUTION 1.65 3138.8 1.73 3029.21 2.73 3556.94

FIXED COST 0.13 238.71 0.12 201.47 0.12 160.79

PROFIT 1.53 2900.09 1.62 2827.74 2.61 3396.15

ANALYSIS:
From the above table we can observe that marginal profit decreased by the base year 2016
is2.61,3396.15 in 2017 is1.62, 2827.74but immediately increased in year at 2018 is 1.53,
2900.09.And cost per unit is 1.53, 1.62, and 2.61 respectively. So it is well and good for
increasing the profit line.
CHART NO 2
GRAPH SHOWING THE MARGINAL COST STATEMENT

MARGINAL COST STATEMENT

8000
7000
6000
5000
4000
3000
2000 CPU
1000
CPU2
0
CPU3

INTERPRITATION
From the above graph we can observe that marginal profit decreased by the base year 2016
is2.61,3396.15 in 2017 is1.62, 2827.74but immediately increased in year at 2018 is 1.53,
2900.09.And cost per unit is 1.53, 1.62, and 2.61 respectively. So it is well and good for
increasing the profit line.
TABLE NO 3

TABLE SHOWING THE ABSORPTION COSTING STATEMENT

Rs. In lakhs

YEARS 2018(1900) 2017(1750) 2016(1300)

CPU AMT CPU AMT CPU AMT
PARTICULARS

Direct materials 1.42 2688.66 1.58 2758.36 1.84 2394.50

Direct wages 0.29 552.60 0.30 518.87 0.35 449.37

Prime cost 1.71 3241.26 1.87 3277.23 2.18 2843.87

Factory and office over

heads

Fixed 0.14 259.03 0.13 236.15 0.16 214.55

Variable 1.09 2064.41 1.06 1846.44 1.24 1609.83

Cost of production 2.93 5564.7 3.06 5359.82 3.59 4668.25

Selling overhead

Fixed -- -- -- --

Variable 0.82 1562.43 0.78 1369.12 0.86 1124.95

Total 3.75 7127.13 3.85 6728.94 4.46 5793.2

Profit 0.87 1649.52 0.89 1564.02 1.02 1323.24

Sales 4.62 8776.65 4.74 8292.96 5.47 7116.44

ANALYSIS
From the above table we can observe for cost of production, cost of goods available for
sale, cost of goods sold, contribution, and profit or loss,2016 profit is 7116.44 but 2017
,8292.962016 8776.65 profit decreased in the year of 2016, after 2017 increased for profit
volume.
CHART NO 03

GRAPH SHOWING THE ABSORPTION COSTING STATEMENT

ABSORPTION COSTING STATEMENT

9000
8000
7000
6000
5000
4000
3000 CPU
2000
TOTAL
1000
0 CPU2

INTERPRITATION
From the above graph we can observe for cost of production, cost of goods available for sale,
cost of goods sold, contribution, and profit or loss,2016 profit is 7116.44 but 2017 ,8292.962016
8776.65 profit decreased in the year of 2016, after 2017 increased for profit volume.
Table no: 4

TABLE SHOWING MATERIAL PURCHASE PRICE VARIANCE

YEAR 2016 2015 2014

ACTUAL PRICE 13.05 15.01 16.01

ACTUAL QUANTITY 9.32 13.92 4.96

PURCHASED

STANDARD PRICE 12.5 17.06 17.5

MATERIAL 5.13 F (6.12) A (4.91) A

PURCHASE PRICE
VARIANCE

ANALYSIS

From the above table we can observe that material purchase price variance shows the
favorable variances for one years for 2018 for 2018 material purchase variance is Rs.5.13
and 2017 the variance is unfavorable that is Rs(6.12) and in 2016 the variance is unfavorable
that is Rs(4.91).
WORKING NOTE:

MATERIAL PURCHASE PRICE VARIANCE= (Actual quantity

purchased
2016 *actual price)-(Actual quantity purchased*standard price)

=(9.32*13.05)-(9.32*12.5)
=121.63-116.5 2017
=5.13
=(13.92*17.06)-(13.92*17.5)
=237.48-243.6
=(6.12)

2018

=4.96 x 15.01)-(4.96*16)
=74.45-79.36

=(4.91)

GRAPH NO 4

GRAPH SHOWING MATERIAL PURCHASE PRICE VARIANCE

Chart Title
20

15

10

0
ACTUAL PRICE ACTUAL QUANTITY STANDARD PRICE MATERIAL PURCHASE
PURCHASED PRICE VARIANCE

2016 2017 2018

INTERPRITATION

From
PARTICULARS 2018 2017 2016
the
Material cost 2688.66 2758.36 2394.50

Volume based cost 2150.21 1920.99 1669.06

Other over heads 173.23 161.6 155.32

Packing &dispatch 1562.43 1369.12 1124.95

TOTAL 8776.65 8292.96 7061.46

above graph we can observe that material purchase price variance shows the favorable
variances for one years for 2018 for 2018 material purchase variance is Rs.5.13 and 2017 the
variance is unfavorable that is Rs(6.12) and in 2016 the variance is unfavorable that is
Rs(4.91).

COST INFORMATION IN THE YEAR 2014 to 2016

Over Head Rate / hrs = Total over head/Total Machine hour

2014= 8614.65/ 16110.00=0.53

2015=8526.04/16270.00=0.524

2016=7061.46/16380.00=0.431
OVERHEAD ALLOCATION WE CALUCATED ON THE BASIS OF TWO
COSTING SYSTEM - TRADITIONAL COSTING SYSTEM ASWELL AS
ACTIVITY BASED COSTING SYSTEM.

1) OVERHEAD CALUCATED UNDER TRADITIONAL COSTING

SYSTEM

PARTICULARS 2018 2017 2016

 Cutting ( (1981.37*0.53/134. (1960.99*0.524/ (1624.13*0.431/19

Cloths) 23% 6) 634.4) 6.20)

7.80 1.62 7.27

 Tailoring (1722.93*0.53/269. (1705.21*0.524/ (1412.29*0.431/39
20% 25) 551.67) 2.40)

3.39 1.62 1.55

 Checking (1809.08*0.53/538. (1790.47*0.524/ (1482.91*0.431/78

21% 5) 579.26) 4.81)

1.78 1.62 0.81

 Fixing Buttons. (1378.34*0.53/201. (1364.17*0.524/ (1129.83*0.431/29
16% 64) 441.34) 4.30)

3.62 1.62 1.65

 Washing. (1722.93*0.53/201. (1705.21*0.524/ (1412.29*0.431/29
20% 9) 551.67) 4.30)

4.5 1.62 2.07

Table -5

SHOWING COSTPER UNIT UNDER TRADITIONAL COSTING SYSTEM

PARTICULARS 2018 2017 2016

 Cutting ( 7.80 1.62 7.27

Cloths) 23%

 Tailoring 3.39 1.62 1.55

20%

 Checking 1.78 1.62 0.81

21%
 Fixing 3.62 1.62 1.65
Buttons.
16%
 Washing. 4.5 1.62 2.07
20%

ANALYSIS:
From the above table show that overhead allocated under traditional costing system of the
products Cutting (Cloths).

Year 2018 (7.80, 3.39, 1.78, 3.62, 4.5), 2017(1.62, 1.62, 1.62, 1.62, 1.62), to 2016 (7.27,
1.55, 0.81, 1.65, 2.07) the percentage fluctuated in every yearin year.
Graph -5

GRAPH SHOWING COSTPER UNIT UNDER TRADITIONAL COSTING

SYSTEM

18

16

14 7.27
12

10 2018
1.62 2017
8 2.07
1.65 2016
6 1.55 1.62
1.62 1.62
4 7.8 0.81
1.62 4.5
2 3.39 3.62
1.78
0
YARN DIVISION WEAVING DIVISION FABRIC
DIVISION

Interpretation-
From the above graph show that overhead allocated under traditional costing system of the
products Cutting (Cloths). Year 2018 (7.80, 3.39, 1.78, 3.62, 4.5), 2017(1.62, 1.62, 1.62, 1.62,
1.62), to 2016 (7.27, 1.55, 0.81, 1.65, 2.07) the percentage fluctuated in every year in year.
2) OVER HEAD CALUCATION UNDER A B C SYSTEM

BASIS OF COST POOL AND COST DRIVES.

SL NO ACTIVITY / COST POOL COST DRIVER

01 Material Handling costing No. of Material handle

No. of Labour hours

02 Volume related cost

03 Other overheads No. of Machine hours

No. of Customer order

04 Packaging & dispatch related cost
requirements

COST DRIVES DETAILS:

NO. OF COST
NUMBER(2016) NUMBER(2015) NUMBER(2014)
DRIVES

Number of Material
1346.25 1706.00 1962.02
handling

Number of
16110.000 16270.000 16380.000
Machines hours

Number of labour
16112.000 16285.000 16385.000
hours

Number of
16249.00 17884.50 18256.70
customer order
BASIC CALCULATIONS:

1. Material Handling CPU = Total Material Handling cost / No. of Material

Handling

2018= 2688.66/1346.25=1.98

2017=2758.36/1706.00= 1.62

2016=2394.50/1962.02=1.22

Total valoume based

2. Volume based CPU =
No.of Labour hours

2018=2150.21/16112.=0.13

2017=1920.99/16270.=0.11

2016 = 2150.21/16380.=0.13

Total other over heads

3. Other over Heads =
No.of machin houre

2018=173.23/16112=0.01

2017=161.6/16270.=0.009

2016=155.32/1338.=0.12

4. Packaging & dispatch = Total packing &𝑑𝑖𝑠𝑝𝑎𝑡𝑐ℎ

No. of customer requirements

2018=1562.43/16249.00=0.10

2017=1369.12/17884.50=0.08

2016=1124.95/18256.70=0.06
TABLE NO:–6

TABLE SHOWING THE OVERHEAD ALLOCATION UNDER ACTIVITY

BASED COSTING SYSTEM PRODUCTS

PARTICULARS 2018 2017 2016

Material Handling
cost

 Cutting ( Cloths) 1.98 1.62 1.22

23%

 Tailoring 1.98 1.62 1.22

20%

 Checking 1.98 1.62 1.22

21%

 Fixing Buttons. 1.98 1.62 1.22

16%

 Washing. 1.98 1.62 1.22

20%

Volume based cost

 Cutting ( Cloths) (1981.37*0.13/134.6 (1960.99*0.11/63 (1624.13*0.13/19

23% ) 4.4) 6.20)

1.91 0.34 1.08

 Tailoring (1722.93*0.13/269.2 (1705.21*0.11/55 (1412.29*0.13/39

20% 5) 1.67) 2.40)

0.83 0.34 0.47

 Checking (1809.08*0.13/538.5 (1790.47*0.11/57 (1482.91*0.13/78

21% ) 9.26) 4.81)
0.44 0.34 0.25

 Fixing Buttons. (1378.34*0.13/201.6 (1364.17*0.11/44 (1129.83*0.13/29

16% 4) 1.34) 4.30)

0.89 0.34 0.50

 Washing. (1722.93*0.13/201.9 (1705.21*0.11/55 (1412.29*0.13/29

20% ) 1.67) 4.30)

1.11 0.34 0.62

Other over Heads

 Cutting ( Cloths) (1981.37*0.01/134.6 (1960.99*0.01/63 (1624.13*0.12/19

23% ) 4.4) 6.20)

0.15 0.03 0.99

 Tailoring (1722.93*0.01/269.2 (1705.21*0.01/55 (1412.29*0.12/39

20% 5) 1.67) 2.40)

0.06 0.03 0.43

 Checking (1809.08*0.01/538.5 (1790.47*0.01/57 (1482.91*0.12/78

21% ) 9.26) 4.81)

0.03 0.03 0.45

 Fixing Buttons. (1378.34*0.01/201.6 (1364.17*0.01/44 (1129.83*0.12/29

16% 4) 1.34) 4.30)

0.07 0.03 0.46

 Washing. (1722.93*0.01/201.9 (1705.21*0.01/55 (1412.29*0.12/29

20% ) 1.67) 4.30)

0.09 0.03 0.58

Packaging &
dispatch

 Cutting ( Cloths) (1981.37*0.10/134.6 (1960.99*0.08/63 (1624.13*0.06/19

23% ) 4.4) 6.20)

1.47 0.25 0.50

 Tailoring (1722.93*0.10/269.2 (1705.21*0.08/55 (1412.29*0.06/39
20% 5) 1.67) 2.40)

0.64 0.25 0.22

 Checking (1809.08*0.10/538.5 (1790.47*0.08/57 (1482.91*0.06/78

21% ) 9.26) 4.81)

0.34 0.25 0.11

 Fixing Buttons. (1378.34*0.10/201.6 (1364.17*0.08/44 (1129.83*0.06/29

16% 4) 1.34) 4.30)

0.26 0.25 0.23

 Washing. (1722.93*0.10/201.9 (1705.21*0.08/55 (1412.29*0.06/29

20% ) 1.67) 4.30)

0.85 0.25 0.29

TABLE NO -7

TABLE SHOWING THE OVERHEAD ALLOCATION UNDER ACTIVITY

BASED COSTING SYSTEM.

Particulars 2018 2017 2016

Material handing 1.98 1.62 1.22

Volume based cost 1.91 0.34 1.08

Other over Heads 0.15 0.03 0.99

Packaging & dispatch 1.47 0.25 0.50

Total 5.51 2.24 3.79

ANALYSIS:
From the above table show that overhead allocated activity based costing system of
the products weaving. Year 2018, 2017, and 2016 the percentage fluctuated in every year. In
year .the material x handling calculated percentage on the basis total 5.51 of 2.24, 2.16 the
percentage is 3.79 respectively.
GRAPH:–7

GRAPH SHOWING THE OVERHEAD ALLOCATION UNDER ACTIVITY

BASED COSTING SYSTEM

12

10

8
2018
6 2017
2016
4

0
Material Volume based Other over Packaging & Total
handing cost Heads dispatch

INTERPRETATION:
From the above table show that overhead allocated activity based costing system of the
products weaving. Year 2018, 2017, and 2016 the percentage fluctuated in every year.

In year .the material x handling calculated percentage on the basis total 5.51 of 2.24, 2.16
the percentage is 3.79 respectively.
TABLE NO -8

TABLE SHOWING THE OVERHEAD ALLOCATION UNDER ACTIVITY

BASED COSTING SYSTEM PRODUCT OF THE CUTTING (CLOTHS) 23%

Particulars 2018 2017 2016

Material handing 1.98 1.62 1.22

Volume based cost 0.83 0.34 0.47

Other over Heads 0.06 0.03 0.25

Packaging & dispatch 0.64 0.25 0.22

Total 3.51 2.24 2.16

ANALYSIS:
From the above table show that overhead allocated activity based costing system of the
products weaving. Year 2018, 2017, to 2016 the percentage fluctuated in every year.

In year .the material handling calculated percentage on the basis total 3.51 of 2.24 the
percentage is 2.16
GRAPH NO:–8

GRAPH SHOWING THE OVERHEAD ALLOCATION UNDER ACTIVITY

BASED COSTING SYSTEM PRODUCT OF THE CUTTING (CLOTHS) 23%

100%
90% 0.22
1.22 0.47 2.16
80%
70%
0.25
60% 2018
50% 2017
40% 2016
30% 0.64
0.83
1.98 3.51
20%
10% 0.06

0%
Material Volume Other over Packaging & Total
handing based cost Heads dispatch

INTERPRETATION:
From the above graph show that overhead allocated activity based costing system of the
products weaving. Year 2018, 2017, to 2016 the percentage fluctuated in every year. In year
the material handling calculated percentage on the basis total 3.51 of 2.24 the percentage is
2.16
TABLE NO:–9

 TABLE SHOWING THE OVERHEAD ALLOCATION UNDER

ACTIVITY BASED COSTING SYSTEM PRODUCT OF THE
TAILORING20%

Particulars 2018 2017 2016

Material handing 1.98 1.62 1.22

Volume based cost 0.27 1.07 0.19

Other over Heads 0.18 0.14 1.80

Packaging & dispatch 0.03 0.02 0.02

Total 1.92 2.78 3.18

ANALYSIS:
From the above table show that overhead allocated activity based costing system of the
products weaving. Year 2018, 2017, to 2016 the percentage fluctuated in every year.

In year the material handling calculated percentage on the basis total 1.92, 2.78 and the
percentage is 3.18.
GRAPH NO:–9

GRAPH SHOWING THE OVERHEAD ALLOCATION UNDER ACTIVITY

BASED COSTING SYSTEM PRODUCT OF THE TAILORING20%

100%
0.19
90% 1.22 0.02
80% 3.18

70%
60% 1.8 2018
50% 2017
40% 2016
30%
1.98 0.03
20%
1.92
10% 0.27
0.18
0%
Material Volume Other over Packaging & Total
handing based cost Heads dispatch

INTERPRETATION:
From the above graph showing activity based costing system cost for unit on the basis of
cost per unit Year 2016, 2017; to 2018 the percentage fluctuated in every year. In year .the
material handling calculated percentage on the basis total 1.92, 2.78 and the percentage is
3.18 respectively
TABLE NO:–10

TABLE SHOWING THE OVERHEAD ALLOCATION UNDER ACTIVITY

BASED COSTING SYSTEM PRODUCT OF THE CHECKING21%

Particulars 2018 2017 2016

Material handing 1.98 1.62 1.22

Volume based cost 0.44 0.34 0.25

Other over Heads 0.03 0.03 0.45

Packaging & dispatch 0.34 0.25 0.11

Total 2.79 2.24 2.03

ANALYSIS:
From the above table show that overhead allocated activity based costing system of the
products weaving. Year 2018, 2017, to 2016 the percentage fluctuated in every year.

In year .the material handling calculated percentage on the basis total 2.79, 2.24 and the
percentage is 2.03 respectively.
GRAPH NO:–10

GRAPH SHOWING THE OVERHEAD ALLOCATION UNDER ACTIVITY

BASED COSTING SYSTEM PRODUCT OF THE CHECKING21%

3
2.79
2.5 2.03
2.24
1.98 1.62
2 1.22

1.5 2016
0.25 0.45 2017
1
0.34
0.11 2018
0.44 0.25
0.5 0.03
0.34 2018
0 0.03
2017
Material
Volume 2016
handing Other over
based cost Packaging
Heads Total
& dispatch

INTERPRETATION:
From the above graph show that overhead allocated activity based costing system of the
products weaving. Year 2018, 2017, to 2016 the percentage fluctuated in every year.

In year .the material handling calculated percentage on the basis total 2.79, 2.24 and the
percentage is 2.03 respectively.
TABLE NO: 11

TABLE SHOWING THE OVERHEAD ALLOCATION UNDER ACTIVITY

BASED COSTING SYSTEM PRODUCT OF THE FIXING BUTTONS.16%

Particulars 2018 2017 2016

Material handing 1.98 1.62 1.22

Volume based cost 0.89 0.34 0.50

Other over Heads 0.07 0.03 0.46

Packaging & dispatch 0.26 0.25 0.23

Total 3.2 2.24 2.41

ANALYSIS:
From the above table show that overhead allocated activity based costing system of the
products weaving. Year 2018, 2017, to 2016 the percentage fluctuated in every year. In year.
The material handling calculated percentage on the basis total 3.2, 2.24and the percentage is
2.41respectively.
GRAPH NO:–11

GRAPH SHOWING THE OVERHEAD ALLOCATION UNDER ACTIVITY

BASED COSTING SYSTEM PRODUCT OF THE FIXING BUTTONS.16%

ABC SYSTEM PRODUCT OF THE GARMENTS DIVISION

3.5
3
2.5
2
1.5
1
0.5
0
Material Volume based Other over Packaging & Total
handing cost Heads dispatch
2016 1.98 0.89 0.07 0.26 3.2
2017 1.62 0.34 0.03 0.25 2.24
2018 1.22 0.5 0.46 0.23 2.41

INTERPRETATION:
From the above graph show that overhead allocated activity based costing system of the
products weaving. Year 2018, 2017, to 2016 the percentage fluctuated in every year. In year
the material handling calculated percentage on the basis total 3.2, 2.24and the percentage is
2.41respectively.
TABLE NO:–12

TABLE SHOWING THE OVERHEAD ALLOCATION UNDER ACTIVITY

BASED COSTING SYSTEM PRODUCT OF THE WASHING.20%

Particulars 2018 2017 2016

Material handing 1.98 1.62 1.22

Volume based cost 0.11 0.34 0.62

Other over Heads 0.09 0.03 0.58

Packaging & dispatch 0.85 0.25 0.29

Total 3.03 2.24 2.71

ANALYSIS:
From the above table show that overhead allocated activity based costing system of the
products weaving. Year 2018, 2017, to 2016 the percentage fluctuated in every year.

In year the material handling calculated percentage on the basis total 3.03, 2.24 and the
percentage is 2.71 respectively.
GRAPH NO:–12

GRAPH SHOWING THE OVERHEAD ALLOCATION UNDER ACTIVITY

BASED COSTING SYSTEM PRODUCT OF THE WASHING.20%

3.5

2.5

2 2016
2017
1.5
2018
1

0.5

0
Material Volume based Other over Packaging & Total
handing cost Heads dispatch

INTERPRETATION:
From the above graph show that overhead allocated activity based costing system of the
products weaving. Year 2018, 2017, to 2016 the percentage fluctuated in every year. In year
the material handling calculated percentage on the basis total 3.03, 2.24 and the percentage is
2.71 respectively.
TABLE NO 13

THE TABLE SHOWING THE OVERALL COST INCURRED IN

COTTON WORLD EXPORTS

(RS in Crores)

YEAR Prime cost Work cost Cost of Cost of goods

production sold

2014-15 3486.39 1625.62 134.44 16.4

2015-16 4111.13 1669.06 155.32 1.01

2016-17 4722.79 1920.99 161.6 (55.09)

2017-18 4658.79 2150.21 173.23 69.99

TOTAL 16979.91 7365.88 624.59 32.31

ANALYSIS:

The above table shows that the overall costs in four years. Prime cost is 16979.91. Work cost
7365.88 and cost of production is 624.59 along with this cost of goods sold is 32.31. Cost of
goods sold is low compare to all costs in the cotton world exports.
GRAPH NO 13

THE CHART SHOWING THE OVERALL COST INCURRED IN

COTTON WORLD EXPORTS

5000 4722.79 4658.79

4111.13
4000
3486.39

3000
prime cost
2150.21
1920.99 work cost
2000 1669.06
1625.62 cost of production
cost of goods sold
1000

134.44 155.32 161.6 173.23

0
2014-15 2015-16 2016-17 2017-18

-1000

INTERPRETATION:
From the above graph we can see the fluctuations in the cost incurred on prime cost, work
cost, cost of production, and cost of goods sold of the company, in the year 2014-15 it
incurred 3486.39 Crores on prime cost. In the year 2015-16 is increased to 4111.13, in the
year 2016-17 increased to 4722.79 in the year 2017-18 decreased to 4658.79 Crores.
TABLE NO 14

TABLE SHOWING COST OF MATERIALS CONSUMED IN AN

ORGANIZATION

( Rs in lacks)
Description Cost of materials % in base year Increase or
2015-16 decrease
Consumed

2014-15 2025.64 100 ---

2015-16 2394.50 100.99 0.99

2016-17 2758.36 146.03 46.03

2017-18 2688.66 162.78 62.78

ANALYSIS:-
From the above table shows the cost of materials consumed by the company .that will vary
from year to year. In the year 2014-15 is 2025.64 Crores , in the year 2015-16 is 2394.50
Crores & it is slightly increased to 2758.36 Crores in the year 2016-17, in the year 2017-18
it increased to 2688.66 Crores
GRAPH NO 14

GRAPH SHOWING THE COST OF MATERIALS CONSUMED

cost of materials consumed

180
160
140
120
100
Series 1
162.78
80 146.03
60 100 100.99
40
20
0
2014-15 2015-16 2016-17 2017-18

Interpretation:
From the above graph we can see the fluctuations in the cost of materials consumed by the
company, in the year 2014-15 it considered as base year as 100 In the year 2015-16 is
increased to 100.99%, in the year 2016-17 increased by 146.03 in the year 2017-18 increased
by 162.78.
CHAPTER -5

FINDINGS, SUGGESTIONS AND CONCLUSION

5.1 FINDINGS:
As per my observation AT COTTON WORLD PVT LTD, the following findings are made

namely;

 The company’s comparison between traditional costing and ABC system, its shows the

ABC system is always better than traditional system.

 This is the company to supply the kids wear and pure cotton to national and international

level companies.

 Cotton world is the best leading company to manufacturing the ‘Kids wear’ to supply

their materials to other manufacturing companies throughout the world.

 The company maintains various costing techniques in that marginal costing. There is a

contribution, PV Ratio, BEP in Sales volume and margin of safety is to be calculated.

 The company maintains Uniform costing Techniques and also Target costing Techniques.

 The cost of production incurred in COTTON WORLD PVT LTD is increased year to

year but decreased in last year 2017-18.

 The Company’s overall costs incurred in four years that is Prime cost, Work cost and

Cost of Production along with this cost of goods sold is low compare to all costs in

cotton world exports.

 The cost of selling expenses increased in the year 2018-19 compare to the 2017-18 and

2016-17
 The companies factory overheads decreased in the year 2016-17 compare to the previous

years.

 The Revenue from Operations increased in the year 2016-17compare to the, 2016-17 and

2017-18.

 Cost of materials consumed in an organization are increased in the year 2016-17 compare

to 2017-18, and it increased in the year 2017-18 compare to 2016-17.

 Cost incurred on material handling of the company are increased in year 2018-19 but

decreased in the year 2016-17 and 2017-18.

 The employee benefits expenses incurred in cotton World Company in the year 2017-18

is goes on increasing compare to 2017 and 2016.

 The cost incurred on depreciation and amortization expenses of the company that will

vary from year to year.

 The cost incurred on non-current investment of the company is fluctuated by year to year.

 The costs of fixed assets of the company are increased when compare to 2016-17 and in

the year 2017-18 is decreased.

5.2 SUGGESTIONS:

The following suggestions are given to the Cotton World made by research;

 Cotton World should take up more orders to manufacture bulk production caused to

decreased manufacturing cost and increase the cost saving.

 The company improves the quality of products and gain more customers and giving the

more competition to the leading companies.

 Cotton World should open the more branches across the word to expand their business.

 The company should purchase the raw materials at reasonable price.

 The company should concentrate to Research the new cotton wearing’s to attract the

customers in competitive market.

 The company should concentrate and control the labour cost for manufacturing the kids

wear because it incurred more expenses to the company.

 The company should avoid the indirect expenses for selling the product, because it

increased year by year in the company.

 The company should control the selling cost to sell the products and material costs of the

company are increased in the year 2016-17compare to previous years.

 The company should adopt the reward system for motivating the employees.

 The following recommended Cotton World adopts extra advanced technology to

improve quality of products and control the cost of the company

5.3 CONCLUSION:

The COTTON WORLD PRIVATE LIMITED is one of the famous and leading
manufacturing company. It holds an important place in the mind of consumer and employees
by providing efficient service and better product. The Cost Reduction Techniques helps to
reduce the expenses and increase their sales and profit in fixed price project. Every cost
segment of the company has planned properly and the overall planning of the company as flow
down to the level of incidence of cost in order to achieve the goal. It has attached more
competition in the business environment. It is competing in the market with other competitors.
The professionally managed and export based company, which prefer for quality and customer
satisfaction. However, the key areas like raw material, Labour source, sales promotion and
advertising have potential for further refinements these constitutes substantial portion of the
company and is able to sort out these activities in an optimum manner, it will help the company
is controlling cost better.