Cost Management: The Wasteful Expenses and Cost Containment - Literature review Example

1.0 Literature Review on Cost Management Cost management has been in practice for several years: however, it has become a much-sought-after tool in the business world as entrepreneurs are increasingly searching for ways to cut cost and maximize profits. Cost management practically involves carrying out cost accounting with the purpose of drawing up functional budgets, calculating the actual costs of industrial or nominal operations, manufacturing processes and services. These pieces of information are used by managers to consider the real requirements of their businesses while doing their routine jobs, which include but not limited to planning, financial control and evaluation, continuous business development and efficient decision-making (Hansen et al., 2007). 1.1. Where are the wasteful expenses? Prior to the implementation of any cost containment strategies, it is quite essential that the following appraisal procedures should be carried out to understand which areas of an organisation have been wasteful and inefficient (Moon & Fitzgerald, 1996). Identification of unnecessary expenditures: The very first step in cost appraisal is to investigate which sections of an organisation are using more money than necessary. This activity could be carried out by dissecting the account books with the intention of fishing out extravagant expenditures that bear no direct impacts on the success of organisational success (Pendlebury, 1996). Personnel appraisal: It is also helpful to understand or review the working ethics of those who are responsible for the wastages in an organisation. This process may take 2 a complicated turn as accountants’ qualifications would be reviewed and their attitudes to work would be summarily questioned (Roslender, 1992). Business process appraisal: This is the last step in comprehensive organisational appraisal: it involves looking at the organisation as a system and identifying all dysfunctional parts of it that could have made efficiency practically impossible and draining the scarce funds that are pumped into the system (Puxty, 1993). Critically, analysing an organisation’s processes would help to determine if standards have been neglected or the workers have compromised the organisational goals and mission. 1.2 Cost Containment Cost containment is a continuous process in management by which firms maintain their organizational/operational costs by utilizing all cost-efficient strategies to remain within the specified budget for all the firms’ operations (Bhimani, 2005). Some interesting research have been conducted in the area of cost containment: however, different views or opinions have been expressed in the literature about how best to go about reducing excesses in firms’ financial transactions and expenditures. 1.2.1 Possible Cost Containment Strategies/Techniques A prudent organisation may aspire to contain excesses in its operational costs by implementing any or all of these cost containment strategies outlined below: 4 Strategy Affected Person/Area Merits/Advantages Maximum utilization of available resources All components of an organisation, including employees and different departments This will reduce wastages in the use of organisational resources and materials. Dependency on only in-house resources for Human Resources Management Employees Expensive and external employee training seminars/workshops would be avoided Transparent Procurement Procedure All departments This system would cut out all over-spending owing to confusing purchases Quality Control All departments Guarantee perpetual conformity to standards Increased Accountability All departments Improve the recordkeeping Transformed Organisational Culture All departments Re-engineering organisational culture would help an organisation to position itself for optimum efficiency 4 1.2.1.1 Maximum Utilization of Available Resources Johnson (2002, p.170) unequivocally linked optimum utilization of resources in British industries to optimum output. This direct linkage does not necessarily refer to the quantity of inputs, but, rather, it describes a situation whereby available resources (human, capital and material) are put into effective and qualitative use. And when properly managed, this could lead to satisfactory outcomes, reducing the level of wastages that often arise from improper management, weak policy formulation and improper implementation of organizational policies. When resources are maximally used, it demonstrates that the managerial capability is pronounced; and that all other components of the organisation are functional properly. A great number of firms that are lagging behind in utilizing all the potential resources at their disposal fail to do so because they there has been managerial lapses within the organisations (Ahrens, 1999). Some negative attributes of these lapses include miscommunication and slow coordination among the employees of the organisation. If this situation is allowed to persist, it may lead to the sudden death of the organisation. Pettigrew & Fenton (2000, p.95) strongly believed that if there is strong coordination in an organisation, it will be possible to harness all resources in the organisation together to produce an enviable innovation that could change the organisation’s fortune for good. Research have shown that over-utilisation of human resources could lead to tedium among the employees; a serious problem that could drastically decrease their motivational 5 capacity (Delfgaauw, 2006). So what is the right approach to handling all resources available to an organisation? Reid et al. (2004, p.108) argued that while accountants may not be typically doing the job of human resource development (HRD) to achieve maximum utilization of all available resources in an organisation, they can come in as engines to drive the HRD process. In what way? The accountants are required to carry out cost-benefit analysis for the organisation (Reid et al., 2004). Cost-benefit analysis offers the organisation the unique opportunity of knowing which resources are under-utilised, and what department in the organisation is shirking away from its statutory responsibility. Armed with fundamental statistics of the operations of an organisation, it is possible for account to predict the level of resource utilisation or encourage more dynamic uses for the under-utilised resources, whether it is human or material. Conclusion Encouraging optimal untilisation of resources available in an organisation could help to manage the overall costs of operation in the concerned organisation. The unique role of accountant here is to influence policy-making through the accumulation, computation and interpretation of facts and figures concerning every level of activity in the organisation. It is possible, through accountants’ cost-benefit analysis to discover some lapses in the operation carried out by each department of an organisation. It is also feasible to discover some problems associated with un-coordinating sections of all departments in that 6 organisation. So, accountants may not directly be involved in the human resource development process, but they can feed the Human Resource department the right information that would be instrumental in making all great decisions about how best to utilise both human and material resources in an organisation. 1.2.1.2 Dependency on In-House Resources for Human Resource Management Every organisation that wants to beat competition and position itself for greater efficiency must spend a lot to train and equip its employees with the latest ideas and technological information (Mant, 1983). However, the worry about how to do this without spending too much, and staying within the organisational budget allocation for it, has often beset many organisations. Human resource management is a critical process that demands attention, cutting-edge plan and exposure of employees to the trendy ideas out there; but the cost of successfully executing this process may be too cumbersome for any organisation (Wilson, 1999). So, what is the best approach that organisations could use to train their employees while sticking to the budgetary restrictions? Spencer (1986, p. 25) strongly encouraged that organisations should go to the drawing boards and painstakingly calculate the costs of training their employees before making any decision to go ahead with the process. By doing so, it will be possible to estimate the benefits and the possible expenses the training programme would incur. Normally, organisations set aside an integral part of their budgets to handle all issues related to human 7 resource development: but, on most occasions, these funds are spent sending employees outside the organisations for intensive job/skill training (Stevens, 1973). Over the years, this practice of external trainings has made organisations uncomfortable, considering the huge amount of money lavished on off-worksite seminars, trainings, workshops etc. Many proponents of cost-efficient HRD have canvassed for on-worksite training practices, which they undoubtedly believe would help employers to save a plenty of funds by concentrating only on the available resources in the respective organisations (Lumby, 1995). So far, the only demerit of this practice is that it produces workers that have limited skills, knowledge and technical know-how. This would rob the concerned organisation the confidence to compete with its rivals on all fronts. This circumstance could be referred to as a condition of inadequate skill training: the major problem of inadequate skill training is that such lack of essential knowledge may hamper the organisation’s plans to produce high-quality goods and services (Beaton & Richard, 1997). This is a serious issue because if the affected organisation continues to churn out under-valued goods, this may lead to its sudden collapse. However, it is duty of the both in-house and external accountants to estimate the costs of carrying training activities and compare them with how much the organization would have to pay if it is going to send its to participate in external training activities (Lumby, 1995). Without this initial and vital step, it will be practically impossible for decision-makers in the organisation to understand why it is cheaper to train the workers 8 using only the available resources in the organisation than contracting them out to external trainers that would impact modern ideas and technical know-how to their workers. Conclusion Apparently, there is no better technique to reduce the overhead cost of running an organisation than encouraging that employees are internally trained by some experts hired by the organisation. This would drastically reduce the expenses incurred by the organisation. Without first of all calculating the pros and cons for this exercise, it may confuse the decision-makers about why they have to accept the suggestion for workers to be trained on-worksite. And it is the indefatigable duty of accountants to prove this to the organisation’s management. 1.2.1.3 Transparent Procurement Procedures One of the unfortunate ways organisations lose bunch of money is through their shady, undefined or highly secretive procurement procedures. This problem has affected several organisations because improper procurement exercise leads to corruption and the need to patch up things to conceal the discrepancy between the appropriate and inappropriate purchasing systems (Masterman, 2002). An organisation can lose money through the following unethical practices buyers/bidders always adopt in order to win the supply contracts for raw materials or other stuffs that the organisation needs for its day-to-day operations. Some 9 of these evil practices are encouraged by corrupt management staff or even some careless directors. Giving bribes to the officials in charge of bidding or procurement processes Incomplete documentation for every bidding and procurement process Failure to follow procurement system step-by-step Insider bidding/procurement: relying on the secret information from within the organisation to determine the bid/procurement price There are many advantages of instituting a transparent procurement procedure. A typical example of a transparent system is Request To Pay Integration (RTPI) adopted by British Department for Work and Pension (DWP) for department-wide technique that handle requests, orders and payments for IT services. The features of RTPI are outlined as follows: Making sure that the users of IT services within DWP buy from approved catalogues of services Validation of the invoice details of IT services’ users The payment and allocation of charge to the appropriate business unit is being handled by RTPI From the explanations provided above, the British Department for Work and Pension was able to keep track of every purchase that was made within its departments, therefore 10 encouraging transparency and accountability (Rowlinson & McDermott, 1999; Thai, 2008). Accountants are needed in this area to draw up the structure that would facilitate the payment for orders placed for services. Having all the financial transactions on record can help an organisation improve on its proclivity to accountability (Pendlebury, 1996). Not only that, when all orders and payment have been properly documented, they could be compared with the previous figures to determine how transparency in procurement procedure has been able to remove complicity that had once ruled in organisations where improper procurement processes have been in place. Conclusion Accountants are helpful tools in assuring that proper system is invented at organisations to safeguard the processes of procurement. There are many advantages an organisation can derive from operating a system of transparent procurement: money that had previously been lost to corrupt and sharp practices in the organisation can now be saved and used for other purposes; the organisation can enjoy a rare chance of accountability, since all financial activities in the organisation would be properly documented, processed and kept in a proper manner that future reference to them will be possible. However, the main problem nowadays is that corruption through inappropriate procurement processes has rendered many organisation incapacitated to change their system of operation. 11 1.2.1.4 Quality Control Many organisations nowadays are implementing standards and regulations to maintain low cost of production. The 21st century has brought many challenges to the organisations: and one of the ways money is being wasted in organisations is through the production of defective goods. This reveals that the quality of operations in those organisations has been compromised (Nicholas & Steyn, 2008). This problem could make an organisation incur a huge debt and threatened the plan to cut cost. However, well-managed quality control would help organisations to produce high-quality products/services that would help organisations to manage its operational economically while amassing new wealth through increased sales and production (Aft, 1997). How can accountants work in the area of industrial quality control? Though, an accountant does not necessarily have technical or scientific knowledge that he/she could apply in quality control, but it is possible to accumulate data, process them and present them for the purpose of formulating financial policy that would support the implementation of quality control procedures/systems. Although, managers in organisations take up this kind of responsibilities, but nowadays accountants are brought into the whole picture of calculating the cost of establishing quality control system: this process is referred to as quality costing (Dale & Plunkett, 1999). 12 Conclusion From the foregoing, it is clear that quality control is a cost-cutting procedure that many organisations are adopting now. This involves ensuring that high-quality products and services are produced: but if goods are manufactured without following the right quality procedures, there is every possibility that they would be rejected by consumers. Hence, the concerned organisations would definitely lose money. But accountants could come in to estimate the actual cost of carrying out quality control system for the purpose of presenting facts to the decision-makers about why such a system be adopted. 1.2.1.5 Increased Accountability Why do organisations fail? Bovens (1998, p.25) believed that organisations fail because they are irresponsible. Corporate responsibility can be measured through the process of accountability established in a particular organisation. Hence, accountability stems from the ability of an organisation to successfully document every financial transaction or activity it undertakes with the hope of reconciling them with past performances (Watts, 1996). The bulk of accountability job is being carried out by the accountants, who would document, analyse and present facts, in form of statistics, for the management to look at prior to making vital decisions (Parsons, 1997). Organisations that take the pains 13 to be responsible would have all its accounts ready in case of future auditing, comparison and utilisation of the facts presented in their financial reports. Conclusion Any organisation that aspires to be responsible must take it upon itself to prepare its accounts properly in a way that it would encourage transparency and simplicity in the day-to-day running of the business. This issue is very important for any organisation that would like to stay competitive and be up-to-date in its operations. Accountants are the driving force behind any process of accountability in all organisations. 1.2.1.6 Transformed Organisational Culture As the business world encounters changes on daily basis, due to pressure from both domestic and international rivals, it is imperative that organisation transform their organisational cultures in order to be able to withstand the shocks of modern change. Re-engineering organisational cultures would help organisations to possess the ability to accommodate the increasing changes in the business ideas and practices (Blackwood, 1995). Technically, there is little accountants could accomplish here: but their quest for accountability and compliance with the accounting procedures may help the new organisational culture to succeed (Black, 2003). New technology and modernization have strongly influenced organisational cultures in this 21st century. And this change is reflected in all manners of human endeavors, be it medical or secular establishments. The good news 14 is that such impacts have been able to produce a better organisation, whereby the top priority is how to maximize profits by cutting the overheard cost of operations (Brown, 1998; Scott, 2003). Conclusion Accountants could do little to engineer an organisational culture, but they could help it to survive by pressing on accountability and conformity to laid-down principles. General Conclusion Looking at all the facts presented above, it is understandable that cost management involves many processes: the purpose of these processes is to guarantee that organisations operate within the framework of cost-efficiency, and not necessarily compromising their quality and responsibility. Using in-house resources to train workers and quality control seem to be the two major approaches of cost management. If these two processes are perfectly managed in an organisation, it could position the concerned organisation for: Better competitive advantage High-quality production of goods and services Readiness to adapt to the modern organisational culture Rise in popularity due to the display of enviable responsibility. References Aft, L.S. 1997. Fundamental of industrial quality control. Boca Raton (FL): CRC Press. Ahrens, T. 1999. Contrasting involvements: a study of management accounting practices in Britain and Germany. London: Routledge. Beaton, L. & Richard, S. 1997. Making training pay. London: IPD. Bhimani, A. 2005. Strategic finance and cost accounting. London: Management Press. Black, R. 2003. Organisational culture: creating the influence needed for strategic success. Florida: Universal-Publishers. Blackwood, A. 1995. Accounting for business. Sunderland: Business Education Publishers. Bovens, M.A. 1998. 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