My last post gave an overall picture about the course 'Cost and Management Accounting'. Let me now turn to the significance of understanding the basic concepts of costing. The primary motive of any business organisation is making profits. Profit, in its simplest form, is the difference between the revenue (income) earned by an organisation and the costs incurred towards generating the revenue. Hence, the profits can be maximised either by way of increasing the revenue, or by reducing the cost or by doing both. So, let us look at each one of them in detail. (For the purpose of simplicity, let us look at a manufacturing concern)
Revenue or Sales of an organisation depends on two things, (a) the number of units of its products sold and (b) the selling price per unit. The revenue can be increased either by increasing the number of units sold (volume) or by increasing the selling price per unit or by doing both. But there are certain challenges that an organisation faces when it tries to increase the volume of sales or the selling price. In case of monopoly, the organisation might find it easy to increase the volume of sales, if sufficient demand for its product exists. But in case of a highly competitive market, pushing volumes is really tough and beyond a point it can be achieved only by reducing the selling price. Now if we turn to the price, I always remember what my Professor told me, 'the only place where you find the price being fixed at the intersection of demand and supply curve is the text book!'. Most of the times, in a competitive market, business organisations hardly have any control on the price as the price is dictated by the competitive forces. So, we can summarise that a strategy of profit maximisation through enhancing revenue alone has limited scope.
Therefore, any organisation that is interested in maximising profits has to do so by reducing and controlling its costs. Understanding various costs and the behaviour of these costs is the first step towards controlling the costs. This is where the significance of product cost determination lies. As I had explained in my last post, product cost determination requires application of various methods and techniques of costing, which I will explain in detail in my next post. But, it has been proven time and again that in a highly competitive market, only those firms, which keep a tight grip on their costs survive in the long. I am reminded of a special issue of Business Today on Cost Management, which was published almost a decade ago. The cover page of the issue carried the picture of an eye with a subtitle, 'If you have only one eye on your costs...'. When the page is turned, the next page carried the picture of another eye with subtitle '.... then, why do you think you have two?'. This highlights the significance of cost control. A variety of methods are adopted by firms in controlling and cutting down costs. Following are the links to three recent stories related to cost cutting by three companies, Orient Cement, Indigo, and Vedanta. You may please read them and look at various strategies adopted by them in controlling costs.
Revenue or Sales of an organisation depends on two things, (a) the number of units of its products sold and (b) the selling price per unit. The revenue can be increased either by increasing the number of units sold (volume) or by increasing the selling price per unit or by doing both. But there are certain challenges that an organisation faces when it tries to increase the volume of sales or the selling price. In case of monopoly, the organisation might find it easy to increase the volume of sales, if sufficient demand for its product exists. But in case of a highly competitive market, pushing volumes is really tough and beyond a point it can be achieved only by reducing the selling price. Now if we turn to the price, I always remember what my Professor told me, 'the only place where you find the price being fixed at the intersection of demand and supply curve is the text book!'. Most of the times, in a competitive market, business organisations hardly have any control on the price as the price is dictated by the competitive forces. So, we can summarise that a strategy of profit maximisation through enhancing revenue alone has limited scope.
Therefore, any organisation that is interested in maximising profits has to do so by reducing and controlling its costs. Understanding various costs and the behaviour of these costs is the first step towards controlling the costs. This is where the significance of product cost determination lies. As I had explained in my last post, product cost determination requires application of various methods and techniques of costing, which I will explain in detail in my next post. But, it has been proven time and again that in a highly competitive market, only those firms, which keep a tight grip on their costs survive in the long. I am reminded of a special issue of Business Today on Cost Management, which was published almost a decade ago. The cover page of the issue carried the picture of an eye with a subtitle, 'If you have only one eye on your costs...'. When the page is turned, the next page carried the picture of another eye with subtitle '.... then, why do you think you have two?'. This highlights the significance of cost control. A variety of methods are adopted by firms in controlling and cutting down costs. Following are the links to three recent stories related to cost cutting by three companies, Orient Cement, Indigo, and Vedanta. You may please read them and look at various strategies adopted by them in controlling costs.
- Orient Cement: http://articles.economictimes.indiatimes.com/2014-03-20/news/48401858_1_cement-production-jk-lakshmi-cement-mangalam-cement
- Indigo: http://www.business-standard.com/article/companies/indigo-profit-zooms-to-rs-1-304-crore-in-2014-15-115091001039_1.html
- Vedanta: http://www.moneycontrol.com/news/economy/vedantamajor-cost-cutting-drive-at-goa-iron-ore-biz_3088521.html
