The Right Way to Control Period Expense期间费用成本控制相关外文文献

The Right Way to Control Period Expense期间费用成本控制相关外文文献 The Right Way to Control Period Expense Management Accounting; Sep 1990; 72, 3; ABI/INFORM Complete pg. 55-59 BY DONALD A. J. BYRUM Year in and year out, the greatest challenge facing industry is cost control. No manager in his right mind would try to control direct material costs by stopping the purchase of direct material. Such an action obviously soon would bring production to a stop, i which would bring sales to a stop, which would bring the business to an end. Managers are smarter than that. They will have their engineering staff design out the most costly components and then have their purchasing staff find the least costly suppliers for the remaining components. In the same way, no manager in his right mind would try to control direct labor costs by firing his direct workers. The result would be exactly the same as not buying direct material. Instead, design engineers would be asked to simplify the construction specifications, and manufacturing engineers would be asked to provide tools and equipment that would maximize worker efficiency. In both these instances management recognizes, perhaps only subconsciously, that the cost is a symptom, not a disease, and that it is the disease that must be attacked. To continue the medical metaphor, the disease is like an active cancer that will grow continuously unless it is attacked continuously. But consider how management has handled salaried expense, where the "normal" method of cost control is decimation, that is, elimination of a percentage of the head count in expectation of a equal percentage reduction of salaried expense. It never happens. In fact, such actions have been known to result in an increase in total period cost expense. The question is, "What is the most effective way of controlling period costs?" The answer is through exactly the same techniques as are used for direct material and direct labor, that is, changing the design specifications of the job description to eliminate inefficient, redundant, and unnecessary work elements. The difference is that cost analysts and administrators make the design changes rather than engineers and buyers. The design changes must be completed and implemented before you can expect to see a cost reduction flow through to the P&L. The design changes require an application of manpower resources to create, so it is best to undertake them when times Eire good rather than wait until things are tough. Put simply, if you want to save period costs next year, you must do the design work this year. As with direct costs, the first step in reducing period costs is identifying those conditions, practices, and procedures that cause the costs (not the people who are the result). Everything must be open to question; there can be no sacred cows. For this reason it is usually best for outsiders such as administrators and cost analysts to do the actual design change work rather than having functional managers do it. Outsiders are far less likely to have any ingrained bias, and it is a fact ofhuman nature that one can see inefficiencies in another's operation much more easily than in one's own. Conversely, one's own employees are generally better than outside consultants because they already have a working knowledge of the existing state of affairs and usually will start with a pretty good idea of where some, at least, of the bodies are buried. This could mean a two- to three- man-month head start. In addition, each project worked on invariably will expose other areas that should be investigated. Effective period cost control and reduction should be a continuous process. TOO MANY COPIES Once upon a time, before the advent of mainframe computers and office copiers, reports were short, few in number, and had limited distribution. Unfortunately, that is no longer the case. For all of the benefits accruing from them, it is nevertheless true that computers and copiers are the greatest wasters of manpower in modern industry. This situation arises because management always is pressing for more, new, or different information and reports but rarely, if ever, considers purging old reports. A case in point was a fair-sized manufacturing operation of about 2,000 people. Each month data processing produced 41 reports—eight weekly reports and nine monthly summaries. A total of 321 copies was produced. The copies contained 140,000 pages and were distributed to 63 persons. It took about two man-months to interview all 63 persons and find out what was happening to the 321 copies. Eventually, it was determined that the weekly reports were totally unneeded. It was further decided to produce only two copies of the monthly reports, one of which was filed in an office at the north end of the building and the other in an office at the south end. It took several months for all of the results of this change to show up, and some came in unexpected places. Manufacturing removed more than 300 used filing cabinets from the shop floor and sold them. This removal freed up more than 3,000 sq. ft. of floor space, which then was used to store materials that had been kept in an outside warehouse (rental cost $30,000 per year). Giving up the warehouse, in turn, eliminated the need for a driver and truck (operating costs about $4,000 per year) used exclusively for moving goods to and from the warehouse. In addition, two file clerk positions were eliminated, and a printer operator in data processing was eliminated. Finally, open purchase orders for 42 new file cabinets were cancelled, as was a $20,000 appropriation for an additional printer and burster and an $18,000 appropriation for an additional truck. No one ever bothered to figure out how much was saved in computer paper or report folders. Finally, from a human standpoint, no one got fired. Because the changes were planned and orderly and took place over several months, all four people in eliminated positions were able to move into other, similar jobs that had become open through natural attrition. In addition, because the cause was excised, a permanent cost reduction in excess of $100,000 per year was realized. Not a bad payback for about two man-months of effort. Even less conspicuous than computers are office copiers. In fact, the cost of individual copies has become so low that their true cost usually is ignored. The true cost is the labor needed to copy, distribute, glance at (and in some cases read), and file. It probably takes an average time of about five minutes to perform all of these operations. Multiply all of the copies produced on all machines by five and divide by 120,000 to find the equivalent number of people involved with copies. One relatively small operation (300 persons) was producing 180,000 copies per year. The cost was only slightly more than $2,000, so they weren't concerned—that is, until it was pointed out that copies were the exclusive preserve of indirect people (100 of the 300) and that 180,000 copies were the equivalent of eight persons. There was a subsequent clampdown on copy making, resulting in about a 33% reduction in the number of copies over the following months. While no jobs actually were eliminated, there was a small reduction in indirect overtime (about 1.5 points). With work elements this small, it's often impossible to make a direct connection between the cause and effect. One must work almost on faith but with the firm knowledge that there truly is a cause-and-effect relationship and that it ultimately must be reflected in the P&L. TOO MANY BODIES A growing problem in many older organizations is the number of levels of local management. New companies tend to have only two or three levels of functional managers, plus one additional level for the company manager. Older organizations often have four or five levels of functional managers and up to three more levels to tie the organization together. If you've ever played the party game where a message is passed from one person to another, you'll be aware that it usually is totally garbled by the time it reaches the fourth individual. This is exactly the same thing that happens in business as information passes up the management pyramid and decisions filter down. The lowest level of management will be fully cognizant of both the form and details of what the workers actually are doing. The second level of management will have a firm idea of what's going on but few details. The third level of management will have only a general idea of what's going on and no details. The fourth-level manager knows only what is supposed to be going on. The second problem with too many layers of management is the delay that each level builds into the whole process. It is axiomatic that the greater the number of layers of managers, the longer it takes for decisions to be made and implemented. Better managers are usually aware of the weaknesses of the information immediately available to them. Consequently, in effect, they reach down two or more levels in the organization to where they can find information of a quality that they can use comfortably to make a decision. Thus the delay. If they didn't do so, the probability of a correct decision would be reduced significantly. To overcome this inertia, overly structured organizations tend to develop an "express" system. This is an individual or group who, in order to handle day-to-day problems, has direct access to the decision level, bypassing the entire chain of command. While this procedure has the short-term effect of keeping the company going, it also has the adverse effect of putting the intermediate levels of management even more in the dark about what actually is happening in the workplace. Under extreme conditions this "express" group even may develop autonomous decisionmaking power, which eventually can lead to a situation in which managers not only are unaware of what is happening but have no way of finding out. Identifying overstructure is fairly simple because you need only look at the organization chart. Any function with more than four levels of management and any local organization with more than five almost certainly has a problem. What to do about overstructure is also simple although sometimes painful. The excess levels should be eliminated. Extra levels of management usually are created in response to a specific business situation. The problem is that they fail to go away when the situation no longer exists. They are almost never at the bottom layer. They also tend to have a very small number of direct reports. One-to-one reporting situations invariably indicate an excess manager, and anything less than four direct reports should be suspect. If overstructure is an identified problem, then there surely also will be "express" groups, which normally will be at a very low level in the organization. They most often are found in units such as manufacturing and engineering facilities and in manufacturing and design engineering units associated with customizing products. In a properly structured organization, "express" groups can cause more problems than they solve, so in a restructuring they must be eliminated. One final point must be made in this area. A great many middle managers are "working" managers. Most of their time is spent performing real work and only a small percentage on supervision and administration. Eliminating a management level will not eliminate the requirement for any real work performed at that level and so may not result directly in losing anyone from the payroll. The true benefit is an improvement in the up-and-down flow of information, which will mean faster and better decisions, leading to an overall improvement in the efficiency of the entire operation. The eventual reduced manpower requirement may show up in an area far removed from the eliminated manager positions. Another hangover from the days of yore are personal secretaries and assistants. A secretary, in the traditional sense, takes dictation, types correspondence, files correspondence, places phone calls, sharpens pencils, makes coffee, and so on. Assistants write letters (which the boss then signs), prepare reports and charts (which the boss later presents), and actually make phone calls giving or receiving information (which then is passed on to the boss). With the advances that have been made in office equipment, the only remaining need for a secretary in modern industry is as a status symbol. Anyone of average intelligence with one good hand and reasonable eyesight can prepare a finished letter or report using a word processor in no more time than it would take first to dictate and later to proofread the same item prepared by a secretary. Anyone who knows the alphabet can file five documents per minute. If daily filing takes more than five minutes, then you are receiving a lot of documents for which you have no real need. On modern phones a call can be placed by pressing a single button, and it takes little effort to push a pencil into the maw of an electric sharpener. This leaves only the coffee. On the other end of the scale are assistants. Here the boss is frequently merely a front for the individual who actually is doing all of the work. In such situations it is not uncommon for the boss to take off for a week and have no one know it—which is a great "perk" for the boss but a terrible waste of funds for the organization paying him. This situation is not unlike the one-to-one management structure. Industry is rife with personal secretaries and assistants. In most cases where such positions exist, one individual is superfluous for requirements of the business—sometimes it will be the secretary or assistant, and" sometimes it will be the boss. Each case must be examined individually to determine which. As an example of how easy it is for an outsider to spot problems in organization structure, look at Figure 1, an organization chart for the Mythical Company. Indications of the functions involved are omitted intentionally. Thus, this could be an entire company or simply a single function such as manufacturing or engineering. Regardless, there are several fairly obvious problems. Foremost is the intermediate manager Ml, with his secretary and assistant. It is difficult to imagine how the insertion of this extra level of management can contribute to the efficient operation of the organization. Next up is the group headed by manager M7. He certainly should be able to handle seven workers by himself. The two line managers appear to be completely superfluous. Three secretaries in an organization this small also appears excessive. Finally, there are three managers, M2, M3, and M4, each of whom has a secretary and at least one assistant. Once again, employing three secretaries for this small a group of people appears excessive. In the cases of M3 and M4, it also might be questioned which is needed, the manager or the assistant. From what has been said, it should not be inferred that these jobs can be eliminated automatically. Close examination may reveal that real, important work is being done by all of the persons involved. It is the organization, not the individuals, that is being questioned by this approach. TOO MANY TASKS The number of indirect activities performed in a modern business is staggering. It can range from 100,000 in a relatively simple operation to well over one million in a truly complicated one. The problem here is that a significant number of these activities may be completely unnecessary. The origins of these tasks are many and varied. Some are lost in the mists of time—'It has always been done this way." Some were brought in by new managers, or even by employees, from their last job—"It worked there, so it will work here." Some were temporary situations that became permanent—"Well keep manual records until we're sure that all of the bugs are out of the system." Some are overapplication of standards—'If it's good enough for NASA, it's good enough for Joe's Shoe Repair." None of these "reasons" holds water. The basic criteria should be that work is performed only if necessary to the efficient operation of the business or if it is required by law (not necessarily the same thing). Any activities that do not jibe with either of these requirements should be eliminated. Every work activity should have three elements: input, conversion (added value), and output. If there is no conversion, then the activity is an unnecessary step in the work chain and should be elim- inated. If there is no output and the activity is not a direct response to one of the two basic criteria, it should be eliminated. Any time an activity is eliminated, its inputs (the outputs of preceding activities) also should be eliminated right down through the work chain. The snowballing effect of eKminating a single report sometimes can be quite dramatic. For example, consider the measurement of direct labor in a manufacturing operation using some form of time standards. This practice harks back to the days when direct labor was the primary ingredient of cost of operations—-sometimes as much as 80%. Today it rarely reaches 30%, even in the most labor-intensive operations, and 15% is probably the norm, with extremes as low as 5%. The manpower in finance, EDP, and manufacturing needed to collect, collate, measure, analyze, and review this labor is the equivalent of one and a half persons per 100 direct workers, with a minimum of four equivalent persons being required. For most modern industry, direct labor measurement is an outdated and unnecessary luxury. The hunt for unnecessary work can be an enlightening experience. In many companies as many as half of all final reports and two-thirds of all interim reports are really unnecessary. Therefore, an excellent place to pick up the spoor of unnecessary work is in the file cabinets scattered throughout an operation. All reports should be examined but especially those produced on a regular basis. When a report is found in the file of someone who doesn't need it, that person should be eliminated from the distribution. That report then should get special attention when you are checking everyone else on the distribution list. One frequent finding will be that even though the work leading up to the report was necessary, the actual issuing of a report was not. At all times the two basic work criteria must be kept in mind. Even when an individual is found who "needs" a report, it must be questioned whether his "need" contributes to the requirements. WHEN TO BUY Virtually all companies have one thing in common—they start small. While they are small, almost invariably they also perform most activities using their own employees. Most, though not all, larger companies learn that they can purchase many services for less cost than they can do themselves. Any activity that doesn't directly affect the operation of the business should be considered as a potential purchased service. Take, for example, a small high-tech electronics firm whose total employees, including the president, numbered 84. This number included three security guards, a groundskeeper, two janitors, three maintenance people, and a payroll clerk. All of these persons represent services that can be purchased readily. They also represented 12% of the total company manpower and a considerable waste of management resources. As is normally the case, it was not planned that this would happen. Like Topsy, the situation just grew. The president wanted to hire a full-time plant services manager but couldn't really afford it. Instead, he was persuaded to consider buying all of these services. He was surprised to learn that he could do so for less than the compensation and benefits involved. His decision was a foregone conclusion. With regard to auxiliary services, it is almost always true that once a requirement exists for a fulltime worker, it is more cost effective to purchase the service than to do it yourself. Purchasing the service often entails eliminating jobs held by long-service employees, so many smaller companies are loath to take the necessary action. From an economic standpoint, however, the question is only when, not if, the action must be taken. All companies are wise to take such an action as soon as possible. There is a second, less obvious, benefit to purchased services. They can be increased or decreased faster and in increments less than one full employee. This is especially useful for businesses that experience large seasonal or other fluctuations or are on a slow or erratic growth or contraction curve. TOO MUCH LOSS Many companies are plagued by high losses, but they seldom realize exactly how high because the losses can be hidden under a number of other guises. Costs identified as scrap, rework, and warranty expense are obvious. More often than not, these costs represent inferior design and materials rather than poor workmanship. Less obvious are a great deal of inspection and fault-finding, which frequently are masked as direct labor. These, too, are usually the result of inferior design and materials. Just as costly but less easy to spot are the results of poor scheduling. In addition to causing overtime and requiring extra materials expeditors and handlers, poor scheduling also results in paying premium prices for materials and for both incoming and outgoing freight charges. Late deliveries also can result in late payments by customers and, in extreme cases, the invoking of penalty clauses. Either or both of these eventualities adversely affect cash flow with a resulting effect on payables and payroll or on external financing. Add to these results the damage to any hope of obtaining future business. One of the most pervasive loss areas in modern industry is petty theft by employees. It is so prevalent that management has virtually given up any attempt to control it. On the average, every new office worker stocks his or her home office with more than $150 of company-purchased office supplies. Similarly, every factory or lab worker stocks his or her home workshop with more than $150 of standard tools and parts. After the initial stocking, only replenishments are taken, which will run less than $50 per year. Because the practice extends from the janitor to the executive officer (another reason for management's failure to control it), a simple calculation of the size of the loss in any year can be made using $150 for every new employee and $50 for every other employee. One large manufacturing operation reasoned that its employees were basically honest and, if given the choice, would buy rather than steal. It implemented a practice by which any employee could buy at cost any item normally stocked. In the first year it sold $80,000 of office supplies and $20,000 of standard tools. In that same year, compared to the prior year, its office supplies expense dropped $60,000 and its standard tools expense dropped $18,000. The plan was also simple and inexpensive. The employee filled out a stock requisition and delivered it to the stockroom. The stock keeper filled the requisition and passed the paperwork to accounts. The amount then was deducted from the employee's next paycheck. No new persons were added to the payroll, no new forms were created, and no cash was involved. Office supply transactions could occur only during the period when the office staff were normally at lunch, and toolroom transactions occurred only during the period when the factory was normally at lunch. There may be legal or other reasons why such a practice might not be practicable in a particular operation. But because of the benefits to both the company and its employees, this idea certainly deserves consideration. PLAN TO REDUCE In any cost control or reduction activity, the one fundamental fact that must be kept in mind is that all costs are results, not causes. Costs can be reduced or eliminated only by attacking their causes. Simply firing people to attack the salary expense line is likely to be offset by increases in overtime premiums and temporary help lines, in addition to separation expenses. It's like a water bed. Placing all the weight in one area merely causes another to rise up. To make the bed flatter, you have to let the water out. The other result of simply firing people can be that necessary work doesn't get done and the whole operation falls apart. This undesirable outcome, of course, dictates more cost cutting which, if done the same way, will be equally ineffective. The resulting downward spiral has caused the demise of more than one business. There are always a number of small areas in which immediate cuts in expense can be made. Actions such as turning off unneeded lights, buying cheaper toilet paper, and reusing cartons will effect immediate savings. But even when such economies are practiced throughout an organization, their combined effect is usually insignificant in the total period cost pool. So when cost is a problem, keep in mind that the P&L is the worst direction from which to attack it. Organization, practices, and procedures are invariably the root causes of all costs. Here alone can true economies be realized. ?