Introduction:
In current times where the economic aspects of globalization, openness and internationalization of the economy prevail, national companies have had to propose new strategies to remain competitive.
These strategies can be divided into two categories: The first, related to external situations of the Company and has to do with achieving new markets, launching new products, providing a better service in all aspects related to the chain of value, to maintain its degree of competitiveness in the market and therefore, seek consolidation.
The second, related to internal aspects, which revolve around how to contribute to obtaining that competitiveness and for which it is important to analyze the way in which human, physical and economic resources are being used in such a way that they contribute to the generation of value aggregate and what is even more important, such as its distribution among the different actors involved in the process, taking into account the commitment and social responsibility that as a Company they must carry out in the context of the country.
Costs and value generation
For the operationalization of the strategies, it is necessary that they be carried out in an integral way, for which the companies previously require finding the answers to the following questions:
- Where are we really generating added value and where are we not? How can we be more proactive towards our clients and towards the demands of the market? Are our processes really efficient and contribute to the optimization of resources and translate into lower costs of production?
The answers to these questions, to a large extent, are found within the Company, and are related, in one way or another, to its cost structure; because, to be competitive, it is necessary to produce at low costs, in such a way that it allows us to have a margin to maneuver and be prepared for surprises that arise in the market.
In accordance with the above, it is important to reflect on the following points:
- How much are the costs of activities that generate value and how many are those of activities that do not generate them? What is the participation of each one of them? How to clearly and precisely identify the cause / effect relationship of costs "By what criteria do we distribute indirect costs to the different products? How do we determine which are the star products and which are those that present losses, but that when they are consolidated, apparently all of them are useful?"
Activities that do not add value to the product
The Company develops a set of activities that revolve around the goods and / or services that are offered as satisfactory to its customers, but that are reviewed in order to establish whether they truly add value to the product.
These activities are directly related to the strategies that we indicated above.
That is, the external ones deal with the quality, time and form of delivery, price, after-sales service; while the internal ones with the acquisition of raw materials, the production processes, production times, storage, quantities of goods; etc.; in addition to other activities to support the above.
For a cost reduction program to be effective, it is necessary to periodically carry out verifications, in order to detect possible activities that are performing unnecessary tasks or that are no longer required in the processes; Well, there is nothing more absurd than doing a job that is not needed.
In this regard, it is important to note that, on some occasions, workers are not committed to the changes made to the organization and find it more favorable to do their tasks as they have always been doing, resulting in higher costs for resistance to change and which, in some cases, lends itself to duplication of tasks.
Based on the above, we can affirm that eliminating superfluous activities necessarily leads to reducing costs. These reductions, to a large extent, come from the identification of inefficiencies in the design of the product or the production process.
The relationship has an effect on costs:
Under current conditions, companies do not specialize in the production and / or provision of a particular good or service; on the contrary, its activity revolves around what customers request; what originates a complexity in the determination of the unit costs for each product or service that they offer; however, all costs and expenses appear on the profit and loss statement.
The situation described is no more than the result of the allocation of indirect costs and is mainly due to the increase in its percentage participation within the cost elements.
The situation is no longer the same as before; technological advances allow to have multifunctional production lines through which various products are made; the same product must have several presentations according to the demands of the clients; labor is not specialized; on the contrary, it contributes to the elaboration of all products; raw materials can be used as direct materials for some products and for others as indirect.
In accordance with the above, it is important that companies rethink their costing system; It is not intended to ignore the contribution of traditional cost systems with its three elements: direct labor, raw material and indirect manufacturing costs; What we want to show is the need to establish a methodology that, truly, contributes to determining the participation of each of the costs in each one of the goods or services that the company offers, in order to have control over the themselves and constantly reviewing them and having them as a frame of reference to evaluate business management.
This is precisely the most important contribution of cost accounting to modern management, where it becomes management accounting capable of identifying product life cycles; exercise control and monitoring of costs and determine the guidelines for their decrease, and be willing to introduce and / or similar technological changes that occur.
Distribution of costs to products
An activity-based costing system (ABC) was recently structured, which revolves around the following principles:
- The cost of a product or service is equal to the cost of materials plus the sums of the costs of all the activities carried out to make that product or service. The cost system should not only be concerned with generating information, but should also seek reduction of costs; this is like becoming a value-added generator. Going from a cost accounting system to a cost management accounting system. It involves the “hidden from the factory” expenses (sales, administration, generals) that although it is true, are globally listed in GYP it is not possible to assign the product or service in a clear way, based on a logical cause / effect relationship. It emphasizes the profitability and flows of each product or service; through the preparation of a separate profit and loss statement;in such a way, that it allows to establish what is the contribution margin of each of the products and what is the cash generated by a determined period of time.
Analysis of star products
From the economic point of view and introducing the contributions and contributions of the ABC costing system, it is of singular importance to carry out the analysis of Investment, Volume and Performance for each of the products or services offered, in order to determine which are the ones that contribute the most to the generation of added value for the Company.
Conclusions
From the above it follows that the approaches presented have a dual purpose.
On the one hand, seek competitiveness and on the other, focus attention on reducing any process that generates unnecessary costs; therefore, it is essential to bear in mind that any improvement in the quality of the processes automatically contributes savings in it; not forgetting the advantages that technological innovations have brought in recent years.
Finally, some reflections are presented that can serve as a starting point for the above:
Engage all your employees
- Let them know the benefits of lowering costs. Evaluate your degree of operating leverage and try to reduce your fixed unit costs. Have an adequate and correct inventory policy. Don't forget that high inventories involve economic, financial and fiscal costs. Look at the company as a whole.
