A small rice manufacturing unit in Kerala once went through a dilemma when they did not see any profit coming even when the sales were shooting up. After a detailed observation of the finances of the company, the organization couldn’t find the area where it was facing an issue. To understand the same and to mitigate it the organization asked for the professional help of a cost accountant. The challenge before the cost accountant here was to find out the area which was creating financial leakage to the organization and to suggest a plan of action to overcome the same.
After a careful evaluation and detailed discussions with the management team and the workers or employees of the manufacturing unit, the cost accountant came up with two findings. One, the company is selling its products at a wholesale quantity which are being purchased by small retailers who repack the same and sell at more profit. But this was not affecting the company in any way since the sales were not affected at all. In fact, the same showed an upward trend.
The second finding, however, was of more importance and it was the root cause of the company earning less than it was expecting. In order to reduce the material cost, which consists of a huge part in the total direct cost, the new management purchased rice from new suppliers at a very cheap price. However, in doing so they compromised on the quality. Instead of buying fully dried rice for flouring purposes they bought rice half dried, which required an additional process of drying and in doing so the quantity of the rice reduced further, which affected the yield of the product. A simple decision made by the company to reduce the costs without proper planning and supervision thus backfired resulting in a loss to the company in terms of profit and reputation altogether.
Whatever may be the business one is doing, it involves expenditure on manpower or labor, material and other items required for manufacturing and distributing the product or services. It is possible that in case of business there exists a chance of wastage at each stage, in order to ensure that machine doesn’t remain idle, no labor is under paid, by-products are utilized effectively and to ascertain the cost systematically, cost accounting and management is inevitable to any organization.
A good costing system ensures that the overall productivity of the organization is improved and thereby provides growth to the national economy as a whole. The wrong mixture used, the wrong quotations made, the wrong choices or options selected during the business won’t be reflected in the P&L or Balance Sheet. However, a cost accountant dives into every segment of the organization and points out specific areas which requires further focus and control in order to make the company/ entity profitable.
“Watch the cost and the profit will take care of themselves.” These are the words of famous Scottish-American industrialist and Philanthropist Mr. Andrew Carnegie. The words of Mr. Carnegie though seem simple, elegantly depicts the need of focusing on the cost one bears whether in their personal life or in a business environment.
The profit or sometimes referred to as the Margin of a product or a business depends primarily on two factors, the revenue it earns and the cost it incurs. Unless there is a nexus between the two, profit maximization is not possible. The concept of cost itself is very complicated and consists of wide meaning. While most people use the term cost and expense synonymously, the difference between both the terms is very huge. While in common parlance it is one and the same, in an elaborate scenario cost is more like a one-time settlement made and expense is a recurring one in nature.
The usage of the right cost in the right context is extremely important for a sustainable growth of the business and the economy. From the very basic concept of the steady cost or correct cost for a product or service, the concept of cost has evolved into what we now know as the cost optimization or cost management. The ever-changing economy fueled by the new and advanced technologies requires a more in-depth focus on the cost concept being put into use and the same needs to be evaluated on a timely basis. Today’s cost concept should therefore be more adaptive and fit to cope with the changing requirements. This is where the need for and importance of a cost accountant in the business is required.
A cost accountant is not like a regular accountant who looks after your books of accounts or financial statements to give you an idea about the financial position of the organization as on that date or period. In fact, a cost accountant’s duty or role is widely spread into various horizons of a business. The role of cost accountant starts from the very beginning of the development of a business idea and it continues throughout the business lifecycle.
The development of cost accounting as a separate branch of study itself came because of the limitation that financial accounting bears. That to say, financial accounting simply investigates the outer layer of the whole accounting concept where they prepare reports to help the management control in general and quantitative ways the various functions of business. However, it fails to evaluate the efficiency of the organization and to direct the business in a detailed way, areas where it trails and how the same can be overcome. Thus it can be said that cost accounting comes where financial accounting fails. Cost Accounting, unlike financial accounting, is a detailed examination of the cost part of an organization by analyzing and evaluating the organization in deep and formulating strategies and suggestions to ensure the organization is not making any unnecessary cost and thereby ensuring more profitable at the same time less exploitative business environment.
The Applicability of cost accounting is such wide that it can itself create a healthy economy if used or implemented carefully and seriously, unfortunately it is really saddening to observe that in a country like India, having vast opportunity and huge potentials with a thirst of becoming $ 5 trillion economy in the nearest future, neither the cost management or the cost accountants are getting the importance they required and in most of the cases they are being neglected.
Even today, a misconception is there in place among the public that cost reduction is what cost management is. Cost management focuses primarily on cost control and not on cost reduction. The maintenance of a balance between the cost and revenue is the ultimate key to profit. Proper cost management is only possible when a qualified cost accountant is placed in the company to look after the business performance as a whole and direct the business in the right path through maintaining the cost and revenue nexus.
In words of famous American engineer, professor, physicist and inventor, Mr. Robert. H. Goddard, “The reason many people fail is not for lack of vision but for lack of resolve and resolve is born out of counting the cost.” The post covid era has been really challenging for a country like India. Though the GDP growth and other related parameters are giving a positive outlook to the economy, the trauma from the past still exists. The continuing act of employee termination in the name of cost cutting is not going to make any benefit to any organization. It can only result in forcing the remaining employees to get exhausted while pushing their limits to achieve the organizational goals, ultimately resulting in poor quality workforce and services.
It is high time for a country like India to give focus on the cost and its management. The service of a cost accountant is neither an expenditure nor a cost. It is in all aspects an investment. To think that my company does have a Chartered Accountant in place and therefore there is no need for a Cost Accountant is simple ignorance. The importance of cost is such huge that a qualified Cost Accountant in any organization will serve as an asset in the long run. The more one delays in understanding and accepting the same and recognizing the contributions of a Cost and Management Accountant (CMA) in their organization, the is the chance for a county to achieve its goals. Without proper cost management, no economy can function to its full potential.
CMA Hrishikesh R Nampoothiri
mail id: hyadu12345@gmail.com
Mobile Number: +917560938431
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