Prelude For Organizational Efficiency: Cost Consciousness

C OS T C ON SCIO U SNE SS-
Prelude for
Organizational
Efficiency
The Institute of Cost Accountants of India

(Statutory body under an Act of Parliament)
C OS T C ON SCIO U SNE SS-
Prelude for
Organizational
Efficiency

This publication does not constitute professional advice. The information in this
publication has been obtained or derived from sources believed by The Institute
of Cost Accountants of India (ICAI) to be reliable. Any opinions or estimates
contained in this publication represent the judgment of ICAI at this time. Readers
of this publication are advised to seek their own professional advice before
taking any course of action or decision, for which they are entirely responsible,
based on the contents of this publication. ICAI neither accepts nor assumes
any responsibility or liability to any reader of this publication in respect of the
information contained within it or for any decisions readers may take or decide
not to or fail to take.
© 2016 The Institute of Cost Accountants of India. All rights reserved.

Preface
Cost consciousness being prelude for bringing about organisational efficiency is an effective
approach to cost management. Everybody in an organisation needs to be aware of the
importance of cost and implications thereof in deriving organisational efficiency. Only a
cost-efficient organisation can sustain the shock of competition. The costing system provides
managers with the information for determining the cost of products or service, processes or
operation and for exercising cost control in the firm under reference. The cost accounting system
is embodiment of general accounting for supplying information to all the levels of management
for effecting improvement and effectiveness is planning, control and decision making. ‘Cost
Consciousness -Prelude for Organisational Efficiency’ is an effort to sketch the outline of roles
and functions of cost culture which entails ascertainment of cost, responsibility accounting,
product pricing, profit planning and determination thereof , budgeting, cost control and cost
information reporting. The whole exercise on “Cost Consciousness – Prelude for Organisational
Efficiency” has been reflected on six sub-themes representing the meaning, significance and
relevance of cost in a modern business organisation. The constituents of ‘Cost Consciousness-
Prelude for Organizational Efficiency ‘ includes Cost Accounting-An Evolutionary Overview,
Cost Consciousness Vs. Organizational Efficiency, Methodology for Creating Cost Conscious
Environment in an Organization, Sustainability of Business through Cost Consciousness, Cost
Efficiency for Strategic Capability of Indian Economy through Cost Consciousness and finally
a Case Study on Cost inefficiency and implications of cost consciousness. It is the sincere hope
that this work would help the policy makers to make policy decisions towards cost management
in general and on the role of Cost & Management Accountancy Profession and contribution
of Cost & Management Accountants (CMAs) in economy management.
Arjun Ram Meghwal
Hon’ble Minister
Minister of State for Finance and Corporate Affairs
Government of India
CMA Manas Kumar Thakur
President
Table of Contents
Cost Accounting – An Evolutionary Overview 10
Cost Consciousness Vs. Organisational Efficiency 14
Methodology For Creating Cost Conscious
Environment in an Organisation
20
Sustainability of Business Through
Cost Consciousness
24
Cost Efficiency for Strategic Capability of
Indian Economy through Cost Consciousness
28
Cost of Inefficiency – A Case Study 32
CHAPTER – I
C OST AC C OUNTING –
AN EVOLU TIONARY
OVERVIEW
Introduction
In order to trace the evolutionary development of Cost Accounting, we need
to understand the philosophy of the first Book on accounting titled “Smma
De Aithnatica, Geometrieca Proportionilita” or simply “Summa” authored by
Fra Luca Pacioli in 1494 which contains a chapter on double entry system of
Book keeping and some discussions on certain aspects of cost analysis. Today
cost accounting is known as either Cost & Management Accounting or simply
Management Accounting because of significant metamorphosis it has gone
through over the past six countries. Cost Accounting deals with ascertainment
and determination of cost of production and distribution of wants removing
goods and services and transmitting relevant, significant and meaningful cost
information to the management for the purpose of decision making under
different socio-economic situations. Cost consciousness is the pivotal force that
necessitates emergence of Cost Accounting or Cost & Management Accounting
as a distinct discipline and the same has been recognised to be a noble Profession
for guiding different levels of Management in an Organisation which may
include commercial, bureaucratic or entities not for profits.
Evolutionary Sketch
The history and development of Cost & Management Accounting can be
presented in the following way which took place in different parts of the world
and more specifically in the UK, USA, Canada etc. It has been mentioned earlier
that the terms Cost Accounting, Cost & Management Accounting, Management
Accounting & Cost Management are used synonymously and interchangeably in
the literature of Management Accountancy.
Cost Consciousness-Prelude for Organizational Efficiency 10

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Cost Accounting Prior to the 19th Century

According to Carolyn Perry (1996),
collecting and recording information about During mid 1990’s onwards there
economic activities has been found to be in
place since man first started to write. The was intense competition in the
necessity to record cost information leads
not only to the development of scientific global market as a consequence
accounting system but such system even
existed around 1400 B.C. In Italy, by the 15th of globalisation and emergence
Century Accounting had developed into
the basics of Double Entry Book Keeping of market economy which led
System by Pacioli as we have mentioned
elsewhere. Cost
to the emergence of
Cost Analysis – 19th Century Management era that
Cost Analysis era emerged during this occupied a room significantly in the
period and found to be in practice out of
the consequence of rapid industrialization
during 18th & 19th Century. Cost Analysis
domain of Management
being the nucleus of Management
Accounting began to develop when Accounting .
individuals and business houses felt the
need to attach cost to economic activities
and products. In 1740’s the Accountant of
Melinicryddan Smelting Works provided
information to the management to asses which of the two possible locations would be profitable.
Similarly in by 1775, in the UK, Josiah Wedgwood was using much more sophisticated cost
management system in his pottery works, In the same way Lyman Mills, USA, developed efficiency
reports which emphasized labour time and pounds of Colton converted in each process. Cost
Records were maintained to account for efficiency of the manufacturing processes and purpose of
Cost Control.
Between 1880 & 1914 an approach brown as Scientific Management was developed by F.W. Taylor
who is brown as the Fatter of Scientific Management, F.W. Taylor developed a method for analysing
productivity of the factors of production in a number of industries. Time and motion study is the
contribution of Taylor who applied Standard Costing System as a management accounting tool for
cost control purpose.
Cost Accounting – 1st half of the 20th Century

The rise of Du Pont in the USA at the beginning of the 20th Century emerged to be a landmark in the
development of Cost Accounting System, During this period many new businesses come into bring
which were vertically integrated ones that required good cost accounting information. Secondly F.

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Donaldson Brown devised a system for relating costs, net profit and return on investment to short
run output variations. Flexible Budget mechanism is the contribution of Donaldson and this is an
effective tool for planning and control.
Management Accounting Between 1950’s and 1980’

Cost Accounting was elevated to the status of Management Accounting during post World War
Era. Upto 1930’s Cost Accounting was found to be relevant to be guide of management but Ronald
Coase, of London School of Economics expressed his unhappiness on the role of Cost Accounting
and suggested a new system which measured cost relative to alternative activities forgone and this
was known as opportunity costing system. During 1940’s William Vatter from the University of
Chicago suggested that Management Accounting should provide relevant information for the
purpose of managerial decision making. He categorically opined that same cost are sunk that is
irrecoverable, while others may be escaped, curtailed or adjusted by management action. Costs
may be controllable or uncontrollable, avoidable or unavoidable, linear or non linear in statistical
behaviour. In simplicity, William Vatter emphasized that different costs were needed for different
purposes and cost and financial being two different Accounting Systems were needed with different
degrees of accuracy and timeliness and thus management accounting as on effective tool for guiding
the managers come into being formally at this point of time. Management Accounting and Financial
Accounting become district prominently from each other and emerged to be recognized as two
distinct branches of Accountancy attributed with distinct purpose. Management Accounting came
into place as an internal reporting system and as guide to management in planning, control and
decision making whereas Financial Accounting was recognized as a system of external reporting
and to serve the need of information for the people outside the business organization. Management
Accounting is thus defined as the presentation of accounting information in such a way as to
assist the management of a firm in the formulation of policy, decision making and controlling
and monitoring the day to day commercial operation of an undertaking. There was considerable
development of different management accounting tools and techniques including learning curve,
simulation, linear programming, , PERT/CPM, Game Theory etc besides traditional management
accounting tools like Standard Costing, Break-even Analysis, Budgeting, Responsibility Accounting
were started to be in practice at random.
Strategic Management Accounting: 1980’s to mid 1990’s

Strategic Management Accounting was first coined by Prof Ken Simmonds of London Business
School in order to give Management Accounting a new direction such as “Put your effort where it
matters, give your Management Accountant a camera not a PC(Management Accounting Research
Group Newsletter 1992). Prof Simmonds emphasized that Management Accounting shall be used
to guide the management of an organisation in formulating and framing strategies and formulating
policies with reference to competitors, customers, cost leadership, product differentiation,
merger and acquisition, price fixation etc. under different market conditions. During this period
development of Activity Based Costing (ABC) and Activity based Management (ABM) are the
landmark contributions of Johnson & Kaplan. Development of Balanced Scorecard (BSC) as a
strategic planning tool is an important contribution in the field of Management Accounting.

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Balanced Scorecard as a strategic performance management tool uses both Financial & Non-
Financial measures and the same is found to be in wider practice across the globe.
Cost management – Mid 1990’s onwards.

During mid 1990’s onwards there was intense competition in the global market as a consequence of
globalisation and emergence of market economy which led to the emergence of cost management
era that occupied a room significantly in the domain of Management Accounting. During this
period and onwards the role of management accountant has undergone a remarkable sea change
from numbers crunching preparer of financial statement to a high level decision support specialist.
Management Accountants assumed the role of business partners, business strategist, internal
consultants and a professional of high order of wisdom. Cost Management arises at optimising
profitability through Cost efficiency. It not only ascertains cost of doing but cost of not doing
simultaneously.
Conclusion:
In Order to understand the role of Cost Consciousness in bringing about organisational efficiency it
is an imperative to shade some lights on the evolutionary development of erstwhile Cost Accounting
and today’s Management Accounting Management through which Cost Consciousness is practiced
and it generates desired result of the organisation. Philosophically speaking, an organisation should
not spend more than actual requirement and should spent judiciously which forms part of cost.
The gulf between sales and cost is profit and profit is the measure of effective performance of the
management, Cost Management ensures cost control and measures the performance of the factors
production in an economy. The ongoing era is the era of cost management. The evolutionary
development of the discipline of Cost & Management Accounting is presented below.

Cost Recording – Prior to the 19th Century

Cost Analysis – 19th Century

Cost Accounting – 1st half of 20th Century
Management Accounting – 1950’s to 1980’s
Strategic Management Accounting – 1980’s to 1990’s
Cost Management – 1990’s Onward

CHAPTER – II
C OST C ONSCIOUSNESS
VS ORGANISATIONAL
EFFICIENCY
Introduction
Cost is the common denominator and the principal guide for achieving
organisational efficiency under the environment of competition. Under
competitive business environment, price of a product or service is determined by
the interactive forces of demand and supply. In other words, price is determined
by the market and a business has to sell its products or service at the price
determined by the market when market is under the influence of competition.
Price is the contribution and consideration that contains cost and profit. Under
competitive market environment, a business can make only normal profit and
there is hardly any scope for earning extraordinary profit. What a business
can do is to manage the cost of production and distribution of the product or
service and here lies the role of cost consciousness which contributes to bringing
about organisational efficiency, growth and development. Cost Management at
the various phases of production and distribution cycle is the sustainable and
surviving strategy for a business at micro level and the economy as a whole
at macro level that face the heat of cut throat competition under the business
environment of market driven economy. The efficiency of a business is measured
by the degree of efficiency it controls and manages the cost.Cost consciousness
and cost culture play a pivotal role in the practice of cost management in order to
accrue organisational efficiency.
Importance of cost management as a contribution to Organisational Efficiency:
The contemporary era in the evolutionary development of cost and management
accountancy profession has been attributed to cost management era. Cost
management is given prime importance from the angle of supply chain in the
process of procurement of inputs to transfer the ownership in the products or
service in favourer of the customers. Supply chain management takes care of

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management of cost of supply of inputs and it continues its effort till the output is finally handed
over to the ultimate customers. There are various techniques used in cost management and some of
them are value analysis, ABC, ABM, ABB, Target Costing, Lifecycle Costing, Theory of Constraints
etc, and CMA(Cost & Management Accountant) is the architect of cost management methodology,
In raw materials procurement, there involves transaction-processing cost, input purchase cost
and input holding or carrying cost. It is an imperative to mention that CMAs guide the business
with regard to the methodology and scope of cost reduction and control of cost in each and every
stage of product planning and design. The business must know at what stage of its operation it
would be able achieve its breakeven and when it would be able to start earning profit. It is to make
industry analysis and make a thorough SWOT analysis in order to identify the avenues when it
can enjoy competitive advantage over others. The profession of cost and management accountancy
has reached over such a stage during last two hundred years where it became an indispensable
discipline that guides the business under different situations. It plays its effective and pivotal role
under different phases of business cycle in appropriate manner.
Issues concerning Cost Competitiveness that leads to Organisational Efficiency.

Porter’s five forces model plays the significant role in framing business strategy. Five forces
identified by Porter are threat of new competition, threat of substitute of products or services,
bargaining power of the customers or buyers, bargaining power of suppliers and degree of intensity
of the completive rivalry. Threat of new competition is assessed from the angle of cost and quality
perspectives of the product and service. New competitors normally follow penetrating pricing
policy for gaining entry in a particular market. The competitive advantage of the competitors
is analysed in objective manner and a recommendation is transmitted by the CMAs. Secondly
threat of the substitute products is analysed. Substitute is the alternative. For instance, Journey by
bus is substitute of journey by train. When service from both of these elements is compared, the
service quality, time factor, comforts and cost of obtaining the required service is to be taken into
consideration. Thirdly, bargaining power of customer is examined and taken into consideration
while adopting a particular pricing policy. Customers bargain on the basis of the criteria of price of
the substitute, quality, post sale service and quality. It is to ascertain the cost of replacement, post
sale service cost and other relevant factors that drives cost. Similarly the bargaining power of the
suppliers is examined.
The issues concerning Cost Competitiveness as a sustainable business strategy are dealt with
hereunder:
Competitive Advantage
Why do customers buy one product in preference to other is nothing but the competitive advantage
between the two is compared and it is again cost and quality aspects that matter and help in taking
a decision. Competitive advantage is a set of unique features of a company expressed and translated
in terms of quality and cost per unit. It also takes into consideration its products that are perceived
by the target market as Significant and superior to the competition. The firms to are focus on the
issues relating to cost, product differentiation and niche strategies. These aspects together constitute
the foundation stone of competitive advantage. When a firm is able utilize skilled workforce,

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judicious purchase of raw materials and efficient commercial operations, it is said to be working
with competitive advantage. The example of Bata India Ltd. Can be cited in this context. Bata
India Ltd manufactures different kinds of Shoes and sandals and the customers enjoy competitive
advantage of Bata products over other shoe manufacturing companies both in terms of cost and
quality. This is from customers point of view. From the side of the firm, the firm enjoys competitive
advantage in the shoe market as it does have customers’ support since it is able to offer the wider
range of products at reasonable cost with desired quality. Similarly, we may cite the example of
Maruti Suzuki, an Indo- Japanese car manufacturing firm, does have competitive advantage over
other car manufacturing companies in term of cost and quality. Cost is the only mantra for survival
and sustainability under the context of competitive business environment. Cost management is
exercised at product design and development stage and technology with cost efficiency prescribed
by the cost manager is one of the ways of cost minimization.
Product Differentiation
Product differentiation is another mantra for survival under competitive environment. The
mechanism of product differentiation keeping cost at minimum level with requisite quality
conformity allows a firm to compete with others. The gulf between sales and cost is the profit. The
firm cannot influence price under competitive environment but cost control and cost reduction are
under its workable domain. Branding helps in product differentiation and branding has also a cost
and it has to decide that whether a firm should go for branding or not and comparative analysis for
cost with or without branding is made and conclusively an appropriate decision is taken.
Marketing Mix
A marketing mix is nothing but a planned mix of the four Ps within a marketing plan. The four Ps
of marketing mix consist of product. price. place and promotion. A successful marketing mix must
have all four elements created to reach the target market effectively in order to have an efficient and
desired market share for a product likely to be launched. Each element of marketing mix is analysed
and the cost perspective and implication of the same are examined. As far as first ‘P’ i.e. product is
concerned. the first question arises whether the product likely to be marketed in near future is cost
competitive and it takes care of analysis of cost with reference to physical shape. packaging and
brand etc. When we talk of product. we mean the relevance of customer-value. physical appearance
and associated services are taken into consideration in the definition of the product. Physical
distribution or place comes into the next purview of analysis. Place is the location where the
product or service is available for the purpose of purchase by the customers. It is to ensure that the
product or service is available whenever the customers want to buy it. Sometimes product may be
available on a particular location and here the distribution cost is of prime concern and the same is
taken into consideration while the decision with reference to place is taken into consideration. The
prime location or location on posh locality is involved with greater bracket of distribution cost. The
third ‘P’ i.e. promotion which communicates the product value through advertisement and it has
to be a cost effective media otherwise it would overburden product. As far as product promotion is
concerned. Advertising, public relations, personal selling and distribution of samples are the cost
drivers when the product or service concerned is the cost object. Finally fourth ‘P’ i.e. price that
represents the monetary benefit a customer is willing to sacrifice for acquiring the product or a

particular service. Price is the consideration
that includes the financial term along with
time and effort of the customer and they
same defined in term of cost of procurement
by a customer. In the literature of marketing
management, however, product, price, place
and promotion is given the importance of
this order and discussed accordingly. Cost is the only
Market Penetration and Development mantra for survival
Market penetration is a strategy for gaining
market share for a new product or service. and sustainability
It is an earnest effort of a firm to increase
its sales with the existing and prospective under the context of
customers. Market development is the
process of expanding the market for product competitive business
and samples of the product are freely sent
to the prospects with a hope that soon the
prospects shall be converted into loyal
Cost
environment.
customers. Now the samples etc, which are
freely distributed among the prospects, are
Management is
definitely are not free from cost implication. exercised at product design
It is to cover in the price of the products that
would be coming to the market for regular and development stage
commercial transaction. The cost manager
is to advise the marketing manager how to and technology with cost
cover up the product development cost for
the new product. efficiency prescribed by
Diversification the cost manager is one
Cost
This is a strategy for increasing sales by
creating new market for the new products. of the ways of
Diversification is prone to higher risk but
generates healthy profit too. While taking
a decision with regard to diversification,
Minimization
it is imperative to scan the cost structure
of the products or services. For taking any
decision for a new project, it is essentially
to evaluate the project in terms of cost and
benefit. Benefit is the cash flow generated
over the life of the project and its economic
viability is judged before it is recommended
for acceptance or rejection of a particular

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project. It also uses modular contribution approach for marketing cost analysis. The whole market
is divided into certain number of segments and it ascertains contribution of each segment to profit
besides indirect fixed cost that is associated with the segment. The modular contribution approach
assesses the profitability of specific marketing mix in a specific zone and evaluates and examines the
feasibility for making change in the marketing strategy in the concerned zone. The fundamental
objective of a business is to maximize its revenue and profit. In order to achieve this objective, it is
important to keep in view that quality and cost aspects of a product are to given necessary weightage
at the time of product planning, product design, manufacturing and use. Product planning involves
taking decision about which products and services a firm is contemplating for marketing. The
management is to take a decision with regard to market segment, product features, quantity level,
price and expected volume of sales. The manufacturer must take into consideration the design of
the product by product designer and it must take care of abnormal spoilage and waste of inputs
otherwise it tell upon the financial health of the product. Finally, it must ensure that cost for post
selling period is minimum and the cost implication aspects from product planning to product
reaching the final users is analysed for the new product and before diversification these issues
are critically analysed by the cost manager and places the same before the management for their
appropriate action.
Conclusion
It may be relevant to assert that a product failing the test of cost competitiveness cannot sustain
and survive in market other than
monopoly. In monopoly, the firm
.....diversification is the price maker whereas under

competition, it is price taker since
strategy enables
price is determined in competitive
market by demand-supply forces
prevailing in the market. In the same
a firm entering way, it can be stated that product
differentiation ensures how a firm’s
into new markets product or services differ from other
competitors in terms of quality and
with completely cost. Product development strategy
is adopted by a firm when its existing
new product market is saturated and it tries to
leverage its market related experience
and here lies and effective customer relations
management with the existing
the risk and risk customers to push the new products

after designing the same in terms
assessment.
of customers preference. Product
development strategy is practiced to
move away from hard degree cut throat
competition and creating uncontested

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market which may be called ‘Blue Ocean Strategy’. Here it is to ascertain the impact of research
and development cost and advertisement focus over the concerned product or service. Finally,
diversification strategy enables a firm entering into new markets with completely new product and
here lies the risk and risk assessment. It may not be irrelevant to mention that to cite the example of
Honda that leveraged upon the core competency of engines to enter into the business of generators
and lawn mowers as has been dealt with by Gary Hamel and C. K. Prahlad in their famous book
‘Competing for the Future’ and here also the role of cost management is well accepted and thus
cost is the principal guide in framing the sustainable business strategy and cost competitiveness
is the test that needs to be passed by any product or service for survival and sustaining in the
competitive business environment particularly when it is the buyers’ market. Moreover for the
purpose of generating maximum customer value, cost competitiveness is a must for the product or
service in order to create a niche of its own.

CHAPTER – III
METHOD OLO GY FOR

CREATING C OST
C ONSCIOUS
ENVIRONMENT IN AN
ORGANISATION
Introduction
Cost consciousness leads to cost saving. Saving in cost analyse leads to greater
profitability and profit is a prerequisite for existence for any economic entity.
Costs of closing business and costs of staying in business, cost of factors of
production etc, are the constituents of outlay forming the part of cost an
organisation incurs during its day to day operation. There are three situations
in connection with profitability analysis of a firm and one of them is likely to
happen at a time and they are (i) Sales > cost leads to profit, (ii) Sales< cost
leads to loss and (iii) Sales = cost leads to a situation of neither profit nor loss.
Situation (i) i.e. sales> cost in the primary objective or target of a business and
situation, (iii) i.e. Sales=cost is better than situation, (II) and cost consciousness
and cost conscious culture only can make a business navigate in situation (i) or
Situation, (iii) Situation (iii) is acceptable as a temporal phase of commercial
operations and ideal target is Situation (i) Thus cost consciousness and
cost conscious culture do have a positive role is making an economic entity
economically stable and financially solvent.
How to create cost Conscious Environment

Following are the steps normally adopted to create a cost conscious environment:

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66 Educating people about meaning, significance and importance of costs. Fixing responsibilities
and roles of the rank and file in managing and saving to Costs.
66 Bridging the behavioural and professional gulf between Finance & Accounts and Other
wings processionals.
66 Ensuring that everybody favours decision-making on costing information.
66 Obtaining Support of top management to sensitive the areole organisation about Cost
consciousness and its workability.
Relevant costing information for Decision Making

Managers are to take different decisions under different situations comprising of risk, uncertainty,
risk and uncertainty etc. and for this purpose they need to understand the implications of cost for
the following purposes.

Planning
66 Accepting or rejecting investment in Project.
66 On expansion or contraction of activities
66 Monitoring day to day operation
66 Selecting the best alternative
66 Deciding optimum Product mix
66 Deciding the most profitable activity level
66 Plan to meet the challenges of unexpected and contingent events.

Decision Cycle

Decision on strategy Decision on spending
i.e. planning i.e. budgeting

Organisation

Review

Feedback Monitoring Implementing


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Cost information for different types of decision

For different levels of management, requirement of information is also different. Normally, there are
three levels of management and they are strategic level, tactical level and operational level and they
also otherwise known on top level, middle level and lower levels management respectively. Strategic
decision are taken by top management which remains engrossed in priority settings, commitment
of fund in capital asset procurement and alternative courses action etc. Tactical level Managers are
responsible for smooth implementation of the policies formulated by top management and lower
level management is responsible for execution. Strategically speaking, managers must be clear
and certain to know what decision they are to take, accordingly identity the relevant and right cost
information, which leads to making cost analysis, information generation and dissemination of the
same through efficient reporting.
Steps for creating cost conscious culture:

It may be presented in the following flow diagram:

Communication w.r.t. importance of cost

Fixing cost management responsibility on managers

Establishing dialogue among different departments

Ensuring decision made on costing information

Periodic Review on functioning of cost management system
Cost saving acts as panacea for survival growth and development of an organisation. The objective of
non-profit organisations is to generate surplus whereas profit motive organisation’s main purpose is
to earn profit in order to ensure perpetuity of existence in the business. Managing financial aspects
of an organisation is nothing but similar to personal finance management through prudence and
ultimate objective is to ensure that it is subject to profitability and for this purpose, it is to create
cost consciousness to manage the commercial operation carefully.

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Driving sustainable cost Efficiency and removing cost Inefficiency

Driving sustainable cost efficiency is a mandatory action on the part of management and it is of
more significance when a business passes through recession and under such a situation a clear
cut understanding of cost implications is a must. Eliminating unsustainable cost enables removal
of inefficient cost and this is efficiency. If projects are kept untaken off, tour and travel costs are
slashed, training and HRD budget is cut short, and finally reductions in manpower is initiated.
Barriers to Cost Consciousness
Reluctance of a firm whether belonging to private sector set up or public sector set up to take part
in cost management is the major barrier to the cause of development of cost conscious culture in
such organisation in order to remove the barriers, it is to initiate dialogue among the people, equip
the cost management team, examining performances management targets are to be made in place.
Conclusion
Organisational well being depends upon the principles of there ‘Es` and E-1 Stands for Economy.
Efficiency means to do the thing right, E-2 stands for Effectiveness which means to do the right
thing and finally E-3 means Economy which refers to the philosophy – ‘ waste not, want not’ and
the third ‘E’ is the foundation of cost consciousness.

Efficiency

Survival, Growth & Effectiveness
Economy Development of an organisation

depends upon

Workability of Three Es
Cost management is the managerial action built on the foundation of cost consciousness and cost
culture and no organisation including government establishment cannot sustain and survive in
absence of cost culture.

CHAPTER – IV
SUSTAINABILIT Y OF
BUSINESS THROUGH
C OST C ONSCIOUSNESS
Introduction
The question of sustainability of business is central to business strategy. A business
can sustain only when it sets its priority to meet the interest of the stakeholders.
The key issue of strategic management is that of how an organization uses its
resources and capabilities to develop a sustainable competitive advantage in
its favour. The long term success of a firm depends upon the ability to create
and sustain a competitive advantage over the rivals that operate parallel in
the market. A sustainable business is required to understand the dynamics of
economic environment whose essentials constituents are the internal and
external stakeholders that include investors, customers, suppliers, employees and
regulators. Investors provide capital, customers are the source of profitability,
suppliers supply credit, employees are the cause of productivity and regulators
i.e. government ensures environment for fair and healthy competition and
social justice in the business environment. The business in turn is to prioritize
the responsibility for capital appreciations as return and dividend as reward for
the investors, timely delivery of high quality products and services at reasonable
price for the customers, profit for the suppliers of funds in order to sustain in
the business, support, respect, fair treatment, training for upgrading of skill and
competence and sustainable with comfort a remuneration for the employees
and finally, regulators want a business complies with rules and law of the land,
honesty and fairness in the day to day dealings of the firms besides payment of
tax in time. The essence of sustainability should be considered as a strategic issue
for every business and a business cannot sustain without securing the Interest of
the stakeholders.

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Profit-Indicator of Performance
An organization generally targets at attaining economic prosperity and environmental quality. No
business can sustain without profit-and according the Michael E. Porter, new entrants to business,
power of buyers, power of suppliers, substitutes and rivalry among the competitors directly or
indirectly influence the degree of profitability of a business. New entrants into the market brings
extra capacity and intensify competition, existing competition and its intensity and powerful
buyers can enforce price cutting, suppliers attributed with bargaining power charge higher prices,
substitutes threat across industries and in order to have harmonious balance of these five forces,
the business has to gain strength from the stakeholders. No business can rise to the zenith of
its success by ignoring the interest of the stakeholders. The theory of stakeholders has become
a prominent subject and occupied an important room in the literature of management since
publication of the book' Strategic Management; A Stakeholder Approach' authored by R. Freeman
in year of 1984. Freeman says, "Current approaches to understanding the business environment
fail to take account of a wide range of groups who can affect or are affected by the corporation, its
stakeholders". Modern businesses in developed countries are seen to be more serious in protecting
the interests of the stakeholders than that of business organizations operating in developing
countries like India. Overall commercial success of a business depends on successful management
of relationships that a firm does have with the stakeholders. Again, in the version of Freeman, a
firm ceases to exist without the support of the stakeholders. The stakeholders do have direct and
indirect influence on the long term strategic decision of the firms and without spontaneous support
of the stakeholders, it is difficult maintain its continued success in the economic environment.
Employees and investors are the internal stakeholders and customers, suppliers and government
are the external stakeholders of the firms. It is to take into consideration the fundamental interest
of the stakeholders in the process of architecting planning and formulating policy of a company. In
India, business management policies are formulated without taking into consideration the views
of the stakeholders in many cases. Employees are exploited to the possible extent and in private
sectors, organizations barring few private sector multinational companies who adopt the standard
practice in treatment of the people with respect , customers is provided with adulterated products
, promoters vanish from the market with investors money, suppliers claim are dishonoured, and
regulatory bodies i.e. governments is deprived of due tax through the mechanism of tax evasion
and tax avoidance process.
Value Maximization through Cost Consciousness

Stakeholder Theory being an important theory and guide to modern management believes in
professionalism and only professional practice and procedure can create value for the society. Indian
business tycoons like Sahara, Kingfisher, Satyam etc exploited the stakeholders to an unimaginative
extent and government is struggling for recovery of misappropriated assets of these so called blue-
chip companies. The basic objective of the firm is to maximize value for the society by exploiting
the available resources whose ownership belongs to the society. According to the neoclassical
theory of Economics, economic value is the sum of the consumer surplus and producer surplus.
Consumers’ surplus represents the gulf between the maximum price the consumers are ready to
pay for the goods and services in order to satisfy their wants and the price they actually pay. On
the other hand, producer surplus is referred to be the difference between the selling price of the

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product or service and the cost of resources used for generating revenue which is technically called
cost. A business cannot survive and sustain if the customers shun the business. Peter F. Drucker,
the renowned management thinker of the twentieth century says that customer is the business and
sales is the only window through which revenue enters into the business.
Cost Assessment-Result of Cost Consciousness

A business cannot afford to lose the customers and ignore the interest of customers. In the same
way, all the stakeholders play distinct roles in bringing about overall economic success of a firm.
The opportunity cost of the factors of production is to be ascertained correctly otherwise it will be
difficult to work out the magnitude of value. Here, the business has to hire the professional service
of the Cost & Management Accountants (CMAs) who are the experts in cost assessment and cost
ascertainment. Moreover, the surplus value so created need to be appropriated in logical manner
among the stakeholders in order to have command over
their confidence in the governance of day to day
as well as strategic affairs of the firms. A
customer becomes willing to pay higher
price for the bundle of benefits and not
for the features of the products and
A business cannot afford when it is so, then only higher
magnitude of value is said to be
to lose the customers created. Sustainable strategy
and strategic planning
and ignore the interest of can only take care of the
interest of the stakeholders.
customers. In the same way, Strategy is all about
competitive advantage,
future, direction, resource
all the stakeholders play allocation and utilization,
direction and course of
distinct roles in bringing action in order to achieve the
objectives of value creation
about overall economic and the contribution of all
the stakeholders is Significant
success of a firm. and meaningful for attaining
the mission of the business. Cost
consciousness leads to influence the
understanding of cost implications and
efficiency of management in value creation.
Sustainable Strategy
Business strategies should be formulated within the framework of overall objectives of a firm with
a view to meet the needs of the stakeholders. If someone sees from micro point of view, it can
be understood that strategy comprises of how and where to compete, how management uses the

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financial resources and how it maintains its relationship with that of suppliers of capital. The mission
of an economic entity normally is embodiment of three questions and they are as to why does a
business exist, what does it provide and for whom does it exist? If someone thinks deeply, strategy
is nothing but mechanism for meeting the needs of the stakeholders. In this context of generating
value for the stakeholders, perhaps it will be pertinent to refer the McKinsey 7-S Model where
strategy has been given an important room. While dealing with the needs of the stakeholders, it is
to keep in view the transparent corporate governance which is embodiment of governance, ethics
and social responsibility and fair dealings with the stakeholders is possible under the spirit of these
aspects of modern management principles. Stakeholders' support is unconditionally available when
an organization practices in transparency, accountability and commits to social responsibility since
these are essential ingredients of sustainable strategic management. R. Freeman says that it is the
business of the business to honour the due claims of the stakeholders having direct and indirect
contribution to the growth, development, survival and sustainability of business and therefore
entrepreneurs should have broad view as to how to generate confidence of the stakeholders in the
economic affairs of the business. It is therefore worthwhile to mention that in order to maintain
the reasonable degree of flow of sustainability of a business, it is a compulsion and not just an
imperative to take care of the interests of the stakeholders and cost consciousness is a productive
strategy to generate necessary surplus for the business in general and the investors in particular.
Cost is the measure of the sacrifices of the resources that transform into consumable goods and
services. The fundamental theory of cost consciousness is bared on the premise that ’waste not,
want not’. Costs can be reduced through innovation. Enhancing efficiency of the inputs would
enable cost reduction. Under competitive business environment, price is fixed by interaction of
market forces and the producer can hardly influence over price. It is the cost that remains within
the Control of the producers. Cost leadership Strategy can only ensure survival and sustainability
of a business under competitive environment. Thus, cost consciousness and cost competitiveness
have no substitutes.
Conclusion
Cost management culture develops only through cost consciousness at individual as well as business
level. It is the religious responsibility of the business organisations to derive the result of being cost
consciousness at no cost. It is possible through positive behavioural actions.

CHAPTER – V
C O ST E F F IC I E NC Y
F OR ST R AT E G IC
C A PA B I L I T Y OF
I N DIA N E C ONOM Y
T H ROU G H C O ST
C ON S C IOU SN E S S
Introduction
India is attributed with a vast economy comprising of public sector and private
sector manufacturing hubs. A commercial organisation's ability to grow, survive
and develop depends upon its strategic capability and cost efficiency is the pivot
which ensures strategic capability to the concerned business organisation in
particular and the whole economy in general. Cost management is the nucleus
of cost efficiency philosophy. Cost efficiency is practiced on the foundation of
efficient and judicious uses of factors of production which essentially includes
land, labour, capital and entrepreneurial ability and it is the outcome of efficient
management of the rewards payable to the contributors of the factors of
production. The degree of cost efficiency depends on how effectively costs are
managed or the ability of a firm to manage cost. The need and requirement of
achieving cost efficiency is equally applicable to both the public sector and private
sector organizations though the objectives of public sector organizations are
different to certain extent from that of private sector organizations. Government
of India is very serious in using cost and management accounting theory and
philosophy of cost management and promoting cost culture in the country. In
this context, the role played by the Institute of Cost Accountants of India (ICAI)
formerly the Institute of Cost and Works Accountants of India (lCWAI) is vital.
The name of ICWAI has been changed to ICAI by dint of the Cost and Works
Accountants (Amendment) Act, 2011 (Act No. 10 of 2012) and the professional
designation of the Members of the ICAI have been changed to ACMA(Associate

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Cost & Management Accountant) and FCMA (Fellow Cost & Management Accountant) from
AICWA (Associate Incorporated Cost & Works Accountant) and FICWA(Fellow Incorporated
Cost & Works Accountant) respectively by the same Act of Parliament.
Cost Efficiency – Need of the Hour

The seed of cost efficiency and cost management as a corporate managerial culture was sowed
seventy two years ago by a group of Management Accountants by promoting the ICWAI in 1944
and the same emerged as a Body Corporate through enactment of the Cost and Works Accountants
Act, 1959 by the Indian Parliament. Government of India is happy to acknowledge
the role being played by ICAI in promotion of cost culture in the country. Any organization can
hardly sustain the shock of intense competition in the globalised economy unless they practice cost
management in order to achieve cost efficiency. Cost efficiency is the function of efficient utilisation
of resources and ability to manage cost. The gulf between price and cost is the profit. Price of a product
is determined by the market forces in competitive business environment and cost management is
left in the hands of the producers of goods and services. It is to state that public sector organisations
and private sector organisations are the twin constituents of the national economy. In public sector,
cost efficiency is the political imperative in order to provide improved and affordable level of service
while keeping the cost within the circumference of public finance. On the other end, i.e. at the end
of the private sector organizations, cost efficiency enables the firm to offer the economic benefits
at managed cost. Cost efficiency aims at building core competence of both the public and private
sector firms. Profit earning capability of an economic entity is the litmus test of survival. Without
cost efficiency through effective cost management, it is perhaps impossible to ensure perpetuity of a
business under the business environment of competition. Customers are price sensitive and they as
usual intend to trade off between the desirability of features of the products and consideration for
purchase they are to sacrifice. In simplicity, the suppliers are to provide requisite value for money
for the features of a particular product and customers would go elsewhere if the firms fail to do so.
Every firm operating in competitive business environment is required to drive down the cost of
products in order to offer value for sacrifice of the customers measured in monetary term through
judicious practice of cost management. Cost and Management Accountants (CMAs) are the expert
professionals who are rigorously educated and trained to manage cost of the products or services
strategically. Cost management is an art of strategic business management and CMAs are business
strategists who monitor commercial performance of the firms remaining engaged in production
of economic goods and services. Cost and Management Accountancy Profession's heart is cost
management and generating cost efficiency which helps the business sustain the shock of intense
competition that prevail under the influence of market economy by and large. The constituents
of cost efficiency include economies of scale, design of products and processes, supply cost and
experience. The effect of economies of scale reduces cost per unit as the scale of operation increases.
The prices paid for factors of production do have linear effect on cost structure. Thirdly, business
process and product design jointly becomes the source of cost efficiency. Productivity of labour,
material yields and management of working capital are of prime importance in generating cost
efficiency through cost management. Finally, experience i.e. learning curve helps in generating
cost advantage mainly in repetitive processes. Michael Porter's value chain on the other end does
have a positive role in accruing cost efficiency. The CMAs analyse costs involving inbound logistics,

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operation, outbound logistics, marketing and sales and rendering services and measure earnings
in terms of margin. The margin represents excess of consideration over cost paid to the firms for
obtaining bundle of values added to the inputs through manufacturing operations. Cost incurred
through various primary and secondary activities need proper monitoring and reporting to the
strategic level management for appropriate action.
Cost – Prime influential factor

Costs have greater influence on procurement, technology adoption, human resource management
practices and infrastructure development. Value chain management by the CMAs ensures achieving
cost efficiency and consequently developing strategic capability of a firm. It helps the firms in
establishing those economic activities which provide the customers monetary value they want and
this is possible with the managerial action advised by the CMAs. Moreover, the areas of weakness
in the entire value chain are identified and placed before the management for appropriate action
in order to take the firm to the desired level of prosperity. The purpose of value chain analysis is
to ascertain how a firm creates value. A firm has to outperform its rivals in order to lengthen its
stay in the market. The theory of Product Life Cycle (PLC) helps a lot in generating cost efficiency.
PLC comprises of four stages and they are introduction, growth, maturity and decline. A product
is attributed with different characteristics of revenue, cost profit and investment at each stage of its
life cycle. Sales-revenue and profitability of a product are subject to change in each of the four stages
of life cycle and cost management thorough cost analysis ensures cost efficiency for the concerned
product. A product failing to be in the bracket of cost efficiency cannot sustain in the long run and
more specifically it meets untimely death. During introduction stage, unit cost of a product is high
because of low output and high promotional expenses. At the growth stage, high capital investment
is felt to be necessary in order to meet the market demand which leads to low cash flow and it is
even lower than profit and even sometimes a negative cash flow becomes a reality. During maturity
stage, profit becomes healthier, investment becomes low and cash flow becomes certainly positive.
Moreover, prices of the products start to decline since the firms face stiff competition. Decline
stage in the PLC becomes very dangerous to any firm. At this stage, sales decline considerably at
high rate and there remains over capacity of production in the industry. Degree of competition is
severe, profit falls and it compels some producers to leave the market. Therefore, cost management,
profitability analysis and securing cost efficiency is the prerequisite at each and every stage of PLC
and it is part and parcel of strategic management. The business undertakings should take into
cognisance the importance of cost management as a tool for securing, survival, sustainability,
growth and perpetuity of existence in the market. Cost management is strategic management tool
and it is the cause whereas cost efficiency is the effect and it is difficult to think of one without
the other and therefore cost management and cost efficiency can be used interchangeably. Cost
management is the core function of CMAs in particular and it is the most valuable gift of Cost and
Management Accountancy Profession in general. Strategy in simplicity stands for plan of action
under different situations that prevail in dynamic economy. A business devoid of practice of cost
efficiency philosophy can hardly reach its target and cost ineffective economy can hardly succeed in
promoting wellbeing of the society. Therefore, every business should into consideration the role of
cost management in achieving cost efficiency in order to minimise the risk of low profitability and
consequently low return on investment. Cost management is science and it can deliver panacea for

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sustainability, growth and economic prosperity

of the business. Cost efficient products can
only rule the market thus it should be used as
strategic management weapon in the hands
of the management. Cost efficiency is a must
to have new customers whose presence and
absence determine the rise and fall of a business.
Government of India
Conclusion
is very serious in using Cost
and Management
Cost competitiveness is the panacea for survival
and sustainability of an economic entity
Accounting theory and

under competitive economic environment.
Cost Audit is a mechanism for developing
cost consciousness among the industrial
organisations both in private sector as well as philosophy of cost management
and promoting cost culture
private sector. Cost Audit was initiated under
section 233B of the Companies Act 1956 in
the year of 1968 and the same has been carried
forward to section 148 of the Companies Act in the country. In this context, the
role played by the Institute
2013. The industries belonging to strategic,
constructions, chemicals, health care and
of Cost Accountants
sanitation etc are covered by the canvas of
Cost Audit. But it is the need of the hour in
of India (ICAI)
order to make the nation Cost competitive
that cost audit should be extended to other
formerly the Institute

sectors including medium size organisations
as well as small scale industries. In order to
of Cost and Works

reap the benefit of cost competitiveness, cost
consciousness, development of cost culture is
Accountants of India
an essential measure that needs to be adopted
throughout the length and breadth of the
(lCWAI) is vital.
country. Cost efficiency through cost audit is
possible since cost audit has been emerged as
on effective tool of cost management. It helps
in bringing about industrial efficiency, effective
business decisions with the help of attentive
cost information and over and above all it
enables the economy to cause faster economic
development by optimum utilisation of
economic resources.

CHAPTER – VI
C O ST OF
I N E F F IC I E NC Y:
A C ASE ST U DY
Introduction
Modern India Limited (MIL), a multinational firm engaged in manufacturing of
alternator parts (P1, P2, P3 and P4) of generator for last fifty years. The product of
the company has international market and it leads in term of cost efficiency and
quality management. The company has manufacturing units in UK, USA, Japan,
South Africa and Australia besides India. The company's financial performance
during last five years is sluggish and depressive. All the manufacturing Units
across the globe are functioning as individual Strategic Business Units (SBUs)
and they compete with one another. However, they work on the principles of
goal congruence. Each SBU is headed by a General Manager (Operations) and
the organization structure of the company is of pyramidal and traditional headed
by CEO Cum Managing Director. There is intra- SBU competition and one SBU
can exercise option to buy input from another SBU or open market. Transfer
Pricing Mechanism is in place. The company has four directorates and they are
Marketing, operations, Finance and Human Resource and all the board members
and their immediate subordinates sit in the Headquarters of the company. The
leaders of the SBUs function as an individual decision making entity and report
to the CEO thorough the concerned directorates. The company works on the
strong guiding principles of focus, cost leadership and product differentiation.
The firm has a full -fledged Total Quality Management (TQM) cell and the total
quality management cell of the company was very active and efficient at the initial
years of operations and it did never make any compromise in quality control and
quality management of the product keeping in view the international standards
and parameters. This was the inherent strength of the company. The company
was always watchful on market standing, productivity, management of financial
resources, performance of the managers, attitude of the staff, professionalism,
surplus creation and honouring corporate social responsibilities. These are the
preambles of the company on which it is founded. But the company is not in a
position to make its way in the roads of globalisation. The case of the company's
performance in totality can be understood, from the foregoing account as is made

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hereunder. concerning production of sub-standard

product which does not conform to the true
Marketing Function The Operations Directorate of the company is
The Marketing Directorate is headed by Director headed by Director (Operations) and assisted
(Marketing) assisted by GM (Marketing) at by GM (Operations) at corporate level and all
the corporate level. The company is having a the SBUs are headed by GM (Operations) as
downward trend in sales over the years. The already mentioned elsewhere. The engineering
budgeted sales for each SBU is 12,000 (in works of each SBU has 585 uniformly employees
P1:P2:P3:P4: 1:1:1:1 Ratio). Order received for under different hierarchies starting from
sales during last five years are as in year1, it was Operational Managers. It follows a scalar chain
14,000 units, year2 it was 12, 000 units, year3 it of 1:8 and it is maintained that 1-8-64-512 i.e.
was 10,000 units, year4 it was 9, 000 units and one GM(Operations), eight Dy. GMs, sixty
year 5 the order received was for 7, 000 units. four Managers and five hundred and twelve
Actual orders received were almost in the above Operational Managers are approximately there
ratio in last five years for the products of the in the payroll of a SBU. Operations Directorate
company. The marketing directorate placed its is also controlling authority of Purchase
arguments in favour of downward order that functions and Research and Development and
both quality and cost in particular and selling Research and Development Cell is responsible
price in general are having adverse impact on for value analysis and value engineering
fulfilling sales target. Earlier, the company was including product designing. Cost of product
the market leader for the products mentioned is alarmingly high and cost reduction and
above. Now market is very competitive (and cost control policy and mechanism is in place
practically it became a 'red ocean now) and in paper only. This is the age of automation
after sales service are offered free for three years and this hardly receives any priority in the
to five years by the competitors whereas MIL Operations Directorate.
offers only one year after sales free service.
The pricing policy is not reviewed for last two Employee cost is almost entirely fixed and
years. Market Research (MR) cell is not in a nothing other than material cost is variable.
position to work in proper direction keeping Overhead is semi-variable and it may be within
pace with at least for the purpose it was created. a range of 2:0% as variable and remaining 80 %
The marketing information reports generated is fixed. The Cost & Management Accountant
by the marketing wing of the company both at (CMA) is of the view that activity based costing
SBU levels as well as corporate levels reach late can bring about correct product costing and
to the board for taking appropriate measures hence in product pricing. Each product should
and decision. Director (Marketing) does not be burdened with its own cost and not that
have sufficient information for reviewing the of others. It is the general tendency of GM
performance of the sales force periodically. (Operations), SBU-In-charge, to overrule the
Sales are the part and parcel of the marketing recommendations and suggestions of the CMA
directorate. Advertising and Sales Promotion posted at the SBUs. The material cost variance,
Budget, according to the CMA of the company. labour cost variance and overhead variance in
is devoid of justification in terms of result. The most of the times are adverse and the principles
incentive for ...sales force is hardly linked with of management by exception are the allergy of
target achieved by the sales and marketing SBU-In-charge. Purchase manager is to work in
people. Sometimes, marketing people blames conjunction with stores manager, production
production people for untimely delivery to managers and finance managers and production
the customers. There is continuous complaint managers are required to work in conjunction

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with marketing managers. Scientific inventory and remaining 60% is locked up in physical and
management techniques can help in managing infrastructural assets. The CFO of the firm is
inventory carrying cost and inventory ordering worried that operational cost is with upward
cost according to the CMA. Purchase manager trend and revenue earning is with downward
can help in getting reasonable discount in trend and it is a very difficult situation to match
following effective purchase policy. Work study revenue with escalating expenses. An Earning
was undertaken by the SBUs five years back and per share is abruptly low and it is difficult to
the recommendations of work study group are earn the confidence of the investors under
under the cover of dust. such circumstances. There is accumulation of
book debts and inventory and stores and this
Finance Functions disturbs the short term liquidity of the business.
The Finance Directorate is headed by Director The cost structure in terms of the cost of sales
(Finance) and CFO and is assisted by GM of the product comprises of 50% material, 30%
(Finance) at corporate level and Finance Function employee costs, 20% overhead and 5% of the
at SBU level is headed by Dy. GM (Finance) who cost of sales hardly contributes to profit. CFO
is essentially a qualified CMA as per the policy feels that abnormal loss in material handling
of the company. According to the periodical and overhead needs to be controlled and the
report generated by Finance Wing, cash flow is performance based incentive scheme for the
very weak and there is irregular flow of revenue employees should be adopted in order to make
to the coffer of the company. Collection cell is the firm financially solvent.
under the administrative control of Marketing
Directorate and functionally responsible to the Human Resource Functions
Finance Directorate. It violates the principles The HR Directorate is headed by Director
of unity of command and as result it causes (HR). The Company has a full-fledged
an administrative problem for securing Human Resource Directorate and it deals with
accountability and this has been brought to recruitment, training and development and
notice of the HR Directorate over time and promotions of the people of the organizations
again but no workable solution is generated so in general. The HR Directorate functions and
far. Financing working capital is dependent of monitors the HR Budget as is framed by the
the strength of cash flow. Purchase Department company. There is centralization of HR Policy.
fails to secure more credit period from the It is the responsibility of the GM (HR) at
sundry creditors than the collection period corporate level to act as the chief coordinator
allowed to sundry debtors and the same is being among the SBU level HR Managers. The SBU
practiced by the collection department without HR Managers prepare HR Budgets annually and
any review. The company is contemplating the same is incorporated in the Master Budget
for diversification of its business from of the Company. It is has been observed that a
manufacturing alternator parts of generator substantial portion of the HR budget remained
to manufacturing of industrial cranes and for unutilised during the panned period and the
this purpose it needs injecting both debt and GM (HR) could not justify the non-utilization
equity in terms of RS.1000 crores. But it is of the HR Budget. Budget proposal is placed by
afraid as to whether people would subscribe SBU HR Managers and the same is forwarded
to the equity since for last five years rate of by the GM (Operations) .to Headquarters of
dividend payment is marginal even less than the company located at Mumbai, India for
that of savings bank interest rate. Currently the adoption. Moreover GM (HR) takes lot of time
company has a capital base of Rs. 2,000 crores to communicate the approved HR budget to
out of which 40% is invested in working capital the SBU HR Managers and SBU In-charges.

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The world is changing very fast keeping pace external failure cost, appraisal cost and
with advancement of science and technology. correcting costs are major components of TQM
Staff cost is 30% of the cost of sales in general but they remain unreported in most of the
and every employee has to contribute positively time. There is huge gap between contemplation
to growth and prosperity of the company. and action. An organization means people and
The people of the organization have to work it fails to deal with its people in time-honoured
keeping in view of importance and Significance conducive manner that can inspire and motivate
of economy, efficiency and effectiveness. the workforce of the company. The CMA was
Non performers have to be identified and giving continuously alarming bell but the
the company does not have a time-honoured management did not give due attention to it. It
mechanism and parameters for measuring is now high time to draw the existing balanced
the efficiency of the people. The company HR scorecard and the budgeted one for the given
Policy is back dated. It is observed that a person firm. Both the principles of management by
who joined as Foreman/ supervisor remained objectives and management by exception need
in the same position during last twenty or to be made workable in cohesive manner. The
more years. The employees at all levels are sustainability and survival of the company under
found demoralized and de- motivated. The fierce competitive environment needs to be
Cost of inefficiency burdens the pricing of the ensured. The CEO & Managing Director is not
product in particular and the firm in general. getting relevant information for the purpose of
The people of the organization are concerned formulating appropriate strategy. Management
with mission, vision, objectives and goal of the Information System (MIS) is inactive, inefficient
company only in paper and it lacks initiative in and ineffective. The whole organization is
translating vision into action and action into plagued by inefficiency and they ultimately
result. The leadership of the company is found have failed to deliver the result. Under the
to bureaucratic and sometimes it is autocratic. circumstances, the CEO & Managing Director
Chain of command and control is centralized at requested the CMA as the business strategist
corporate level. There is mounting court cases to submit its report on the overall functioning
between the unhappy workforce and the firm. of the firm incorporating its recommendations
The company is functioning in a closed ended for revamping, sustainability under competitive
system. is environment, honouring the claims of
various stakeholders and complying with the
Conclusion requirement of corporate social responsibility
It is evident from the above that the firm in our of multi-product-multinational firm as the
Case is ambitious for expansion of the business present one. It also should suggest an efficient
in one hand and on the other hand it is not in a transfer pricing mechanism that would promote
position to manage the existing business in cost goal congruency in the organization on overall
effective manner. It fails to generate reasonable count.
rate of return on capital employed, could not
pay good dividend, working capital financing is
weak as a result of feeble cash flow, burdened
with inefficient workforce and attributed
with alarming rise in cost of production and
attributed with declining trend of earning
revenue. The cost of inefficiency is yet to be
worked out. The Total Quality Management
(TQM) hardly works. Internal failure cost,

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Generating Cost Consciousness

which helps us in the following ways
C ost C onsciousness
Cost Awareness
Cost Reduction Cost Control
Cost Efficiency Study
Cost Competitiveness
Helps to Industry
Helps to Economy
Helps to Society

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N OT E S
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The Institute of Cost Accountants of India International Federation of Accountants (IFAC),

is a statutory body set up under an Act of South-Asian Federation of Accountants (SAFA),
Parliament in the year 1959. The Institute, as a Confederation of Asian & Pacific Accountants
part of its obligations, regulates the profession (CAPA), National Advisory Committee on
of Cost and Management Accountancy, enrols Accounting Standards (NACAS), and National
students for its courses, provides coaching Foundation for Corporate Governance (NFCG)
facilities to students, organises professional is also a member of the Government Accounting
development programmes for members and Standards Advisory Board (GASAB)
undertakes research in the field of Cost and
Management Accountancy. The Institute Vision Statement
pursues the vision of cost competitiveness, cost “The Institute of Cost Accountants of India
management, efficient use of resources and a would be the preferred source of resources
structured approach to cost accounting as the and professionals for the financial leadership of
key drivers of the profession. In today’s world, enterprises globally.”
the profession of conventional accounting and
auditing has taken a back seat and cost and Mission Statement
management accountants are increasingly “The CMA professionals would ethically drive
contributing to the management of scarce enterprises globally by creating value to
resources like funds and land and take decisions stakeholders in the socio-economic context
that are strategic in nature. This has given cost through competencies drawn from the
accountants in India and abroad further scope integration of strategy, management and
and tremendous opportunities. accounting.
After an amendment passed by Indian About ICAI-CMA

Parliament, the institute was renamed as ‘The √ Four Regional Councils, 93 Chapters all over
Institute of Cost Accountants of India’ from India, nine Overseas Centres
‘The Institute of Cost and Works Accountants of √ About 50,000 qualified members
India’. This was aimed at synergising with global √ Over 5 lakh students enrolled
management accounting bodies and sharing √ Consistent record of campus placements
best practices. It was also useful to a large √ About ICAI-CMA Course
number of transnational Indian companies √ Full-time course for students
operating from India and abroad to remain √ Ideally suits working executives too
competitive. With the current emphasis on √ Choice of classroom learning, or through
management of resources coupled with the distance learn-ing from anywhere in India Can
specialized knowledge of evaluating operating be pursued along with other full-time courses
efficiency and strategic management, Cost
Accountant professionals are now known as Role of a CMA
‘Cost and Management Accountants (CMAs)’.
√ Improving cost competencies
The institution operates through four regional
√ Resource Management
councils in Kolkata, Delhi, Mumbai and Chennai
√ Performance Management
and 95 Chapters situated in important cities in
√ Financial Reporting and Strategy
the country as well as 9 Overseas Centres. The
√ Cost Audit and Assurance
Institute is head-quartered in Kolkata. It is under
√ Cost control and Cost Reduction
the administrative control of the Ministry of
√ Risk management and Mitigation
Corporate Affairs, Government of India.
√ Direct and Indirect Taxation
√ Valuations
The Institute, apart from being a member of the
√ Internal Audit
Mission Statement (Statutory body under an Act of Parliament)
The CMA professionals would ethically

drive enterprise globally by creating value to
stakeholders in the socio-economic context
through competencies drawn from the
integration of strategy, management and
accounting.
The Institute of Cost Accountants of India Vision Statement

would be the preferred source of resources
and professionals for the financial leadership
of enterprises globally.
Beh in d E v e r y Suc c e s s ful B us i n ess D eci si o n, t here i s a lw a y s a C MA

THE INSTITUTE OF COST ACCOUNTANTS OF INDIA
HEADQUARTERS
CMA Bhawan
12, Sudder Street, Kolkata – 700 016
Tel: +91 33 2252 1031/1034/1035/1492/1602/1619/7373/7143
Fax: +91 33 2252 7993/1026/1723
DELHI OFFICE
CMA Bhawan
3, Institutional Area, Lodhi Road
New Delhi – 110003
Tel: +91 11 24666100, 24622156/57/58
Fax : +91 11 43583642
Website: www.icmai.in

Prelude For Organizational Efficiency: Cost Consciousness

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C OS T C ON SCIO U SNE SS-

The Institute of Cost Accountants of India

The Institute of Cost Accountants of India

© 2016 The Institute of Cost Accountants of India. All rights reserved.

Cost Consciousness-Prelude for Organizational Efficiency 10

Cost Accounting Prior to the 19th Century

Cost Accounting – 1st half of the 20th Century

Cost Consciousness-Prelude for Organizational Efficiency 11

Management Accounting Between 1950’s and 1980’

Strategic Management Accounting: 1980’s to mid 1990’s

Cost Consciousness-Prelude for Organizational Efficiency 12

Cost management – Mid 1990’s onwards.

Cost Analysis – 19th Century

Cost Accounting – 1st half of 20th Century

Management Accounting – 1950’s to 1980’s

Strategic Management Accounting – 1980’s to 1990’s

Cost Management – 1990’s Onward

Cost Consciousness-Prelude for Organizational Efficiency 13

Cost Consciousness-Prelude for Organizational Efficiency 14

Issues concerning Cost Competitiveness that leads to Organisational Efficiency.

Cost Consciousness-Prelude for Organizational Efficiency 15

Cost Consciousness-Prelude for Organizational Efficiency 16

Cost Consciousness-Prelude for Organizational Efficiency 17

.....diversification is the price maker whereas under

the risk and risk customers to push the new products

Cost Consciousness-Prelude for Organizational Efficiency 18

Cost Consciousness-Prelude for Organizational Efficiency 19

METHOD OLO GY FOR

How to create cost Conscious Environment

Cost Consciousness-Prelude for Organizational Efficiency 20

Relevant costing information for Decision Making

Feedback Monitoring Implementing

Cost Consciousness-Prelude for Organizational Efficiency 21

Cost information for different types of decision

Steps for creating cost conscious culture:

Establishing dialogue among different departments

Periodic Review on functioning of cost management system

Cost Consciousness-Prelude for Organizational Efficiency 22

Driving sustainable cost Efficiency and removing cost Inefficiency

Cost Consciousness-Prelude for Organizational Efficiency 23

Cost Consciousness-Prelude for Organizational Efficiency 24

Value Maximization through Cost Consciousness

Cost Consciousness-Prelude for Organizational Efficiency 25

Cost Assessment-Result of Cost Consciousness

Cost Consciousness-Prelude for Organizational Efficiency 26

Cost Consciousness-Prelude for Organizational Efficiency 27

Cost Consciousness-Prelude for Organizational Efficiency 28

Cost Efficiency – Need of the Hour

Cost Consciousness-Prelude for Organizational Efficiency 29

Cost – Prime influential factor

Cost Consciousness-Prelude for Organizational Efficiency 30

sustainability, growth and economic prosperity

Accounting theory and

formerly the Institute

of Cost and Works

Cost Consciousness-Prelude for Organizational Efficiency 31

Cost Consciousness-Prelude for Organizational Efficiency 32

hereunder. concerning production of sub-standard

Cost Consciousness-Prelude for Organizational Efficiency 33