Cost-benefit analysis is used to determine if a planned action will have positive or negative outcomes. It quantifies all the benefits and costs to calculate the net impact. Some key applications include deciding whether to hire additional staff, purchase new equipment, or invest cash. A proper cost-benefit analysis involves identifying and monetizing all relevant costs and benefits to help make efficient decisions.

1. Cost-benefit Analysis
 A cost benefit analysis is done to determine how well, or how poorly, a planned
action will turn out. Although a cost benefit analysis can be used for almost
anything, it is most commonly done on financial questions
 A cost benefit analysis finds, quantifies, and adds all the positive factors. These
are the benefits. Then it identifies, quantifies, and subtracts all the negatives, the
costs. The difference between the two indicates whether the planned action is
advisable
 Should we hire an additional sales person or assign overtime? Is it a good idea
to purchase the new stamping machine? Will we be better off putting our free
cash flow into securities rather than investing in additional capital equipment?
Each of these questions can be answered by doing a proper cost benefit analysis
 Eg-A product manager may compare manufacturing and marketing expenses
with projected sales for a proposed product and decide to produce it only if he
expects the revenues to eventually recoup the costs

2. Cost-benefit Analysis
 Cost-benefit Analysis is made up of three parts-
 Technical-Engineering part
 Context and technical characteristics of the project are identified
 Defining the socio-economic objectives that the project intends to achieve
 The technical analysis is carried out to ensure the feasibility of the projected
work from a technical point of view
 Financial Analysis
 It provides all the necessary data regarding input, output, their relative prices
and how they are distributed over time
 Formulate tables for the analysis of the cash flows(selection of the important
cost and revenue items)
 Evaluate the financial feasibility
 Evaluate the financial benefit by calculating the return from the private
investor’s point of view(financial return of the project and the capital)
 Economic Analysis
 Serves to identify all the income and expenditure items and the relative market
prices

3. Cost-benefit Analysis
 The economic internal rate of return is expected to be higher than the rate of
financial return otherwise the the project would be more convenient for a private
investor than for a public operator
 The calculation of the economic indicators allows for the creation of a ranking
of projects and helps in the selection of more than one alternative intervention
 Steps in Cost-benefit Analysis
 Defining objective and project scope
 Identify and screening the alternatives
 Identifying the benefits and costs
 Calculating discounted cash flows and project performance criteria
 Ranking the alternatives in order of preference
 Conducting sensitivity analysis
 Make a final recommendation

4. Cost-benefit Analysis
 Principle of Cost-benefit Analysis
 All benefits and costs of a project should be measured in terms of their
equivalent money value
 The net benefit of the projects is the sum of the PV of the benefits less the PV of
the costs
 The valuation of benefits and costs should reflect preferences revealed by
choices which have been made
 When consumers make purchases at market prices they reveal that the things
they buy are at least as beneficial to them as the money they relinquish
 The increase in benefits resulting from an increase in consumption is the sum of
the marginal benefit times each incremental increase in consumption
 When a project is being evaluated the analysis must estimate not only what the
situation would be with the project but also what it would be without the project
 Double counting of benefits or costs must be avoided. Pg 19
 Decision criteria for Projects
 If the discounted PV of the benefits exceeds the discounted PV of the costs then
the project is worthwhile
 Ratio of the PV of the benefits to the PV of the costs must be greater than 1
 From the set of mutually exclusive projects the one that should be selected is the
one with the highest NPV

5. Cost-benefit Analysis
 Use of Cost-benefit Analysis- Road safety measures
 Some people find the very idea of assigning a monetary value to lifesaving or to
quality of life, which is an essential element of cost-benefit analysis,
meaningless and ethically wrong
 The purpose of assigning a monetary value to human life is simply to provide a
guideline with respect to the amount of resources we would like to spend on the
prevention of accidents or injuries.
 A limited amount of resources is at our disposal for the prevention of accidents
or injuries, or indeed for catering to any human need
 Safety is certainly one of the more basic human needs, it is not the only one, and
no society would ever be able to spend more than a fraction of disposable
resources on the prevention of accidents or injuries
 How much to spend on the prevention of accidents or injuries will depend on
how important people think this good is, seen in relation to all other goods they
would like to see produced
 The objective of cost-benefit analysis is to help us find the right balance
between safety and other goods
 The main reason for doing cost-benefit analyses of road safety measures is to
help develop policies that make the most efficient use of resources. Cost-benefit
analysis seeks to identify the cheapest way of improving road safety

6. Cost-benefit Analysis
 Applicability of Cost-benefit Analysis- Road safety measures
 In general, to be amenable to cost-benefit analysis, a road safety measure should
satisfy the following criteria:
 It should be known what category of accidents the measure affects (all
accidents, accidents involving young drivers, accidents in the dark, etc),
preferably so that the number of "target" accidents can be estimated numerically
 The effects of the measure on target accidents should known, i.e. numerical
estimates of these effects should be available. If possible, these estimates should
state the severity of accidents or injuries they apply to
 It should be possible to describe the use of the measure in numerical terms.eg-
number of junctions converted, number of cars equipped, number of drivers
trained, man hours of police enforcementetc. This information is needed in
order to estimate marginal costs and benefits of the measure
 Costs of the measure should be known, and it should be known who pays the
cost. Private and public expenditures are not treated identically in cost-benefit
analysis. An opportunity cost of taxation is added to public expenditures, but
not to private expenditures
 Monetary valuations should be available for all impacts of the measure

7. Cost-benefit Analysis
 Accuracy problem in Cost-benefit Analysis
 Rely heavily on past like projects(often differing markedly in function or size
and certainly in the skill levels of the team members)
 Rely heavily on the project’s members to identify(remember from their
collective past experiences) the significant cost drivers
 Rely on very crude heuristics to estimate the money cost of the intangible
elements
 Are unable to completely dispel the usually unconscious biases of the team
members(who often have a vested interest in a decision to go ahead)
 Determining which costs should be included in an analysis

8. Cost-benefit Analysis
 Barriers to the use of Cost-benefit Analysis
 Fundamental barriers
 Rejecting the principles of welfare economics
 Rejecting efficiency as a relevant criterion of desirability
 Rejecting the monetary valuation of risk reductions
 Institutional barriers (barriers related to the organisation of policy making)
 Lack of consensus on relevant policy objectives
 Formulation of policy objectives inconsistent with cost-benefit analysis
 Priority given to policy objectives unsuitable for cost-benefit analysis
 Horse trading/vote trading
 Political opportunism
 Unfunded mandates and excessive delegation of authority
 Abundance of resources
 Rigidity of reallocation mechanisms
 Wrong timing of EAT information in decision-making process

9. Cost-benefit Analysis
 Technical/methodological barriers
 Lack of knowledge of relevant impacts
 Inadequate monetary valuation of relevant impacts
 Inadequate treatment of uncertainty
 Barriers related to the implementation of cost-effective policy options
 Social dilemmas
 Vested interests in road safety measures
 Lack of incentives to implement cost-effective solutions
 Lack of marketing of efficient policies
 Strengths and Limitations
 Strengths
 Enables us to express an opinion on the economic-social convenience of a
project
 To create rankings among projects
 Encourages the practice of identifying the economic benefits and costs, even of
they are not immediately monetisable

10. Cost-benefit Analysis
 Limitations
 Does not take redistributive effects into consideration
 Does not consider the effect on the economic return of non-monetisable benefits
or costs
 Sometimes uses discretional criteria for the monetisation of the costs and
benefits for which no market exists

11. Cost Management Practices
 A cost control system can bring immediate savings and ensure that you remain
competitive in the longer term
 Eliminating wasteful activities is beneficial but indiscriminate cost cutting can
lead to falling quality and poor morale
 An organisation gains competitive advantage by creating more value for its
customers than its competitors as customers demand enhanced value at reduced
cost. Cost Management is one of the ways by which customers value could be
enhanced
 Value Analysis
 It is an approach to improve the value of a product or process by understanding
its constituent components and their associated costs
 Find improvements to the components by either reducing cost or increasing the
value of the functions

12. Cost Management Practices
 Phases of Value Analysis Job Plan
 Identify and prioritize functions
 Identify the item to be analysed and the customers for whom it is produced.
 List the basic functions (the things for which the customer is paying)
 Identify the secondary functions by asking ‘How is this achieved?’ or ‘What
other functions support the basic functions?’.
 Determine the relative importance of each function, preferably by asking a
representative sample of customers
 Analyze contributing functions
 Identify functions given by a product which have an importance(weight) and a
cost
 Measure the cost of each component as accurately as possible, including all
material and production costs
 Recording Ideas- Documentation of all the ideas generated during the analysis
phase is done without any filtration
 Speculation
 The objective is to develop a large quantity of ideas for performing each
function selected for study at less total cost and improved performance

13. Cost Management Practices
 Free flow of thought and ideas without criticism is required
 Investigation
 It represents a confrontation of ideas, a collection of information about the
feasibility and cost of ideas, and measures the value of the best alternatives
 This process usually involves determining the cost and selecting those ideas that
can be practically implemented
 Recommendation- To obtain concurrence and a commitment from the designer,
project sponsor and other management to proceed with the implementation of
the recommendations
 Implementation
 It is necessary to prepare a report that summarises the work that has been done,
including conclusions and specific proposals
 Describe action plans for implementation
 Application of Value Analysis
 It can be applied to everything- materials, methods, processes, services etc
 Items whose total annual consumption is high should receive top priorities in the
application of Value Analysis

14. Cost Management Practices
 Scarce materials, imported materials and monopoly items should also receive
the attention of value analyst
 The item should be taken up again for value analysis after six months or a year
 Organisation for Value Analysis
 It should be directly under a high ranking officer who has access to all
departments and their records, performance, costs etc
 VA is a team effort and the action needs to be taken is decided by
representatives from Design, Production, Purchase and Accounts Department
 VA refers to the analysis of an existing product, service or administrative
process while Value engineering refers to the same analysis applied to the
product ,services or administrative processes that are under design and have not
been finalised
 Value Engineering
 It is a systematic approach aimed at achieving the desired functions of a
product, a process, a system or a service at minimum overall cost, without
affecting quality, reliability, performance and safety

15. Cost Management Practices
 Job Plan
 Information gathering - Function analysis is usually done in this initial stage.
It tries to determine what functions or performance characteristics are important.
It asks questions like; What does the object do? What must it do? What should it
do? What could it do? What must it not do?
 Alternative generation (creation) - In this stage value engineers ask; What are
the various alternative ways of meeting requirements? What else will perform
the desired function?
 Evaluation - In this stage all the alternatives are assessed by evaluating how
well they meet the required functions and how great will the cost savings be
 Presentation - In the final stage, the best alternative will be chosen and
presented to the client for final decision
 When Value Analysis- Pg 38
 Wastage Control-Pg 39

16. Cost Management Practices
 Business Process Re-Engineering
 It is basically the fundamental rethinking and radical re-design, made to an
organizations existing resources
 It is an approach for redesigning the way work is done to better support the
organization's mission and reduce costs
 Process Steps
 Set up a steering committee and a project team
 Analyze and document current processes including information flows
 Consult stakeholders/beneficiaries to detect problems/opportunities
 Identify change opportunities and present them to the steering committee - get
agreement on where and how to proceed
 Define new business processes, analyze and document the required
organizational changes and impacts
 Obtain approval from the steering regarding proposed changes
 Implement
 Monitor outcomes and anticipated benefits
 Adjust and fine tune as required

17. Cost Management Practices
 Critical Success Factors when implementing BPR components include:
 Well informed investment decisions
 Effective engagement with stakeholders
 Knowledge of the supplier marketplace
 Knowledge of the delivery chain
 Effective risk management
 Knowledge about operations
 Active management of intended outcomes and benefits
 Leadership
 BPR - Methodology
 Envision new processes
 Ensure management support
 Identify reengineering opportunities
 Identify enabling technologies
 Align with organizational strategy

18. Cost Management Practices
 Initiate change
 Set up the reengineering team
 Outline performance goals
 Process diagnosis
 An assessment must be done about how IT is aligned to creating value for the
business.
 Process redesign
 Develop alternative process scenarios
 Develop new process design
 Design human resource architecture
 Select IT platform
 Develop overall blueprint and gather feedback
 Reconstruction
 A checklist before cut-over to new capabilities includes asking:
 Is the organisation ready?
 Is the staff ready?
 Are businesses and/or citizens ready?

19. Cost Management Practices
 Is contract management in place?
 Is service management in place?
 Is benefits management in place?
 Is performance management in place?
 Are changes ahead been thought through
 Process monitoring
 checklist of key issues includes asking:
 Was the business case justification realistic?
 Have changes throughout the project compromise our original intentions
 Have we done a post-implementation review?
 Do we have enough qualified personnel to manage operations including
fulfilment contract with third parties?
 Are we actively seeking to improve performance?
 Are we measuring performance?
 Are we setting maturity targets?
 Pg 41

20. Cost Management Practices
 Total Quality Management
 It is an approach that seeks to improve quality and performance which will meet
or exceed customer expectations which can be achieved by integrating all
quality-related functions and processes throughout the company
 Principles of TQM
 Executive Management – Top management should act as the main driver for
TQM and create an environment that ensures its success
 Training – Employees should receive regular training on the methods and
concepts of quality
 Customer Focus – Improvements in quality should improve customer
satisfaction
 Decision Making – Quality decisions should be made based on measurements
 Appropriate methodology and Tools should be used
 Continuous Improvement – Companies should continuously work towards
improving manufacturing and quality procedures
 Company Culture – The culture of the company should aim at developing
employees ability to work together to improve quality
 Employee Involvement – Employees should be encouraged to be pro-active in
identifying and addressing quality related problems

21. Cost Management Practices
 The Cost Of TQM
 Prevention costs are associated with the design, implementation and
maintenance of the TQM system. They are planned and incurred before actual
operation, and can include
 Product Requirements – The setting specifications for incoming materials,
processes, finished products/services.
 Quality Planning – Creation of plans for quality, reliability, operational,
production and inspections
 Quality Assurance – The creation and maintenance of the quality system.
 Training – The development, preparation and maintenance of processes.
 Appraisal costs are associated with the vendors and customers evaluation of
purchased materials and services to ensure they are within specification. They
can include
 Verification – Inspection of incoming material against agreed upon
specifications
 Quality Audits – Check that the quality system is functioning correctly
 Vendor Evaluation – Assessment and approval of vendors

22. Cost Management Practices
 Failure costs can be split into those resulting from internal and external failure.
Internal failure costs occur when results fail to reach quality standards and are
detected before they are shipped to the customer. These can include:
 Waste – Unnecessary work or holding stocks as a result of errors, poor
organization or communication
 Scrap – Defective product or material that cannot be repaired, used or sold
 Rework – Correction of defective material or errors
 Failure Analysis – This is required to establish the causes of internal product
failure
 External failure costs occur when the products or services fail to reach quality
standards, but are not detected until after the customer receives the item. These
can include:
 Repairs – Servicing of returned products or at the customer site
 Warranty Claims – Items are replaced or services re-performed under warranty
 Complaints – All work and costs associated with dealing with customer’s
complaints
 Returns – Transportation, investigation and handling of returned items

23. Cost Management Practices
 Total Productive Maintenance
 The goal of the TPM program is to markedly increase production while, at the
same time, increase employee morale and job satisfaction
 TPM brings maintenance into focus in order to minimise downtime and
maximise equipment usage
 The goal of TPM is to avoid emergency repairs and keep unscheduled
maintenance to a minimum which helps to increase output and make it more
uniform and predictable
 Why TPM ?
 Avoid wastage in a quickly changing economic environment
 Producing goods without reducing product quality
 Reduce cost
 Produce a low batch quantity at the earliest possible time
 Goods send to the customers must be non defective

24. Cost Management Practices
 Similarities and differences between TQM and TPM :
 Total commitment to the program by upper level management is required in
both programs
 Employees must be empowered to initiate corrective action
 A long range outlook must be accepted as TPM may take a year or more to
implement and is an on-going process. Changes in employee mind-set toward
their job responsibilities must take place as well.
 The differences between TQM and TPM Pg 62
 Types of maintenance :
 Breakdown maintenance- When the equipment failure does not significantly
affect the operation or production or generate any significant loss other than
repair cost people wait until equipment fails and repair it
 Preventive maintenance- It is a daily maintenance ( cleaning, inspection, oiling
and re-tightening ), design to retain the healthy condition of equipment and
prevent failure, the equipment service life can be prolonged by doing preventive
maintenance

25. Cost Management Practices
 Periodic maintenance ( Time based maintenance - TBM)- Time based
maintenance consists of periodically inspecting, servicing and cleaning
equipment and replacing parts to prevent sudden failure and process problems
 Predictive maintenance- This is a method in which the service life of
important part is predicted based on inspection or diagnosis, in order to use the
parts to the limit of their service life
 Corrective maintenance- It improves equipment and its components so that
preventive maintenance can be carried out reliably. Equipment with design
weakness must be redesigned to improve reliability or improving
maintainability
 Maintenance prevention- It indicates the design of a new equipment.
Weakness of current machines are sufficiently studied and are incorporated
before commissioning a new equipment

26. Cost Management Practices
 Steps in introduction of TPM in a organization :
 Preparatory Stage
 Announcement by Management to all about TPM introduction in the
organization
 Initial education and training is to be done based on the need
 Committees are set up for improvement, autonomous maintenance, quality
maintenance etc
 Fixing up a target for achievement
 Introduction Stage
 This is a ceremony and we should invite all. Suppliers as they should know that
we want quality supply from them. Related companies and affiliated companies
who can be our customers, sisters concerns etc. Some may learn from us and
some can help us and customers will get the communication from us that we
care for quality output
 Implementation. Stage
 Institutionalising Stage- It is the time for applying for PM award and to think
of the challenging level to which you can take this movement

27. Product Life Cycle Costing
 Pg 80
 The LCC model (LCCM) is basically a simplified economic representation of
the real world. It provides the analytical structure from which the cost estimate
is made. An LCCM typically develops cost projections
 Types of LCC Models
 Parametric models- A parametric model estimates cost using a set of complex
mathematical or statistical equations that relate cost to system parameters such
as design, performance, or operating characteristics, or the environment. These
models are typically used during the very early stages of a program when cost-
related historical data are limited or non-existent
 Accounting models- An accounting model uses a set of relatively simple
equations to calculate and aggregate cost elements using direct data inputs and
cost factors. Accounting models attempt to represent what actually happens in
the real world using a structured set of basic accounting relationships to
quantify all the relevant variable factors associated with each cost element
 Simulation models- These models typically use probabilistic computer
simulations to assess the LCC impacts of a system's operational and
performance characteristics, basing and deployment concepts, operations and
maintenance plans, and provisioning and support requirements. Although very
accurate, the large amount of data required to generate the simulation normally
limits the use of such models to the later stages of a program, when sufficient

28. Activity-based Management
 Activity-based Management(ABM)
 It is a method of identifying and evaluating activities that a business performs
using activity-based costing to carry out a value chain analysis or a re-
engineering initiative to improve strategic and operational decisions in an
organisation
 Activity-based costing establishes relationships between overhead costs and
activities so that overhead costs can be more precisely allocated to products,
services or customer segments. Organisation achieves the same outcomes at a
lower total cost
 The focus of ABC is on accurate information about the true cost of products,
services, processes, activities, distribution channels, customer segments,
contracts and projects
 Activity-based management focuses on managing activities to reduce costs and
improve customer value

29. Activity-based Management
 ABM can be divided into
 Operational ABM- It is about ”doing things right” using ABC information to
improve efficiency, lower costs and enhances asset utilisation
 It can increase the capacity of resources(equipment and people) by reducing
machine downtime, improving or eliminating faulty activities and processes,
and increasing the efficiency of the organisation’s resources
 Activities that add value to the product can be identified and improved
 Activities that don’t add value need to be reduced to cut costs without reducing
product value
 Strategic ABM- It is about “doing the right things” using ABC information to
decide which products to develop and which activities to use
 It can be used for customer profitability analysis, identifying which customers
are the most profitable and focusing on them more
 It encompasses decisions about product design and development where
opportunity for cost reduction exists

30. Activity-based Management
 Process Management through Activity Networks
 Activity networks are used to determine the commitment of resources on
nonproductive processes of the organisation
 Understanding the costs of the exceptions will help you focus on ways to
eliminate these costs
 Difference between ABM and ABC
 Management gains a thorough understanding of its business processes and cost
behavior during the ABC analysis process
 Management applies the insights gained during ABC fact gathering and analysis
to improve decision making at both operating and strategic levels. This is the
essence of ABM
 ABC becomes ABM when it is used to
 Design products and services that meet or exceed customers’ expectations and
can be produced and delivered at a profit
 Signal where either continuous or discontinuous improvements in quality,
efficiency and speed are needed
 Guide product mix and investmenet decisions
 Choose among alternat1ive suppliers

31. Activity-based Management
 Negotiate about price, product features, quality , delivery and service with
customers
 Employ efficient and effective distribution and service processes to target
market and customer segments
 Improve the value of an organisation’s products and services
 Outputs of ABM
 The cost of activities and business processes
 The cost of non-value-added activities
 Activity-based performance measures
 Accurate product/service cost
 Cost drivers- Factor that causes a change in the cost of an activity

32. Value Chain Analysis
 Value Chain Analysis
 It helps an institution to determine which type of competitive advantage to
pursue and how to pursue it
 Two components of value chain analysis are-
 Industry value chain- value creating activities within the industry
 Organisation’s internal value chain
 Porter’s Five Forces- A model for Industry Analysis
 Threat of New Entrants
 New entrants to an industry can raise the level of competition, thereby reducing
its attractiveness
 The threat of new entrants largely depends on the barriers to entry
 High entry barriers exist in some industries (e.g. shipbuilding) whereas other
industries are very easy to enter (e.g. estate agency, restaurants)

33. Value Chain Analysis
 Key barriers to entry include
- Economies of scale
- Capital / investment requirements
- Customer switching costs
- Access to industry distribution channels
 Threat of Substitutes
 The presence of substitute products can lower industry attractiveness and
profitability because they limit price levels
 The threat of substitute products depends on:
- Buyers' willingness to substitute
- The relative price and performance of substitutes
- The costs of switching to substitutes
 Bargaining Power of Suppliers
 Suppliers are the businesses that supply materials & other products into the
industry
 The cost of items bought from suppliers (e.g. raw materials, components) can
have a significant impact on a company's profitability. If suppliers have high
bargaining power over a company, then in theory the company's industry is less
attractive

34. Value Chain Analysis
 The bargaining power of suppliers will be high when:
- There are many buyers and few dominant suppliers
- Suppliers threaten to integrate forward into the industry (e.g. brand
manufacturers threatening to set up their own retail outlets)
- The industry is not a key customer group to the suppliers
 Bargaining Power of Buyers
 Buyers are the people / organisations who create demand in an industry
 The bargaining power of buyers is greater when
- There are few dominant buyers and many sellers in the industry
- Products are standardised
- Buyers threaten to integrate backward into the industry
- Suppliers do not threaten to integrate forward into the buyer's industry
- The industry is not a key supplying group for buyers

35. Value Chain Analysis
 Intensity of Rivalry- The intensity of rivalry between competitors in an
industry will depend on:
 - The structure of competition - for example, rivalry is more intense where there
are many small or equally sized competitors; rivalry is less when an industry has
a clear market leader
 - The structure of industry costs - for example, industries with high fixed costs
encourage competitors to fill unused capacity by price cutting
 - Degree of differentiation - industries where products are commodities (e.g.
steel, coal) have greater rivalry; industries where competitors can differentiate
their products have less rivalry
 - Switching costs - rivalry is reduced where buyers have high switching costs -
i.e. there is a significant cost associated with the decision to buy a product from
an alternative supplier
 - Strategic objectives - when competitors are pursuing aggressive growth
strategies, rivalry is more intense. Where competitors are "milking" profits in a
mature industry, the degree of rivalry is less
 - Exit barriers - when barriers to leaving an industry are high (e.g. the cost of
closing down factories) - then competitors tend to exhibit greater rivalry.


36. Value Chain Analysis
 Limitations of Value Chain Analysis
 One of the limitations of the value chain model is that it describes an industrial
organization which essentially buys raw materials and transforms these into
physical products
 The limitations of the model include the fact that ‘value’ for the final customer
is the value only in its theoretical context and not practical terms. The real value
of the product is assessed when the product reaches the final customer, and any
assessment of that value before that moment is only something that is true in
theory
 Steps in Value Chain Analysis
 Value chain analysis can be broken down into a three sequential steps:
 Break down a market/organisation into its key activities under each of the major
headings in the model
 Assess the potential for adding value via cost advantage or differentiation, or
identify current activities where a business appears to be at a competitive
disadvantage
 Determine strategies built around focusing on activities where competitive
advantage can be sustained

37. Balanced Scorecard
 Four barriers to strategic implementation
 Vision Barrier- No one in the organisation understands the strategies of the
organisation
 People Barrier- Most people have objectives that are not linked to the strategy
of the organisation
 Resource Barrier- Time, energy and money are not allocated to things that are
critical to the organisation
 Management Barrier- Management spends too little time on strategy and too
much time on short-term tactical decision-making
 With Balanced Scorecards, strategy reaches everyone in a language that makes
sense. When strategy is expressed in terms of measurements and targets, the
employee can relate to what must happen which leads to much better execution
of strategy

38. Balanced Scorecard
 Balanced Scorecards
 It tells you the knowledge, skills and systems that your employees will need to
innovate and build the right strategic capabilities and efficiencies that deliver
specific value to the market which will eventually lead to higher shareholder
value
 It has three elements
 Measurement System- It allows an organisation to translate its vision and
strategies by providing a new framework, which tells the story of the
organisation’s startegy through the objectives and measures chosen. While the
scorecard retains financial measures it complements them with three other
distinct perspectives
 Customer- Encourages the identification of measures that answer the question
“How do customers see us?"
 Internal Business Processes- Encourages the identification of measures that
answer the question "What must we excel at?"
 Learning and Growth- Encourages the identification of measures that answer
the question "Can we continue to improve and create value?".

39. Balanced Scorecard
 Strategic Management System
 By combining financial measures and non-financial measures in a single report,
the Balanced Scorecard aims to provide managers with richer and more relevant
information about activities they are managing than is provided by financial
measures alone
 Communication Tool
 With the balanced scorecard, communication is easy. You are able to give your
employees the chance to participate in understanding the goals and the main
mission of your company. This is essential since they have a big influence on
the productivity of your business. Aside from that, you will give them an idea
on how they can evaluate their performance and how they can contribute more
so that your company will be able to accomplish the tasks and become
successful
 Process of Balanced Scorecard- Pg 113

40. Target Costing
 Target Costing
 It is defined as a cost management tool for reducing the overall cost of a product
over its entire life-cycle with the help of production, engineering, research and
design
 It is the maximum amount of cost that can be incurred on a product and with it
the firm can still earn the required profit margin at a particular selling price
 It is a systematic process of cost management and profit planning
 It is used to plan or project the costs of products before they are introduced, and
to ensure that low-margin products are not introduced which do not bring
sufficient returns
 Four basic steps of target costing are-
 Define the product
 Set the price and cost targets
 Achieve the targets
 Maintain Competitive costs

41. Target Costing
 Target Costing is based on three premises
 Orienting products to customer affordability or market-driven pricing
 Treating product cost as an independent variable during the definition of a
product’s requirements
 Proactively working to achieve target cost during product and process
development
 The following ten steps are required to install a comprehensive target costing
approach within an organisation
 Re-orient thinking toward market-driven pricing and priortise customer needs
rather than just technical requirements as a basis for product development
 A target price needs to be established based upon market factors such as the
company position in the market place, business and market penetration strategy,
competition and competitive price response, targeted market niche or price point
and elasticity of demand
 Once the target price is established, a worksheet is used to calculate the target
cost by subtracting the standard profit margin, warranty reserves and any
uncontrollable corporate allocations

42. Target Costing
 Before the target cost is finalised, it must be considered in conjunction with
product requirements
 Establish a target costing process and a team based organisation
 Brainstorm and analyse design alternatives for both the product and its
manufacturing and support processes at each stage of the development cycle
 Establish product cost models to support decision-making
 Use of tools and methodologies related to design to reduce costs
 A significant portion of a product’s costs(30-50%) are indirect, these costs must
also be addressed
 Measure reults and maintain management focus
 Target Costing Principles
 Price-led costing- Market prices are used to determine target costs
Target cost=Market price-required profit margin
 Focus on customers- Customer requirements for quality, cost and time are
incorporated in product and process decisions and guide cost analysis
 Focus on design- Cost control is emphasized at the product and process design
stage

43. Target Costing
 Cross-functional involvement- Cross-functional product and process teams are
responsible for the entire product from initial concept through final production
 Value-chain involvement- All members of the value chain,eg-suppliers,
distributors, service providers and customers are included in the target costing
process
 A life-cycle orientation-Total life cycle costs are minimised for both the
producer and the customer
 Target Costing Process
 Estimate a selling price for the new product and estimated sales volume from an
analysis of the market and a target profit
 Determine the target cost by subtracting the profit from the selling price
 Perform functional cost analysis for individual components and processes
 Determine the estimated cost for the product
 Compare estimate with target
 If estimated cost exceeds target cost, repeat cost analysis/value engineering to
reduce estimated cost
 Make the final decision whether or not to introduce the product once the cost
estimate is on target
 Manage costs during production of the product

44. Target Costing
 Advantages of Target Costing
 To reduce costs before they are locked in- Around 70 to 80% of product costs
are fixed during the design stage. Target costing provides a means to manage
costs from the design stage to maximise the potential for cost reduction
 To control design specifications and production techniques
 The discipline of target costing and the detailed review of costs can reveal more
general managerial problems
 As a driver for cost improvement
 Encourages focus on the customers- Target costing is market driven and
stimulates behavior which is customer focused and encourages all functions
within the company to respond to market demand and competitive trends rather
than internal performance indicators

45. Target Costing
 Key characteristics of successful target costing
 Customer requirements for quality, cost and time are incorporated into the
product decisions and guide the analysis of costs
 Emphasis on cost reduction at early stages in product development
 Consideration of the whole product life cycle
 Target costing is the multidisciplinary nature of the process and the importance
of the involvement of all functions in the analysis and decision-making.
Responsibility for achieving targets must also be shared across functions
 Team members understand their role and how it impacts cost
 Involvement of the whole value/supply chain
 It is an iterative process where targets evolve as teams seek to balance
functionality, price, volumes, capital investment and costs

46. Cost Audit and Management
 Audit
 It means the examination of the books of accounts and documents with a view
to verify the accuracy and correctness of the data shown in the financial
statements
 Audit may be broadly classified into two categories
 Statutory audit- It is an audit which is compulsory by any statue or law. Eg-
Audit of banking companies, insurance companies etc. Audit compulsory in
certain specified companies to be notified by the central government from time
to time
 Non-statutory audit- Voluntary audits undertaken at the discretion of the
management of the business. Eg-cost audit, internal audit, social audit etc
 Cost Audit
 It is an audit of efficiency, of minute details of expenditure, while the work is in
progress and not a postmortem examination
 It is mainly a preventive measure, a guide for management policy and decision
in addition to being a barometer of performance

47. Cost Audit and Management
 Types of Cost Audit
 Cost audit to assist management
 Accurate, relevant and prompt information is made available to management to
assist in making important decisions
 A cost auditor suggests ways to reduce the cost of production and to make an
improvement in the cost accounting plan
 Cost audit on behalf of the government
 The government may appoint a cost auditor to conduct cost audit where it is
necessary
 To ascertain correct cost of certain units when government is approached for
protection or financial help
 To ascertain correct cost of contract given to private firms under ‘cost plus’
basis
 To fix reasonable prices to certain items of production so as to prevent undue
profiteering

48. Cost Audit and Management
 Cost audit on behalf of the customer
 Customer gets cost accounts of the product concerned audited to establish
correct cost so that he may be able to pay price on the basis of correct cost plus
an agreed margin of profit
 Cost audit on behalf of trade association
 To ascertain comparative profitability of its member
 To determine minimum price to avoid cut throat competition among its
members
 To maintain prices at a certain level so as to prevent undue profiteering
 Cost audit on behalf of tribunals
 Labor tribunals may direct the audit of cost accounts to settle trade disputes for
more wages, bonuses
 To assess the correct profit for assessment purposes
 Cost audit under statue
 Certain classes of companies are required to maintain proper record regarding
materials consume, labour etc they are required to get their cost accounts
audited
 The aim of such type of audit is that the government wants to be ascertaining
the relationship of costs and prices

49. Cost Audit and Management
 Objectives of Cost Audit
 Protection of the business
 Detecting errors or ensuring that cost record are compiled correctly
 Checking accuracy of records in order to verify that cost accounts are correctly
maintained in conformity with accepted cost accounting principles adopted in
the industry
 Ascertaining whether procedures and routines as laid down by the management
are properly and uniformly followed
 Constructive appraisal
 The auditor acts as an advisory capacity for the well being of shareholder of the
company
 Judging whether existing procedure, submission of reports and returns are
adequate or wasteful. Changes may be introduced in conformity with modern
costing techniques and unnecessary routines may be eliminated
 Whether existing procedure is effective to the management for taking decisions
 Whether or not the projected expenditure to give the optimum results
 Whether the return from capital employed is adequate, if not, whether it can be
bettered

50. Cost Audit and Management
 Pre-audit or prior concurrence
 Auditor sees whether the expenditure has already been provided for in the
budget estimates and that the cumulative expenditure up-to-date has not
exceeded that provision
 Comaprison of costs
 Comparison of the actual cost for the year is made with the cost pertaining to
previous years to ascertain whether cost has increased or decreased
 By making comparison of costs, the cost auditor is able to know abnormal costs.
These abnormal costs are brought to the notice of the management for taking
remedial measures
 Advanatges Pg 150