Page 193 - DCOM206_COST_ACCOUNTING_II

Cost Accounting – II

Notes This means the focus shifts from the individual line items on the income statement or
balance sheet toward the underlying activities that drive the expenditure. Once these
underlying activities are understood, it is relatively easy to identify and prioritise
improvements that will have a larger and longer-term impact on the business.
“Cost cutting is much more than just the elimination of expenses from a budget.”
The biggest risk for any major initiative is the ability of the organisation to sustain the
benefits. In a survey of 115 multinationals taken from the Financial Times Stock Exchange’s
top 350 companies, it was found that 70% could not sustain the benefits of their cost
reduction efforts beyond two years. Often this is due to the fact that the changes introduced
are not continuously re-enforced through regular, visible reporting of the key measures
that determined success in the beginning. The organisation loses sight of those aspects
that were considered essential when the program was first introduced. This is where the
internal audit function can play a significant role.
The internal audit function should be an integral part of any strategic cost reduction
program because it can ensure the redesigned business processes, activities and structures
(if any) remain responsive to the risks, and are embedded in the business methods and
practices.
The value that can be achieved by the inclusion of the internal audit function is immense,
as it can support a number of strategic objectives, including the following:
1. Achieving buy-in to the cost reduction program from a broader group of
stakeholders.
2. Improving visibility at management, executive and board levels by ensuring internal
audit reports include commentary on the cost cutting initiatives.

3. Identifying the risks and implications of cost reduction initiatives.
4. Providing valuable input and insight into the key processes and activities that drive
certain costs.
5. Identifying critical improvement drivers to keep the business focused on priority
areas.
6. Bringing a process and control capability to the overall program.
7. Monitoring and evaluating key performance indicators on a continuous basis.
8. Developing regular reviews as part of the annual internal audit plan to support
sustainability.
9. Providing an objective viewpoint on the proposed initiatives prior to, during and
after the introduction of the cost cutting program.
10. Reporting on the benefits realised by the program.
As an example, overtime cost was considered to be excessive in one very large organisation.
Certain employees were actually earning more by way of overtime pay than from their
regular salaries. Management decided to cut this cost, especially as difficult economic
circumstances were resulting in lower business activity levels. As a result of the increased
focus on overtime pay together with more regular reporting, the cost began to show a
reducing trend. However, as often happens, the moment the emphasis changed to other
significant areas and the level of scrutiny reduced, the cost of overtime began to increase.
This example highlights the need for much more effort in understanding and changing the
underlying reasons for a particular cost rather than simply focusing on the cost itself.
A more strategic and sustained approach is recommended.
Contd...

188 LOVELY PROFESSIONAL UNIVERSITY