Page 139 - DMGT514_MANAGEMENT_CONTROL_SYSTEMS

Management Control Systems

Notes Efficiency of the portion that precedes production (inward portion) might be improved by
reducing the number of vendors by having a computer system place orders automatically by
limiting deliveries to “just in time” amounts (which reduces inventories), and by holding vendors
responsible for quality and which reduces/estimates inspection costs.
The efficiency of the production portion might be improved by increased automation and
perhaps by using robots, by rearranging machines into “cells”, each of which performs a series
of related production steps and by better production control systems.

The efficiency of the outward portion (i.e. the portion from factory door to receipt by customer)
might be improved by having customers place orders electronically, by changing the locations
of warehouses, by changing the channels of distribution and placing more or less emphasis on
distributors and wholesalers; by improving the efficiency of warehouse operations; and by
changing the mix between company operated trucks and transportation by outside agencies.
Figure 6.5: Profit Improvement Opportunities through Process
Linkages within the Value Chain
Stages in added value

Amount of
Value added
R &D Raw Manufacturing Marketing Distribution service
Materials

6.3.2 Activity Based Costing

Increased computerization and automation in factories have led to important changes in systems
for collecting and using cost information. Some fifty or sixty years back, most companies allocated
overhead costs to products by means of plant wide overhead rate based on direct labour hours
or direct labour cost in rupees. Today, an increasing number of companies collect costs for:
1. Material-related costs (such as transportation, storage, and purchase department costs)
separately from other manufacturing costs.
2. Manufacturing costs for individual departments, individual machines or individual “cells”
which consist of group of machines that perform a series of related operations on a product.
In these cost centres, direct labour costs may be combined with other costs, denoting
conversion cost i.e., the labour and factory overhead cost of converting raw materials and
parts into finished products.
3. The newer systems assign R&D, general, administrative and marketing costs to products.
4. The newer system also uses multiple allocation bases. The word activity is often used
instead of cost centre and cost driver used instead of the basis of allocation and the cost
system is called Activity Based Cost system (ABC).
5. The basis of allocation or cost driver for each of the cost centers reflects the cause of cost
incurrence, that is, the element that explains why the amount of cost incurred in the cost
centre or activity varies.

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