Cost Reduction and Budgeting Process
In this era of a competitive market where most of the firms are price taker, cost reduction is the only option left for companies to survive in the market and earn a profit. Companies can only maximize their profit only if they attach the lowest possible cost to every component of product and process. The Cost Reduction and budgeting process are creating a budget takes management away from its short-term, day-to-day management of the business and forces it to think longer-term. This is the chief goal of budgeting, even if management does not succeed in meeting its goals as outlined in the budget at least it is thinking about the company & competitive and financial position and how to improve it.
Obtaining good costing data
Obtaining transparent cost information isn’t easy. A combination of factors, including increased globalization and years of industry consolidation, have left many companies with a disparate array of financial systems and costing methods that make it enormously challenging to understand their financial data and achieve cost transparency. Moreover, for large organizations with multiple business lines, the move to a shared services model has often made attributing costs to products or customer groups challenging. This is mainly because they need to make changes to how are captured and then blend both data and allocation models across the organization. Complex supply chains that require ongoing transfer pricing activities can also make it very difficult for companies to get an accurate view of true profitability. In short, far from being transparent, cost data is cloudier than ever. And what many financial executives want from their information is a long way from what they are getting.
The granularity gaps
For many organizations, getting cost data to a more granular level is one of the keys to arming managers with the insights they need to support strategic decision-making—from segmenting customers to optimize sales and marketing tactics, to increase accountability for operations and back-office functions. If companies are able to examine the data at the customer or product level, they can use this information to make adjustments that focus resources on areas that are the most profitable. The ideal unit of examination for the data varies by industry.
This desire for granularity is armoured by our survey of financial executives by research house: More than 50 percent of respondents either capture or desire to capture cost data at more granular levels, such as customer or distribution channels. But for those that do measure profitability at these more granular levels, their degree of satisfaction with profitability metrics decreases as the level of detail increases. Low satisfaction levels may be suggestive of challenges in obtaining meaningful cost information at greater levels of detail—for example, difficulties linking overhead costs to detail the objects (such as customers) or inadequate supporting technologies that require important time and effort to manipulate data.
Relevance of budgeting for manufacturing firms
A budget allows a company to track costs. The cost reduction and budgeting process is generally comprises an estimate of how many units the company needs to produce. A number of units produced is based on two factors. First is the inventory. A production budget particular the costs required to keep enough product on hand to meet the inventory requirements of the company. The second factor is the sales targets. The production budget estimates the costs needed to meet sales demand for its products.
It can impact forecast levels. Increased demand for the product can require an increase in the manufacturing of the product, while weaker demand levels can require the company to cut back on production. A production budget helps the company estimate production levels for periods when demand varies. If a company knows that its demand, and production levels, will be low in one month, it can use that stoppage to produce extra product to have on hand for an upcoming period when demand spikes. This allows the company to evade being in a situation where it needs to produce, or have on hand, more of a product but lacks the manufacturing capacity to meet that demand.
A production budget forecasts the costs of manufacturing a product, whether its for a company that manufactures its own products in-house, or a company that outsources the manufacturing of its products to a third party. A production of cost reduction and budgeting process estimate forecasts the costs of having the goods manufactured by someone else. This could contain costs for the making of the product itself, plus the costs the third-party manufacturer charges with its time and labor.
A production budget is a forecast that may change based upon changes outside the company. For example, manufacturing necessitates the use of raw materials; an increase in the price of raw materials can increase the costs needed to produce a product. Also, the UN attainability of raw material or ingredient can require a business to source a new material to use in the manufacturing of the product. This might lead to enhanced costs, but it also could lead to cost savings if the company can obtain the new ingredient for less than the cost of original.