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1、The Right Way to Control Period ExpenseManagement Accounting; Sep 1990; 72, 3; ABI/INFORM Complete pg. 55-59BY DONALD A. J. BYRUMYear in and year out, the greatest challenge facing industry is cost control. No manager in his right mind would try to control direct material costs by stopping the purch
2、ase of direct material. Such an action obviously soon would bring production to a stop, i which would bring sales to a stop, which would bring the business to an end. Managers are smarter than that. They will have their engineering staff design out the most costly components and then have their purc
3、hasing staff find the least costly suppliers for the remaining components.In the same way, no manager in his right mind would try to control direct labor costs by firing his direct workers. The result would be exactly the same as not buying direct material. Instead, design engineers would be asked t
4、o simplify the construction specifications, and manufacturing engineers would be asked to provide tools and equipment that would maximize worker efficiency.In both these instances management recognizes, perhaps only subconsciously, that the cost is a symptom, not a disease, and that it is the diseas
5、e that must be attacked. To continue the medical metaphor, the disease is like an active cancer that will grow continuously unless it is attacked continuously.But consider how management has handled salaried expense, where the normal method of cost control is decimation, that is, elimination of a pe
6、rcentage of the head count in expectation of a equal percentage reduction of salaried expense. It never happens. In fact, such actions have been known to result in an increase in total period cost expense.The question is, What is the most effective way of controlling period costs? The answer is thro
7、ugh exactly the same techniques as are used for direct material and direct labor, that is, changing the design specifications of the job description to eliminate inefficient, redundant, and unnecessary work elements. The difference is that cost analysts and administrators make the design changes rat
8、her than engineers and buyers.The design changes must be completed and implemented before you can expect to see a cost reduction flow through to the P&L. The design changes require an application of manpower resources to create, so it is best to undertake them when times Eire good rather than wait u
9、ntil things are tough. Put simply, if you want to save period costs next year, you must do the design work this year.As with direct costs, the first step in reducing period costs is identifying those conditions, practices, and procedures that cause the costs (not the people who are the result). Ever
10、ything must be open to question; there can be no sacred cows. For this reason it is usually best for outsiders such as administrators and cost analysts to do the actual design change work rather than having functional managers do it.Outsiders are far less likely to have any ingrained bias, and it is
11、 a fact ofhuman nature that one can see inefficiencies in anothers operation much more easily than in ones own. Conversely, ones own employees are generally better than outside consultants because they already have a working knowledge of the existing state of affairs and usually will start with a pr
12、etty good idea of where some, at least, of the bodies are buried. This could mean a two- to three- man-month head start. In addition, each project worked on invariably will expose other areas that should be investigated. Effective period cost control and reduction should be a continuous process.TOO
13、MANY COPIESOnce upon a time, before the advent of mainframe computers and office copiers, reports were short, few in number, and had limited distribution. Unfortunately, that is no longer the case. For all of the benefits accruing from them, it is nevertheless true that computers and copiers are the
14、 greatest wasters of manpower in modern industry. This situation arises because management always is pressing for more, new, or different information and reports but rarely, if ever, considers purging old reports.A case in point was a fair-sized manufacturing operation of about 2,000 people. Each mo
15、nth data processing produced 41 reportseight weekly reports and nine monthly summaries. A total of 321 copies was produced. The copies contained 140,000 pages and were distributed to 63 persons. It took about two man-months to interview all 63 persons and find out what was happening to the 321 copie
16、s. Eventually, it was determined that the weekly reports were totally unneeded. It was further decided to produce only two copies of the monthly reports, one of which was filed in an office at the north end of the building and the other in an office at the south end.It took several months for all of
17、 the results of this change to show up, and some came in unexpected places. Manufacturing removed more than 300 used filing cabinets from the shop floor and sold them. This removal freed up more than 3,000 sq. ft. of floor space, which then was used to store materials that had been kept in an outsid
18、e warehouse (rental cost $30,000 per year). Giving up the warehouse, in turn, eliminated the need for a driver and truck (operating costs about $4,000 per year) used exclusively for moving goods to and from the warehouse. In addition, two file clerk positions were eliminated, and a printer operator
19、in data processing was eliminated. Finally, open purchase orders for 42 new file cabinets were cancelled, as was a $20,000 appropriation for an additional printer and burster and an $18,000 appropriation for an additional truck. No one ever bothered to figure out how much was saved in computer paper
20、 or report folders.Finally, from a human standpoint, no one got fired. Because the changes were planned and orderly and took place over several months, all four people in eliminated positions were able to move into other, similar jobs that had become open through natural attrition. In addition, beca
21、use the cause was excised, a permanent cost reduction in excess of $100,000 per year was realized. Not a bad payback for about two man-months of effort.Even less conspicuous than computers are office copiers. In fact, the cost of individual copies has become so low that their true cost usually is ig
22、nored. The true cost is the labor needed to copy, distribute, glance at (and in some cases read), and file. It probably takes an average time of about five minutes to perform all of these operations. Multiply all of the copies produced on all machines by five and divide by 120,000 to find the equiva
23、lent number of people involved with copies.One relatively small operation (300 persons) was producing 180,000 copies per year. The cost was only slightly more than $2,000, so they werent concernedthat is, until it was pointed out that copies were the exclusive preserve of indirect people (100 of the
24、 300) and that 180,000 copies were the equivalent of eight persons. There was a subsequent clampdown on copy making, resulting in about a 33% reduction in the number of copies over the following months. While no jobs actually were eliminated, there was a small reduction in indirect overtime (about 1
25、.5 points).With work elements this small, its often impossible to make a direct connection between the cause and effect. One must work almost on faith but with the firm knowledge that there truly is a cause-and-effect relationship and that it ultimately must be reflected in the P&L.TOO MANY BODIESA
26、growing problem in many older organizations is the number of levels of local management. New companies tend to have only two or three levels of functional managers, plus one additional level for the company manager. Older organizations often have four or five levels of functional managers and up to
27、three more levels to tie the organization together.If youve ever played the party game where a message is passed from one person to another, youll be aware that it usually is totally garbled by the time it reaches the fourth individual. This is exactly the same thing that happens in business as info
28、rmation passes up the management pyramid and decisions filter down. The lowest level of management will be fully cognizant of both the form and details of what the workers actually are doing. The second level of management will have a firm idea of whats going on but few details. The third level of m
29、anagement will have only a general idea of whats going on and no details. The fourth-level manager knows only what is supposed to be going on.The second problem with too many layers of management is the delay that each level builds into the whole process. It is axiomatic that the greater the number
30、of layers of managers, the longer it takes for decisions to be made and implemented. Better managers are usually aware of the weaknesses of the information immediately available to them. Consequently, in effect, they reach down two or more levels in the organization to where they can find informatio
31、n of a quality that they can use comfortably to make a decision. Thus the delay. If they didnt do so, the probability of a correct decision would be reduced significantly.To overcome this inertia, overly structured organizations tend to develop an express system. This is an individual or group who,
32、in order to handle day-to-day problems, has direct access to the decision level, bypassing the entire chain of command. While this procedure has the short-term effect of keeping the company going, it also has the adverse effect of putting the intermediate levels of management even more in the dark a
33、bout what actually is happening in the workplace. Under extreme conditions this express group even may develop autonomous decisionmaking power, which eventually can lead to a situation in which managers not only are unaware of what is happening but have no way of finding out.Identifying overstructur
34、e is fairly simple because you need only look at the organization chart. Any function with more than four levels of management and any local organization with more than five almost certainly has a problem. What to do about overstructure is also simple although sometimes painful. The excess levels sh
35、ould be eliminated.Extra levels of management usually are created in response to a specific business situation. The problem is that they fail to go away when the situation no longer exists. They are almost never at the bottom layer. They also tend to have a very small number of direct reports. One-t
36、o-one reporting situations invariably indicate an excess manager, and anything less than four direct reports should be suspect.If overstructure is an identified problem, then there surely also will be express groups, which normally will be at a very low level in the organization. They most often are
37、 found in units such as manufacturing and engineering facilities and in manufacturing and design engineering units associated with customizing products. In a properly structured organization, express groups can cause more problems than they solve, so in a restructuring they must be eliminated.One fi
38、nal point must be made in this area. A great many middle managers are working managers. Most of their time is spent performing real work and only a small percentage on supervision and administration. Eliminating a management level will not eliminate the requirement for any real work performed at tha
39、t level and so may not resultdirectly in losing anyone from the payroll. The true benefit is an improvement in the up-and-down flow of information, which will mean faster and better decisions, leading to an overall improvement in the efficiency of the entire operation. The eventual reduced manpower
40、requirement may show up in an area far removed from the eliminated manager positions.Another hangover from the days of yore are personal secretaries and assistants. A secretary, in the traditional sense, takes dictation, types correspondence, files correspondence, places phone calls, sharpens pencil
41、s, makes coffee, and so on. Assistants write letters (which the boss then signs), prepare reports and charts (which the boss later presents), and actually make phone calls giving or receiving information (which then is passed on to the boss).With the advances that have been made in office equipment,
42、 the only remaining need for a secretary in modern industry is as a status symbol. Anyone of average intelligence with one good hand and reasonable eyesight can prepare a finished letter or report using a word processor in no more time than it would take first to dictate and later to proofread the s
43、ame item prepared by a secretary. Anyone who knows the alphabet can file five documents per minute. If daily filing takes more than five minutes, then you are receiving a lot of documents for which you have no real need. On modern phones a call can be placed by pressing a single button, and it takes
44、 little effort to push a pencil into the maw of an electric sharpener. This leaves only the coffee.On the other end of the scale are assistants. Here the boss is frequently merely a front for the individual who actually is doing all of the work. In such situations it is not uncommon for the boss to
45、take off for a week and have no one know itwhich is a great perk for the boss but a terrible waste of funds for the organization paying him. This situation is not unlike the one-to-one management structure.Industry is rife with personal secretaries and assistants. In most cases where such positions
46、exist, one individual is superfluous for requirements of the businesssometimes it will be the secretary or assistant, and sometimes it will be the boss. Each case must be examined individually to determine which.As an example of how easy it is for an outsider to spot problems in organization structu
47、re, look at Figure 1, an organization chart for the Mythical Company. Indications of the functions involved are omitted intentionally. Thus, this could be an entire company or simply a single function such as manufacturing or engineering. Regardless, there are several fairly obvious problems.Foremos
48、t is the intermediate manager Ml, with his secretary and assistant. It is difficult to imagine how the insertion of this extra level of management can contribute to the efficient operation of the organization.Next up is the group headed by manager M7. He certainly should be able to handle seven work
49、ers by himself. The two line managers appear to be completely superfluous. Three secretaries in an organization this small also appears excessive.Finally, there are three managers, M2, M3, and M4, each of whom has a secretary and at least one assistant. Once again, employing three secretaries for this small a group of people appears excessive. In the cases of M3 and M4, it also might be questioned which is needed, the manager or the assistant.From what has been said, it should not be
