Cost management & management control

Cost Management &

Management Control

Case Study

• The Chief Financial Officer (CFO) of Central University is complaining

about the heavy work that he is required to do at the beginning of each

month. The Vice-Chancellor (VC)of the University requires the CFO to

submit a monthly report by the 5th day of the following month. The

monthly report contains financial and cost data.

• The CFO was heard saying: “Why does the Vice-Chancellor need all this

information? He probably does not read half of the report. He is a botany

professor and probably does not know the difference between Costs and

Revenue”

• Required:

• What is the importance of monthly report ?

• What is the responsibility of the CFO with

reference to a Vice-Chancellor who does

not know much about Cost Accounting ?

Types of Monthly Reports

• Monthly reports are an important document for the success

of Central University.

• Monthly reports contain financial and cost data (profit and

cost centre-wise), which include information such as :

– Monthly Revenue

– Product Cost

– Selling & Distribution Expenses

– Overheads

– Administrative costs

• These are useful in analysing the trends in the figures from

month to month.

• Some monthly reports also compare the trends with

reference to the corresponding month of the previous year

• Variances are analyzed and reasoned in the executive

summary

Importance of Monthly Reports for the VC

• A monthly report is generated because it helps the

VC to scrutinize spending trends.

• It helps in timely monitoring expenditure trends

before they get out of hand and prove detrimental

to the university.

• The reports will also allow VC to analyze the

various costs and try to find ways to reduce them.

• To get the maximum value from a monthly report,

the VC needs to understand the individual

importance of each cost item.

Importance of Finance & Costing

• The backbone of every on-going activity or a new venture in

an Organization is Finance and Costing.

• In our present scenario of efficiently managing Central

University by the VC, it is necessary for him to understand

and assess the cost and revenue implications before he

takes any decisions. This will give him a cutting edge on

Management.

• Finance & Costing is the language used in corporate board

rooms. Hence its understanding is of prime importance.

• The VC can understand better the CFO’s language when he

deals with him.

The CFO hand-holding the VC towards

GROWTH !!

Importance of Cost Drivers

• The more VC knows about the drivers of cost and financial

performance, he can drive the respective business activities

in order to achieve better performance.

• If the VC understands the basics of finance and costs, he

can better relate to his area of Business and question the

sanity of the numbers prepared by the CFO.

• This gives the VC an Inside Edge on the functioning of the

University

• Hence giving Performance Reports to the VC on a monthly

basis will help him manage the University efficiently and

enhance growth to attain successful heights.

CFO’s Responsibility

• The CFO needs to present the Monthly Financial Statements in

lucid and understandable format for a Non-Finance person like

the VC.

• The CFO needs to make an Executive Summary to the VC,

comparing the numbers for the corresponding period of last

month v/s the rise/fall in volumes/revenues or costs with reasons.

• The CFO also needs to briefly educate the VC and make him

understand the importance of basic financial statements like :

– Income & Expenditure Statement / Profit & Loss Account

– Balance Sheet

– Cash Flow

• The CFO needs to explain the VC the importance of planning and

budgeting in advance. This is useful in monitoring and measuring

the performance against the plan/budget.

• He also needs to assist the VC to make investment decisions

wherever necessary.

Sample Monthly P&L ReportFinancial Year 2012-13

Report for the month of Oct-12

This Year Last Year Difference % Current Year Previous Year Difference %

Revenues

Fee Receipts 15,00,000 88% 12,00,000 89% 3,00,000 25% 1,15,00,000 88% 95,00,000 91% 20,00,000 21%

Subsidy / Grants 2,00,000 12% 1,50,000 11% 50,000 33% 15,00,000 12% 9,00,000 9% 6,00,000 67%

- -

17,00,000 100% 13,50,000 100% 3,50,000 26% 1,30,00,000 100% 1,04,00,000 100% 26,00,000 25%

Expenditure

Course Material Expenses 10,000 1% 8,000 1% 2,000 25% 60,000 0% 60,000 1% - 0%

Faculty Salaries 5,00,000 29% 4,50,000 33% 50,000 11% 30,00,000 23% 28,50,000 27% 1,50,000 5%

Support Function Salaries 3,00,000 18% 3,50,000 26% -50,000 -14% 20,00,000 15% 21,00,000 20% -1,00,000 -5%

Staff Welfare 15,000 1% 17,000 1% -2,000 -12% 1,00,000 1% 1,20,000 1% -20,000 -17%

Cafetaria Expenses 25,000 1% 26,000 2% -1,000 -4% 1,90,000 1% 1,80,000 2% 10,000 6%

Rent 1,00,000 6% 1,00,000 7% - 0% 7,50,000 6% 7,00,000 7% 50,000 7%

Electricity 25,000 1% 22,000 2% 3,000 14% 2,15,000 2% 1,85,000 2% 30,000 16%

Telephone 15,000 1% 12,000 1% 3,000 25% 95,000 1% 85,000 1% 10,000 12%

Motorcar Expenses 10,000 1% 8,000 1% 2,000 25% 75,000 1% 55,000 1% 20,000 36%

Printing Stationary 5,000 0% 7,000 1% -2,000 -29% 40,000 0% 50,000 0% -10,000 -20%

Office Supplies 3,000 0% 4,000 0% -1,000 -25% 18,000 0% 30,000 0% -12,000 -40%

Postage 2,000 0% 500 0% 1,500 300% 12,000 0% 5,000 0% 7,000 140%

Travel Expenses 10,000 1% 2,000 0% 8,000 400% 60,000 0% 15,000 0% 45,000 300%

Entertainment / Hospitality 2,000 0% 1,000 0% 1,000 100% 20,000 0% 15,000 0% 5,000 33%

Advertising & Publicity 50,000 3% 20,000 1% 30,000 150% 5,00,000 4% 1,50,000 1% 3,50,000 233%

Sundry Expenses 3,000 0% 2,500 0% 500 20% 15,000 0% 20,000 0% -5,000 -25%

- -

10,75,000 63% 10,30,000 76% 45,000 4% 71,50,000 55% 66,20,000 64% 5,30,000 8%

Contribution / Profit (Loss) 6,25,000 37% 3,20,000 24% 3,05,000 95% 58,50,000 45% 37,80,000 36% 20,70,000 55%

Statistics

New Student Enrolments 3,000 2,800 200 7% 25,000 23,500 1,500 6%

Avg Faculty Head Count 50 45 5 11% 52 48 4 8%

Avg Support Function Headcount 20 22 -2 -9% 21 22 -1 -5%

Avg. No. of Courses offered 35 28 7 25% 36 32 4 13%

Equipment Purchases 3,00,000 50,000 2,50,000 500% 15,00,000 25,00,000 -10,00,000 -40%

Current Month Year to dateParticulars

Sample Balance Sheet

Financial Year 2012-13

Report for the month of Oct-12

Beginning Balance Current per Activity Activity YTD Ending Balance

Sources of Funds

Capital 5,00,000 - - 5,00,000

Reserves & Surplus 1,55,00,000 0 0 1,55,00,000

Profit & Loss A/c 2,60,50,000 6,25,000 58,50,000 3,19,00,000

Current Liabilities 22,00,000 1,00,000 7,50,000 29,50,000

Accounts Payable 3,00,000 1,50,000 2,50,000 5,50,000

4,45,50,000 8,75,000 68,50,000 5,14,00,000

Application of Funds

Fixed Assets 2,35,00,000 3,00,000 15,00,000 2,50,00,000

Investments 1,50,00,000 - 45,00,000 1,95,00,000

Current Assets 36,00,000 2,50,000 5,00,000 41,00,000

Operating Cash 24,50,000 3,25,000 3,50,000 28,00,000

4,45,50,000 8,75,000 68,50,000 5,14,00,000

- - - -

Particulars

The balance sheet always balances

Assets = Liabilities + Capital + Reserves & Surplus

Cost Accounting for Decision Making

• The purpose of Cost Accounting is strictly for insiders. That is

why it is also called Management Accounting - a very important

tool for the VC of Central University.

• Cost Accounting Reports serve as an important tool in deciding

whether or not the University is making a gross profit on the

individual courses it conducts.

• It segregates costs into :

– variable and fixed,

– controllable and uncontrollable costs.

• It is also a decision making tool for :

– pricing a course,

– deciding upon the mix of streams,

– replacement of equipment basis past / sunk costs,

– faculty outsourcing or on rolls or lecture-basis decisions,

– discontinue a course decision.

Cost Accounting for Decision Making (contd.)

• When it comes to measuring how wisely the University resources are

being utilized, cost accounting helps to provide the data relevant to the

current situation.

• By using this approach, it is possible to identify the reason for the

change, and take steps to contain the situation before bottom line profits

are impacted to a greater degree.

• By weighing the actual costs versus the anticipated benefit, cost

accounting can help the University to avoid launching a course with no

real market, timely pre-empt hiring the services of redundant faculty, or

alter the current operational model in a manner that will increase

efficiency.

• Working Capital Management :- this is the most crucial task especially

for the industry like Education i.e. for an University where the flow of

funds is cyclical in nature (once or twice a year during the beginning of

the term / at the time of admissions). The management needs to do a

proper cash planning of its activities when the inflow would be scarce to

NIL.

Example for Decision Making

• If the University wishes to start a new module on Computer

Analytics for which they feel that the market exists and the

students would pay an annual fee of Rs. 72,000/-

• The following are the cost on which we can decide upon

whether to go forward with the course and the number of

student enrolments required to break-even

• This will also give us an insight on the idle pricing for the

module

Sample Cost Sheet

Students Enrolled 40 50 60 80

Unit Price Amount Unit Price Amount Unit Price Amount Unit Price Amount

Monthly Fee Receipts A 6,000 2,40,000 6,000 3,00,000 6,000 3,60,000 6,000 4,80,000

Variable expenses

Study Material 100 4,000 100 5,000 100 6,000 100 8,000

Study Furniture Hire Charges 150 6,000 150 7,500 150 9,000 150 12,000

Equipment Hire Charges 300 12,000 300 15,000 300 18,000 300 24,000

Field Trips 50 2,000 50 2,500 50 3,000 50 4,000

TOTAL VARIABLE EXPENSE B 600 24,000 600 30,000 600 36,000 600 48,000

CONTRIBUTION C = (A-B) 5,400 2,16,000 5,400 2,70,000 5,400 3,24,000 5,400 4,32,000

Fixed Cost

Faculty Charges 2,500 1,00,000 2,000 1,00,000 1,667 1,00,000 1,250 1,00,000

Admin Staff Salaries 1,250 50,000 1,000 50,000 833 50,000 625 50,000

Rent for Premises 2,000 80,000 1,600 80,000 1,333 80,000 1,000 80,000

Other Fixrd Costs 1,625 65,000 1,300 65,000 1,083 65,000 813 65,000

TOTAL FIXED COSTS D 7,375 2,95,000 5,900 2,95,000 4,917 2,95,000 3,688 2,95,000

PROFIT / (LOSS) E = (C-D) -1,975 -79,000 -500 -25,000 483 29,000 1,713 1,37,000

Breakeven Student Enrollments 295000/5400 55

Breakeven Fee Receipts 55x6000 3,27,778

The Conclusion / Options / Decision

• We need at the least 55 students to start this new batch.

• If we anticipate a lesser response we need to reconsider the pricing for

the course.

• We can also introspect the costs once again whether and if

– the fixed overhead absorptions rates be reduced, for this new venture,

helping in reduction of break-even quantity

– Can we reduce the variable costs, so as to enhance the contribution which

would reduce the break-even quantity

THANK YOU