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Concept of Cost Consciousness –Cost consciousness in planning and designing INVENTORY CONTROL.

Cost Consciousness is an important concept to be aware of and to be understood by all the persons in any organization carrying out any economic activity and with an aim to improving productivity and profitability of the organization. Indian Railways, being a large commercial Undertaking as well as a Government Organization, the importance of Cost Consciousness need not be emphasized. As Staff of Railways, we are expected to know the financial position of Indian Railways

Indian Railways-A Brief Background on Financial position:

It will be interested to know that Indian Railways used to carry around 89% of the freight traffic generated by the economy, which has now declined to the level of around 40% leading to stringent financial position. In addition to falling share of traffic, the budgetary support the IR from Central Government in the form of Capital is drastically reduced from 75% in V Plan to around 18% now, thus forcing IR to resort to market borrowings which entail payment of lease charges which constitute 8% of working expenses of Railways. You are also expected to know as to how each rupee of earnings and expenses are met with by Railways. It is interesting to know that 65% of earnings are from freight and 28% come from passenger traffic and balance from Sundry and others. Similarly, Staff wages and allowances constitute nearly 37% of working expenses, 11% towards pension, 8% for lease charges etc., It is to be noted that IR could not pay Dividend to General Revenues for the last couple of years. In addition, Railways are in need of around Rs.15000 Cr for meeting replacement of Over aged Bridges, Track and Plant and Machinery etc., This is the background in which IR is functioning which makes it obligatory for all of us to be Cost Conscious and aware of all the steps to reduce costs and improve efficiency and Productivity leading to better operating surplus adequate enough to place IR on sound financial footing.

As you are aware, there was a committee on Identification of profit Centers and Cost centers and introduction of Activity Based Costing System on Indian Railways headed by Sri Hasan Iqbal, Retired FC (Rlys). The Committee pointed out that many of us do not know the cost of carrying out different activities on Railways. Simple things like an Electrical Foreman of a Division does not know the electrical bill of his Division, an IOW in charge of water works does not know the amount of water bill paid to Municipality. Similarly, every one takes pride in the Operating Department for a slight increase in loading by a few million tones but no one knows at what cost the increase has been achieved. The Committee pointed out that the Cost consciousness is absolutely lacking at every level especially at Supervisory. Besides knowing the physical targets of his performance, one is expected to know the cost inputs that go into the achieving these physical targets.

SOME BASIC CONCEPTS OF COSTING

1.Cost: It can be defined as the amount of resource spent to produce a commodity or a service. The cost can be in the form of money spent on men, materials and miscellaneous.

2. Elements of Cost: These are classified according to Function like Production, Administrative, Selling and Distribution costs or according to Behaviour such as Fixed Costs, Variable Costs and Semi Variable Costs.

3.Cost Sheet: This is prepared duly segregating the costs as;

· Prime Cost comprising of Direct Materials, Direct Labour and Direct Materials.

· Overheads comprising of Factory overhead, adminstration overhead and Selling and Distribution Overheads.

· The total of above two gives cost of production divided by no. of units produced gives unit cost of production.

· If the estimated profit is added to Cost of Production, selling Price is arrived at.

4. Activity Based Costing: As envisaged in the Committee on Identification of Profit Center and Cost Center on IR, we are expected to know how to work out Activity wise costs under each Supervisor under certain parameters. This will help inter unit comparison.

Cost Consciousness in Planning and Designing Inventory Control.

Inventory Control encompasses all activities of Material Management right from planning/assessment of quantity of materials required to receipt, inspection, storage, issue, accountal etc of materials covering all phases. Indian Railways are adopting ABC Analysis as a method of Inventory Control as you will be amazed to know that IR is having more than 100 Stores Depots stacking around one-lakh items. The value of purchase made by IR is estimated around Rs.9000 Cr. in a year.

ABC analysis means that all materials are categorized into three categories viz ‘A’ category comprises of high value items constituting a major segment of total value of materials say around 70% whereas they account for only small percentage of number of items. If these materials are controlled at PHOD level right from approving of AACs to the end, it means that 70% of material budget is controlled leading to better economies to the system. ‘B’ category consists of medium class of materials around 20% of the total value, which can be controlled by SA grade officers whereas ‘C’ category comprises materials constituting about 10% of total value of materials but comprise about 70% of numbers whose control can be left to lower levels of administration. The other aspects of cost concepts are-

Cost of stores- as more stores balance involves locking up capital.

Fixation of Minimum, Maximum and re-order levels.

Fixing Economic Order Quantity.

Factors like Obsolescence, thefts, pilferages, shrinkages, evaporation etc,

Proximity to the source of supply.

Items available on Rate Contracts.

Lead time involved for each kind of material.

Storage costs and space constraints and security problems.

Finally the cost of Inventory Control should not be disproportionate to the likely befits that may accrue to the organization.

All five ‘R’ s of Material Management should be given due consideration viz. Right Quantity, Right Price, Right Source, Right Time and Right Quality.

A better Inventory Control will lead to better Inventory Management giving better inventory turn over Ratio which is the final index of material management function of any organization especially a big organization like Indian Railways. It will be heartening to note with satisfaction that IR has been achieving better Inventory Turn Over Ratio over years.

Advantages of observing Cost Consciousness

The following advantages can be derived by the organization if the individuals operating in the organization observe cost consciousness while discharging their duties.

(a) The cost of activity will be kept at minimum.

(b) Savings derived by observance of cost consciousness can be better utilized in other areas where resources are required.

(c) Wastages of all kinds can be reduced.

(d) Financial discipline thus set in will keep the managers to constantly think of achieving higher and higher levels of economy in expenditure.

(e) Cost of products will become more competitive leading to better operating surplus resulting in generation of more internal resources for meeting capital expenditure without resorting to market borrowings at high rates of interest.

(f) Organization can quote competitive prices, which help to corner greater market share.

(g) Workers and shareholders can derive better financial benefits and better return on capital employed. This will lead to harmonious industrial relations and boosts investor confidence.

(h)Economy of the country will improve leading to overall economic development.

Contributed by V.A.PADMANABHAM, SAO/SF/SCRly