The Role of the Management Accountant in Profit Maximization


Profit maximization is where a firm makes the greatest profit out of the little resources that is available to them.  The concept of profit maximization is fundamental to the idea of achieving a corporate goal.  According to pandey (1999) “it is an input-output relationship occasioned by an introduction of  scarce resources as input into a manufacturing process in order to derive outputs that could be offered for consumption either domestically or industrially above the cost of production”.

Profit can be defined as the excess of income over expenditure either for a single transaction or for a series of transaction.  Generally when profit are referred to in business what is meant is profit after all costs expenses and taxes of all kinds have been subtracted.  Profit plays a special role in a free enterprise economy e.g. they provide a yard stick with which to measure the efficiency of the economy.

There are various measure of attiring profit maximization.  Embedded in them are concept that sponsor the goal of profit maximization significantly there exists two major concepts that lead to the improvement of profit and its maximization.  One of these concepts is know as cost minimization or cost reduction.

According Adenji (2001) “Profit maximization suggests production in even increase quantities though Cleary at some stages a limit would be imposed by the existing capacity either to produce or the sell.  But in practice both selling price and cost price are likely to very with quantity of output”.


According to Adeniji (2001) “cost is described as the total amount of expenditure incurved or to incurred in the course of production manufacturing a product and rending service. The whole process of cost ascertainment is directed to awards the establishment of what is actually cost to produce an article.  The cost involved is past costs the cost ascertainment process is concerned with collecting classifying recording analyzing and reporting upon the financial consequences of part action”.

The total cost of manufacturing can be classified into three broad headings popularly known as the elements of costs. They include direct material cost, direct labour cost and overhead cost


These are material that eventually become part of the finished product and can be conveniently and economically traced to specified product units for example wood that is used to manufacture desk can easily be identified be classified as direct material cost. Alternatively material  used for the repairs of a machine that is used for manufacturing of many different desks are classified as indirect materials these items of materials cannot be identified with any one product cannot be identified with any the benefit of all products rather than for one specific product.


This consists of those labour costs than can specifically be traced or identified with a particular product. Example of direct labour cost include the wages  operatives who assemble part into finished products, or machine operatives engaged in production process.  By contrast the salaries paid to factory supervisor cannot be specifically identified with the product and thus from part of indirect labour cost.  He wages of all employees who do not work on the product itself but who assist in the manufacturing operation are classified as part of the indirect labour const.  Indirect labour is classified as part of the manufacturing overhead cost.



This consists of all manufacturing costs other than direct labour direct materials and indirect expanses. It therefore includes all indirect  manufacturing labour and material cost plus indirect manufacturing expenses.  Example of indirect manufacturing expenses in a multi-product company include rent of the factory and depreciation of machinery.  Manufacturing overhead cannot be traced directly to a product. Instead they are assigned to product  using cost allocations.  Cost allocation is the process of estimating the cost of resources consumed by products that involves the use of surrogates rather then direct measure.


The word cost reduction and cost minimization are often used inter changeable.  Formal attempt at reducing costs have become increasingly popular especially during the economic recession. Even now many companies however tends to introduce rash programes of cost reduction in fines of crisis.

Cost reduction is essentially the reduction or lowering of the cost of production or operation in an organization while still manufacturing he functional value. It aims at reducing the target cost by a systematic approach and at the same time give the customers as good if not better value for their money while reducing the cost of making and supplying the goods and service.

As one of the methods of profit maximization it is sate and simple since it does not depend on external changes. The process of cost minimization is profit itself. Every reduction in annual cost has its counterparts in an equivalent increase in annual profit. Where a company  successes in immunizing its annual cost of product by one percent (1%) it will have a commensurate increase in annual profit.

According to he chartered institute of management accountants (CIMA) cost reduction is the achievement of real and permanent reduction in the unit cost of god manufactured  and services rendered without imparting their suitability for the intended purpose.  This definition reveals the following characteristic of cost reduction.

⇛     Cost reduction must be real through increased productivities.

⇛  Cost reduction must be permanent  since temporary reduction in cost is due

to windfall change in market prices

⇛  Cost reduction must not impair the functional value of product or service

for the use intended.

The concept of cost minimization should emanate from an organized and planned action of the organization.  The scope of cost is so wide that it is not practicable to develop fully the areas in which  it can be applied. It is a pragmatic strategy requiring systematic approach to be achieved.  The management accountant who has this as one of his responsibilities  will have to undergo the various procedure involved before deciding on the approach.


Drury (200) expressed that management accountant has the following function to perform.

  1. ⇛ He provides relevant information to help managers make better decision.  This involves both routine and non-routine reporting.  Routine information is required in relation to the profitability of various signets of the business such as product service customer and distribution channel in order to ensure that only profitable activities are undertaken.
  2. ⇛ Provides accurate of information which required in decision making for distinguishing between profitable and unprofitable activities. If the cost system does not caption accurately enough the consumption of resources by products the reported product or service cost will be distorted and there is danger that managers may drop  profitable products or continue with the unprofitable products.  Situations where cost information provided by  the management accountant is used to determine selling prices the under costing of product can result in the acceptance of unprofitable business where as over costing can result in bids being rejected and the loss of profitable business.
  3. ⇛ Management accountant also provides information for planning control and performance measurement.  Planning involves translating goals and objective into the specific activities and resources that are required for the attainment of profit after production.
  4. ⇛ The management accountant provides the management with feed back information in he from of periodic reports suitably analyzed to enable them determining if operations are proceeding according to plan and identify those activities where corrective action is necessary.
  5. ⇛ The management accountant should particularly perform the function of providing the managers with economic feedback to assist them in controlling costs effectively and improving the efficiency and effectiveness of operation.  All these are efforts geared towards maximization of profit by the firm.

However in some make management  accountant will make decision   calculation as well as providing for them but is less likely that he will do so when the computation.  Involve the use of some of the quantitative that requires specialist skills form operational researcher or management scientist. The management accountant should however have some understanding of these techniques otherwise he will find difficultly in providing appropriate data or in interpreting the result obtained.

It is therefore instrument at this point to focus on those cost which are relevant for the purpose of decision making.  Two general point are however relevant at this stage.

⇛  As all decision are believed to be concerned with the future cost for decision making will be estimate of future cost.  Historical data will have importance only to the extent that it provide a basis from which the future can be predicted.

⇛  The decision make will be interested only in cost that will change as a result of adopting a particular alternative in other words in those costs which could be carefully avoided (and those revenues which could be foregone) if that particular alternative were not adopted.

Below are some of the tools at the disposal of the management accountant in achieving the goal of profit maximization while employing the afore mentioned concept.  They includes standard costing marginal costing cost volume-profit analysis and budgeting


According to (Drury 2000) “standard costing are predetermined costs they are target cost that should be incurred under efficient operating conditions. A standard costing system can be applied to organizations that produces many different product as long as production consists of a series of common operations.  For example if the output from a factory is the result of give common operations it is possible to produce many different product variation from these operations. It is therefore possible that a large product range may result from a small number of common operation.  This standard costs should be develop for respective operations and product standard costs are derived simply by combining the standard cost from the operations which are necessary to make the product”.

Standard costing is a system of cost accounting which makes use of determined standard cost relating to each element of costs material labour and overhead for each line of product manufactured or service supplied.  Actual cost incurred are compared with the standard costs as the work process.  The difference between the two is know as “ variances”. These are analyzed by reason so that inefficiency may be quietly brought to the notices of the persons responsible for them and appropriate actions may be taken.

According to Regnold et al (1996) “A standard is a predestined measurement of what amount of input should be and what that input should cost per unit i.e the per unit cost of that input.  A standard should be reasonable in that it should be attainable be skilled and motivated workers and also should enable the company produce a product that is high enough in quality and low enough in cost to be competitive in the market”.  It is a tools used by management for cost planning and cost control purpose. When a company uses standard costs all cost affecting the investor accounts and the cost of goods sold account are stated in terms of standard of per-determined cost rather than actual cost incurrent. In practice five standard are usually predetermined for the product of a manufacturing company. They include:

  1. Material quantity standard: This is the amount of material that  should be used fro a unit of product. In some cases more then one type of material is used it so a standard is set for each material.
  2. Material price standard: This is cost per unit of material
  3. Labour quantity standard: This is the amount of labour usually expressed in direct labour hours that should be used per unit of product.
  4. Labour price standard: This is the cost of direct labour per direct labour hours the common name fro this types of standard is wage rate standard.
  5. Overhead standard: This is the amount of overhead cost that should be per direct labour hours

From the definition it will be seen that the following processing are involved:

  1. Predetermination of standard cost.
  2. Recording of actual costs.
  3. Comparing actual cost with standard cost.
  4. Obtaining the cost variances


The success of any system if cost control depend to some extent on getting the standard cost is guaranteed.  If the target cost are unattainable most of the subsequent work of cost control system may be wasted. This first stages warrants careful consideration.  Setting suitable standards is not difficult provides certain rules are observed and certain pitfall avoided.

Whether dealing with materials labour or overhead the basic principles of setting standards are similar. The target cost should be estimated in terms of two distinct fact quality expressed in physical terms and  the price to be paid for each physical unit for example in estimating material costs the amount of material needed to make he product should be dearly distinguished from the prince to be paid per unit of material.

There are reasons for recommending that target cost be considered in terms of both factor first prices way change especially in time of inflation but the physical quality which is required for production is not  affected by change in price. This is because the same quantity has to be used and at the same time be maintained thus it is much easier to up data standard cost for price change it the quality and price have been defined separately.

The second and more important reason for disgusting these two factor is that it is essential for analyzing the causes of variance. If the actual material costs is say N200,000 more than the standard estimated cost the question that arises is was it because too much materials were used or because the actual price paid was higher  than allowed for the machine? Without this fundamental knowledge it may be impossible to identify the proper standard which is extremely important because management will evaluate past performance and predict future. Performance on the basis of standard for specific jobs developing proper standard represents the work of highly specialization people.



As stated earlier standard can be easily stated provided certain pitfalls are avoided.  A adequate allowances should be made the allow for the inheritable waste involved in productive process for example in a wood working business sawdust is inventible these minimum factors  must be allowed for in the estimate. Moreover some allowance may be appropriate for scrap breakage and other losses which even the best managed factors are only to be expected in practice similarly in estimating the labour contained in a process allowance must be made for tea breaks personnel needs, due relaxation and other minor contingencies. These are as much part of the jobs as the element of work themselves.

Another pitfall in setting standard cost is overlooking the losses due to inevitable lower grade output.  For instance in a factory using natural raw-material such as cotton wood etc. A small portion of the end product may have to be classed as second or third grade and sold off at a lower price.  Normally it may be appropriate to make allowances for some standard output and the allowance must be made for both labour and material. To illustrate further if 5% of the output has to be disposed off at rejected price then that 5% must be coved in the labour cost estimate.

Setting standard for overhead cost can be alone first of all in the from of annual budget absorption costing system is used the overhead cost would include both fixed and variable cost and would in turn be apportion the cost centers and cost units.  Many firm express their overhead costs as percentage of the labour costs or as an overhead per man labour or machine hour. The problem with the approach is that it can give very misleading information in a standard costing system. Having decided how much material or labour is required in setting the standard costing the next thing is ht determine the price of material or labour. Again here are some pitfalls. The price for material should not overlook such factors as discount and premiums for higher grade.  The standard price should b based on the average price expected over the extent year should also include any incentive bonus payment and other extra payments which are apportioned to output. If this procedure is strictly followed no double the cost of control system will disclose the excess costs of current condition so that the mangers can decide what will be done to improve the situation.

Communicating he target of estimated costs setting stages, if the manager the foremen and others concerned in achieving the target costs can be involved in determaing the standard cost they are more likely to agree that the figures are realistic and attainable the more they can participate in formulating the targets and budgets the easier it  become for them to accept the standard and will more willingly work hard to achieve results. Having set the standard cost with the due degree of involvement the next stage in communication is to ensure that adequate instruction on facilities are given to all concern.  May firms this can be incorporated in the document issued as manufacturing instructions for production control purpose. they some managers are reluctant to disclose in advance to the shop- floor wood production.  This has been one of the practice problems of cost control.



Another stage of cost control is collecting information to find out what is actually happening in practice and whether the standards are being active a variety of procedure may be involved in this aspect. For the information to be collected there must be a material cost control there may be the need for store requisition notes arising large purchase order or other purchase data collecting information for labour cost control may mean recording the output and hour worked on daily or weekly sheets job card or other documents fro overhead most of the information  may be collected and a comparative analysis made in the various ledgers used for financial accounting.


The basic rule here is that in any data collection system the amount of information should be kept to a minimum.  Also the incidence of errors should be minimize by using pre-printed data for example work tickets can be produced as a by product of the production control  system and the collection of information should be promptly cheeked because the weekly cost control data may very. Some large firms are now using computerized system for collecting and processing information about output in the shop-floor such system can disclose cost promptly and can be valuable  for updating production schedules.



If cost control is to summarized the scope of the data from the various monitoring sources in order to compare actual cost with target cost and to reveal the causes of cost variances the overall process of comparing the actual and the target cost might relatively by easy. But is it also easy tracing the true reasons for any cost variance?

In the same way that the setting of the standard cost involved the main factors of amount and price so the analysis of the cost variance can be classified into two groups thus the cost of materials may be high or lower than the specified standard cost given rise to what is know as the direct variance which can be broken into price and usage variance.




This occurs when you compare the standard price with the actual price and there is a difference.  Either that the price paid is greater then the specified price in the standard costs this could occur due to an unexpected increase in the prices of material or a decrease in the discount payable when purchasing goods from the suppliers.



This occurs when the actual material used is greater or less than the quantity of material that was budget. It may be due to excessive soap spoilage or to lower proportion of off cut materials.

Similarly actual labour cost may be higher or lower than the standard labour cost giving rise to what is called direct wage variance.



This is the final stage of the control system and is based on the information revealed.  The variances should be analyzed in a systematic way this helping to indicate the nature of the actual required. It require different actual from the one caused by efficiency variance. Within the efficiency variance the various causes of it such as waiting tool machine breakdown excessive work etc. should be identified to guide the manager to take appropriate action the  essence of detailed analysis of causes of variance is to teach the managers or who ever is concerned not to make the same mistakes over and over again.

If the analysis show excess labour costs because of waiting for material this mat indicate the need for better production control to provide a better flow of work.  If the record shop excess usage of materials it is tool late to recover the wasted material and the last output. The cost control records there tone primarily indicate whether the action taken by the manager has produced the desired result and if no what should be done to prevent re-occurrence.

The only way to prevent excess cost in practice is for the  manager to take action before the event. For example the foreman must so organize the flow of work such that no of the workers will be waiting for materials or tolls or even for instructions. He cannot prevent unforeseeable breakdown of plan while the repair is being carried out by the maintenance department or a quick replacement made.

Generally speaking the idea of profit maximization revolves around the sphere of quality information in making decision.


Marginal costing is a method of costing that distinguishes between fixed cost and variable cost.  The marginal cost of products is its variable cost ie. it include direct material direct labour direct expenses and the variable part of overheads.  This is used in making decision that occurs within the short run.

Lucey (1998) says that the accounting system in which variable costs are charge to cost units and fixed cost of the period are written off in full against the aggregate contribution.   Its special value is in decision making. The term contribution mentioned in the formal definition is the term given to the difference between sales and  marginal cost.  Thus marginal cost  = variable cost re DL +DM+ DE = VOLH. Contribution = sales- marginal cost.

The term marginal cost sometimes refers to the  marginal costing per unit and sometimes to the total marginal cost to the department operation the meaning is usually taken from he context.  Alternatively marginal costing could be referred to as contribution approach and as direct costing.


  1. It can be used as a basis for providing information to management for planning and decision-making. It is particularly appropriate for short run decision involving in volume of activities and the resulting cost changes.    
  2. It can be used in the routine cost accounting system for the calculation of and the valuation of stocks used in this fashion consequently the valuation of stocks and work-in- progress contains both fixed and variable elements. On the other hand using marginal cost fixed cost are not absorbed into the cost of producing and they are treated as period cost and written off in each period in the costing profit and loss account. The effect of this is that finished goods and working progress are value at marginal cost only that is the variable element of cost usually prime cost plus variable overhead. Act the end of the period the marginal cost of sales is deducted from sales revenue to show contribution from which fixed cot are deducted to show new profit.



Drury (2000) says that cost-volume-profit is a systematic method of examining the relationship between changes in activity (ie output) and changes in total sales revenue expenses and not profit.

Adeniji (2001) opines that C-V-P represents an application of marginal costing that seeks to study the relationship between cost volume and profit at different activity level and can be value  upon for short-term planning and decision making.

C-VP  analysis are useful for predicting future results.  A company may use C.V.P analysis as a tool for planning when the sales volume is known and management needs to find out how much profit will result. Another way of planning is having a target profit in mind then using the C-V-P analysis a company can decide the level of sales needed to reach that profit for cost control purpose the C-V-P analysis is a way to measure how well different department in the company are doing.  At the end of a period the company analyzes sales volume and relate it to actual cost to get the actual profit.





The cost-volume-profit  figures are useful only when assumptions holds true and certain condition exists. It one or more of these assumptions and conditions are absent  the result of he analysis may be misleading. These assumptions and  conditions are as follows:

  1. All other variable remain constant
  2. A single product or constant sales mix.
  3. Complexity-related fixed cost do not change.
  4. Profit are calculated on a variable costing basis.
  5. Total cost and total revenues are linear function of output.
  6. The analysis apply only to relevant range.
  7. Cost can accurately be divided into their fixed and variable element.
  8. The analysis applies only to short term time horizon



This is the excess of revenues over all variable costs related to a particular sales volume.  It used to cover the fixed expenses and then whatever towards profit if the contribution margin is not sufficient  to cover the fixed expense then a loss occurs for the period.



Malomo (1999)said that a budget is a pre-determines statement of management policy which provides for comparison of results actually achieved during a given period. It a financial   or quantitative plans of operation for a forth coming accounting year.

Lucey (1996) stated that a budget is statement  financial position of a sovereign body for a definite period of time based on detailed estimates of planned or expected expenditure during the period and proposal for financing them.

Allan and Harold (1976) defined budget as a financial plans that set goal and allocates resources for the coming period.

Pickle and Lafferty (1969) said that a budget is a financial or a quantitative statement prepared and approved prior to a definite period of the policy of attaining a given objective. It may include expenditure and the employment of capital.

Owler and Brown in their book defines budgeting as a plan quantities in monetary terms prepared and approved prior to a defined period  of time usually showing planned  income to be generated and expenditure to be arranged doing that period and the capital to be employed  to attain given objective.



Budgeting is very essential in human endeavour since it is the bane for profit maximization and serves as a plan for a future fiscal period of a business or a firm. Budgeting enable the certainty. Some of the benefits are:

  1. It forces the manager the think ahead by requiring him to formalize his planning effort.
  2. It provide definite goals and objectives which serve as a bench mark for evaluating subsequent performance.
  3. It uncover potential bottle necks before they occurrence
  4. It coordinates the activities of the entire organization by integrating the plan and objectives of the various department with the broad goal of the entire organization.

The  act of preparing the budget termed budget planning involved the development of future objectives and the formulation of steps to achieve this objective.  Profit maximization is one of such objectives and it calls for accurate planning a budgeting system to be effective. It must provide a control for the plans involved.



In the preparation of budgets it is essential to consider the key factor or as it is sometimes termed in budgeting the principle limited factor. This is the factor that imposes a limitation on the level of activity usually sales demand but it may also be limitations on any resources materials labour time working capital etc.  Once this factor can be identified the rest of the budget can be prepared

The identification of this principles budget factors by the management accountant is responsible for profit planning and its maximization.  Management may not know in advance which the principle budget factor is to one method of denitrifying this factor is to  prepare  a draft sales budget and them consider whether any resources shortage prevents the level of sales from being met.


A period budget is a forecast of a years operating result for a segment of a company.  It is a quantitative. Expression planning activities period budgets are prepared by the whole management term. They require timely information and careful coordination of this information.  This process concerts unit sales and production forecasts into revenues and cost estimate for each of the many operating segment of the company. Every of these forecasts are as accurate as possible.

Period budget preparation relies heavily on several management tools e.g. knowledge of cost behaviour management projected department or products line revenue and cost amounts. Profit planning in itself is possible only after all cost behaviour partners have been identified.  Responsibility accounting with its network of managerial responsibilities and information flow provide a base for the structure  of the budget data gathering process these tools together with the concept of cost allocation and cost accumulation provides the foundation for preparation of an organization budget.





Period budget are generally prepared for each departmental or functional cost and revenue producing segment of a company. These budget are usually the following:

  1. Sales units
  2. Production unit

iii.      Selling and distribution unit

  1. Direct material usage
  2. Labour how requirement

these budget are closely related to each other following the sales unit for cast the budget can be prepared. The selling expanses budget also depends on the sales.  The key point to remember here is that the whole budgeting process being with the sales unit forecast some of these period budgets are explained below.



This is probably the most difficult period or functional budget the prepare.  It is not easy to estimate consumer’s future demands especially when a new product is being introduction into  the market. It is possibly the most important subsidiary budget because it the sales figure is wrong them practically all other budget will be affected  especially the master budget.  The sales budget is the storing house or point in preparing the master budget and nearly all other budgets depends on it in some ways.

Generally the sales budget is accompanied by a computation of expected cash receipts for the forth coming budget period this composition is needed to assist in preparing the cash budget for the year



Right after the preparation of the sales budget the production requirements for the forthcoming period can be determined and organized in the from of a production budget. Sufficient goods will have to be available to meat sales needs and provide for the desired ending inventory portion of these goods will exist in the forms of a beginning inventory. The remaining will have to be produced. Therefore production need can be determined by simply adding budgeted sales to the desired ending inventory and deducting the beginning inventory.


A direct material budget should be prepared to show the materials that will be required in the production process. Sufficient raw material will have to be provided for the desired ending raw material inventory for the budget period.  A direct materials purchasing budget is also required specifying the expected quantities and price of each store item for raw material bought.

Generally the direct material budget is usually accompanied by a computation of the schedules of cash in the preparation of the cash budget.



This represents the cash receipts and cash payments and the estimated ash balance for each month of the period budget.  It sums up the cash results of planned transactions. It generally shows the company’s projected ending cash balance and the position for each month of the year.


Its main function is:  

  1. To ensure that sufficient cash is available when required.
  2. To reveal any expected shortage of cash so that action may be taken e.g. a bank overdraft or loan arranged.
  3. To reveal any expected plus of cash so that if the management desires cash may be investor or loaned.



This statement enable the company to see what has happened for a period and what has been gained as the profit after considering the value in the sales and overheads that were in cured in production for the stated period.



The master budget is a combined set of department or functional period budget that have been consolidated into forecasted financial statement for the whole company. Osugawu (1998) states that when the functional budget have been prepared the budget officer will prepared a master budget in the from of a budgeted profit and loss account in which he will incorporate the production sales and costs estimated for the budget period. The board of directors will then consider the budget and call for amendment if they are not satisfied with  its contents. The budget however represents a  standard which should be achieved by each department in the business. Each of the separate budget gives the projected costs and revenue for that part of the company when they are combined these budget shown all anticipated transactions of  the company for a future accounting period.  With this information the anticipated results with the beginning general ledger balance to prepare forecasted statement of the company’s not income and financial position for the time period.

Three steps leads to the competed master budget.

  1. The period budget
  2. The forecasted income statement
  3. The forecasted balance sheet



Drury (2000) the budgeted profit and loss account the balance sheet and the cash budget will be submitted by the accountant to the committee together with a number of budget financial ratios such as the return on capital employed working capital liquidity and gearing ratios. If these ratios prove to acceptable the budget will be approved.








For a company to achieve its aim of profit maximization cost incurred by the company in the process of production must be properly regulated. The concepts of cost control and cost reduction will be looked into as they are very essential for the achievement of this aim.



Wilson (1984) opines that cost is essentially the monitoring in an organizaiton while maintaining the quality of the planned or budgeted cost by systematic approach or techniques. Cost control is one of the fundamental methods improving profitability.  Sometimes it is the only open way to a company.

Adeniji (2001) says that cost control is the regulation of the cost of operating a business and is concerned with keeping cost with acceptable limits. These limits will usually be specified as a standard cost limit in a formal operational plan or budget. If actual cost differ from planned costs by an excessive amount cost control action will be necessary.  You exercise in good  housekeeping by avoiding wasteful use of valuable resources and encouraging efficiency and cost consciousness.



This in contrast to cost control starts with an assumption that current cost level or planned cost level are too high even though cost control might be good enough and its efficiency level high. Cost reduction is a planned and positive approach to reducing expenditure.  It is defined by CIMA as “ the reduction in unit cost of goods or service without impairing the suitability for the use intended.

Cost control action aught to lead to a reduction in excessive spending (for example when material wastage is liger than budget or productivity level below agreed standards). A cost reduction programme however can be directed towards reducing expected cost level by cutting cost to below budgeted or standard level by purchasing new equipment or changing methods of working.  Both budget and standard rejects current cost and conditions and not necessarily the cost and conditions which would minimize cost.




There are two basic approaches to cost reduction as was reiterated by Adeniji (2001) they includes:

  1. Crash Programmes To Cut Spending Level: profitability or csh flow the management might decide on an immediate programme to reduce spending to a minimum by abounding some current project differing capital expenditure making some employees redundant and stopping new recruitment and so on. The absence of careful planning  might give such crash programes the characteristics of panic measure and authoritarian dictatorship form top management.  Cost reduction measures might be too little and too late or misdirected. Poorly planning crash programmes to reduce cost might result to decision which seriously reducing  operation efficiency without the effect being immediately noticeably                    
  2. Planning Programes to Reduce Cost: Many companies tend to introduce crash programmes for cost reduction time of difficulty. A far better approach is to introduce continual assessments of an organization’s entire products production methods services internal administration systems and so on.  The management accountant will normally becoming involved when compiling report on the costs and benefits of different alternatives and also on providing cost benefit analysis of the cost reduction schemes themselves.



Improving efficiency and efficiency standards:

One way of reducing cost is improving the efficiency of material usage the productivity of labour or the efficiency of machinery or other equipment. This might be done in the following ways;

  1. Improved materials where wastage is currently high wastage might be reduced by one of the following methods:
  2. Changing he specification for cutting the materials.
  3. Introducing new equipment that reduce wastage in processing or handling materials

iii.      Identifying poor quality output at an earlier stage in the operational process.

  1. Using a better quality of material. Even though more expensive better quality materials might save costs because they are less likely to tear or might lasts longer.
  2. Labour productivity can possible be improved by the following methods:
  3. Giving pay incentive for better productivity.
  4. Changing work methods to criminate unnecessary procedures and make better use of labour time.

iii.      Changing work patterns or schedule so as to smooth out seasonal fluctuations over the year and reduce the need for overtime payments at the height of seasonal production. This can also reduce non-conformance quality cost that is the cost of faulty goods produced under pressure during unrealistically high overtime periods.

  1. Improving the methods for achieving co-operation between groups of departments
  2. Improving the efficiency of equipment usage might involve the following
  3. Making better use of equipment resources
  4. Achieving a better balance between preventive maintenance and machine down time for repairs



The key to reducing labour costs might be as follows:

  1. Improving efficiency/ productivity which was maintained earlier.
  2. Changing the method of work. A work study or organization and method programme a might be set up to look for cost saving from improved work methods
  3. Replacing humans with machinery. The substitution of labour by automatic equipment might reduce costs substantially as the well published experience of the newspaper industry showed.



  1. Finance costs might offer some scope for savings:
  2. There might be a finance cost in taking credit from supplies in the from of an opportunity cost of failing to take advantage of discounts for early payment that suppliers might be offering.
  3. Similarly a company should give some though to the credit terms if offers to customers. finance tied up in  working capital involves a cost (This might be the interest charges on a bank overdraft the cost of borrowing long-term finance or the opportunity cost of the capital tied up).  Costs might be reduced by reassessing policies for offering early payment discounts to credit customers or discounting bills  of exchange receivable.

iii.      A company might whish to reassess its sources of finance.  Is it borrowing at the lowest obtainable rates? Is the gearing too high and does it rely too much on debt capitals?

  1. Saving might be achievable from improved foreign exchange dealings for companies involved in buying and selling abroad.
  2. Expense items other than materials and labour may be significant part of total costs and these too should be controlled for example capital expenditure proposal should be carefully evaluated and management should continually question the need for any cost item e.g. can accommodation (and rent) be reduced?
  3. Cost reduction can be achieved if serious managers ensure that proper control over spending decision is exercise. All  too often costly spending decision are taken by  junior of managers without proper consideration of long-term. Authority for different types of spending is usually given to management at various levels in the heredity depending on the nature of the cost.


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