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Value Analysis is one of the major techniques of cost reduction and control. It is a disciplined approach which ensures the necessary functions for the minimum cost without diminishing quality, reliability, performance and appearance.
It is a creative approach to eliminate the unnecessary costs which add neither to quality nor to the appearance of the product. It is a systematic application of techniques to identify the functions of a product or a component and to provide the desired function at the lowest total cost.
🛑Definitions
🛑Types - value
In the field of value investigation, value refers to economic value, which itself can be sub-divided into four types as cost value, exchange value, use value and esteem value.
▶️“Cost Value” is the measure of sum of all costs incurred in producing the product. The ‘cost value’, therefore is the sum of raw-material cost, labour cost, tool cost and overheads expended to produce the product.
▶️“Exchange Value” is the measure of all the properties, qualities and features of the product which make the product possible of being traded for another product or for money. In a conventional sense, ‘exchange value’ refers to the price that a purchaser will offer for the product, the price being dependent upon the satisfaction value which derives from the product.
▶️“Use Value” is the measure of properties, qualities and features which make the product accomplish a use, work or service. Use value, therefore, is the price paid by the buyer or the cost incurred by the manufacturer in order to ensure that the product performs its intended function efficiently.
▶️“Esteem value”, therefore, is the price paid by the buyer or the cost incurred by the manufacturer beyond the use value. It is the perception value.
Value Analysis is one of the major techniques of cost reduction and control. It is a disciplined approach which ensures the necessary functions for the minimum cost without diminishing quality, reliability, performance and appearance.
It is a creative approach to eliminate the unnecessary costs which add neither to quality nor to the appearance of the product. It is a systematic application of techniques to identify the functions of a product or a component and to provide the desired function at the lowest total cost.
Procedure of Value Analysis:
Following points should be considered for putting a scheme of value analysis in operation:
a. Identification and definition of the problem, i.e. ascertaining whether the customer is being given the full use value and esteem value for the product he purchases and if not, what is required to be done. In case of raw materials and components performance, satisfaction in subsequent production or processes is to be seen.
b. The feasibility of the alternatives and exploring the best method of performing the work at the minimum cost. For this purpose all relevant facts like drawing and design, material specifications, material, labour, overhead and other costs, market competition etc. are considered before proceeding farther with the job of value analysis.
c. The investment, if any, required for the alternative.
d. Percentage of the return on new investment. This return should be equal to or more than the expected return on investment.
e. Costs resulting indirectly out of a decision to change to alternative like costs of items becoming obsolete cost of training, etc.
f. The benefits from the alternative like reduction in costs and increased revenue.
g. Recommendation of the final proposal for implementation after considering the above points
🛑VALUE ENGINEERING 🛑
Value engineering is a systematic, organized approach to providing necessary functions in a project at the lowest cost. Value engineering promotes the substitution of materials and methods with less expensive alternatives, without sacrificing functionality
Value engineering is the review of new or existing products during the design phase to reduce costs and increase functionality to increase the value of the product. The value of an item is defined as the most cost-effective way of producing an item without taking away from its purpose.
Value engineering is used to solve problems and identify and eliminate unwanted costs, while improving function and quality. The aim is to increase the value of products, satisfying the product's performance requirements at the lowest possible cost.
Value engineering can be defined as an organized effort directed at analyzing designed building features, systems, equipment, and material selections for the purpose of achieving essential functions at the lowest life cycle cost consistent with required performance, quality, reliability, and safety.
🛑COST REDUCTION 🛑
“Cost reduction” is a continuous process of critical cost examination, analysis and challenge of standards. In this each aspect of businesses such as products, process, procedures, methods, organization, personnel etc., are critically examined and reviewed with a view of improving efficiency and effectiveness and reducing the costs.
“Cost reduction is to be understood as the achievement of real and permanent reduction in the unit cost of goods manufactured or services rendered without impairing their suitability for the use intended or diminution in the quality of the product.”
The definition given above brings to light the following characteristics of cost reduction:
1. The reduction must be a real one in the course of manufacture or services rendered. Real cost reduction comes through greater productivity. Greater productivity may be through (1) obtaining a large quantity of production from the same facilities; (2) using materials of lower price and of different quality without, however, sacrificing the quality of the finished product, i.e., reducing cost through the process of substitution; (3) simplifying the process of manufacture without sacrificing the quality of the finished product; (4) changing features of the product suitably without sacrificing the quality of the product etc.
2. The reduction must be a permanent one. It is short-lived if it comes through reduction in the prices of inputs, such as materials, labour etc. The reduction should be through improvements in methods of production from research work.
3. The reduction should not be at the cost of essential characteristics, such as quality of the products or services rendered.
Thus, cost reduction must be a genuine one and should aim at the elimination of wasteful elements in methods of doing things. It should not be at the cost of quality. Cost reduction is a continuous process of critically examining various elements of cost and each aspect of the business (i.e. procedures, methods, products, management including market and finance etc.) is critically examined with a view to improving the efficiency for reducing costs.
Every plan of cost reduction proceeds with this assumption that there is always scope for cost reduction. A continuous research is made into various areas for finding out the best possible methods of performance for ensuring minimum possible costs.
The reduction in costs should be real and permanent. Reduction due to wind falls, changes in government policy like a reduction in taxes (or duties or due to temporary) and measures taken for tiding over financial difficulties do not strictly come under the purview of cost reduction.
Tools and Techniques of Cost Reduction:
The various techniques and tools used for achieving cost reduction are practically the same which have been suggested for cost control.
Some of these are:
(i) Budgetary control,
(ii) Standard costing,
(iii) Standardisation of products and tools and equipment’s
(iv) Simplification and variety reduction,
(v) Improvement in design,
(vi) Material control,
(vii) Labour control
(viii) Overhead control,
(ix) Production planning and control,
(x) Automation,
(xi) Operation research,
(xii) Market research,
(xiii) Planning and control of finance,
(xiv) Value analysis,
(xv) Quality measurement and research,
(xvi) Cost benefit analysis.
(xvii) Contribution Analysis
(xviii) PERT
(xix) Job Evaluation and Merit Rating.
Advantages of Cost Reduction:
Cost reduction causes a definite increase in margins. The saving in cost may also be passed to consumers in the form of lower prices or more quantity in the same price. This will create more demand for the products, economies of large scale production, more employment through industrialisation and all-round improvement in the standard of living. Government may also stand to gain by way of higher tax revenues.
Increased competitive strength to the industry stimulates more exports. Thus, profit is increased by reducing the costs, it can be utilised for expansion of the organisation which will create more employment and overall industrial prosperity.
Cost reduction is essential of a product has to withstand its global market. Brand loyalty is fading away fast. Nowadays consumers have become price and quality conscious. Hence cost reduction is the key for global competitiveness.
There are many advantages of cost reduction.
Some of these are:
1. Cost reduction increases profit:
It provides a basis for more dividends to the shareholders, more bonus to the staff and more retention of profit for expansion of the business which will create more employment and overall industrial prospects.
2. Cost reduction will provide more money for labour welfare schemes and thus improve men- management relationship.
3. Cost reduction will help in making goods available to the consumers at cheaper rates. This will create more demand for the products, economies of large scale production, more employment through industrialisation and all-round improvement in the standard of living.
4. Cost reduction will be helpful in meeting competition effectively.
5. Higher profit will provide more revenue to the government by way of taxation.
6. As a result of reduction in cost, export price may be lowered which may increase total exports.
7. Cost reduction is obtained by increasing productivity. Therefore, a developing country, like India, which suffers from shortage of resources can develop faster if it makes the best use of resources by increasing productivity.
8. Cost reduction lays emphasis on a continuous search for improvement which will improve the image of the firm for long-term benefits.
🛑COST CONTROL 🛑
Cost control is a tool of management executives to regulate the working of the manufacturing concern. Under the globalize economy, mere planning is not enough. Efforts are constantly made to scrutinize the results of the workings. If so, out of control situations may be find out and eliminated immediately, with the help of cost control, the executives can limit the costs within the planned level.
The advantage of cost controls is that it enables the company to increase its profits and to use those funds to improve all aspects of its operations.
Cost Control Importance for the Company
Effective cost controls create significant opportunities for a business.
Pay down debt: Paying off debt is always a good move. A lower debt load reduces the ratio of debt to equity.
Improve creditworthiness: A lower debt-to-equity ratio improves the financial strength of the firm and increases its credit rating.
Purchase better equipment: With better profits, an owner can buy more efficient and updated equipment. It could be high-speed manufacturing machines or better computers and software for the office.
Reduce repair and maintenance costs: New equipment needs less maintenance: You will spend less money on repairing old equipment that breaks down.
Increase budgets for marketing and advertising: A more efficient operation generates more funds for aggressive sales campaigns. More sales and new equipment lead to better profits.
Improve your competitive advantage: For a company to stay in business, it needs to maintain an efficient operation, which gives it a competitive advantage. This means more investment in better capital equipment, and increased productivity from employees.
Employees are Affected, Too
Improve productivity: Employees will generally do what you tell them to do. But they need direction. Cost controls give employees guidelines and objectives on how well they need to perform their jobs.
Create culture to control costs: When employees are given the directives to control costs, it becomes a mantra for the entire company. Costs controls create a mindset for employees to find ways to eliminate waste.
Increase pay for employees: With better profits, the owner has more flexibility to increase wages for employees.
Better employee morale: When employees are focused on cost controls, and they see the results of their efforts in their paychecks, morale is improved, and they enjoy coming to work. Employee turnover goes down.
Hire better employees: Firms that can pay higher wages are able to attract better employees.
Aid to Planning
Create budgets: Cost controls are the foundation for creating budgets. They detail how the company intends to make a profit.
Allocate responsibility for cost controls: A budget defines the costs of the company's operations and identifies who is responsible for making sure that actual costs are in line with the budget.
Better records: You can't determine costs without having good records that produce accurate data. Setting up cost controls forces bookkeepers and accountants to put out the most precise information.
Measurement of Performance
Key performance indicators are drawn from the budget for specific areas of cost controls. This enables the owner to periodically check on the performance of the business to make sure it is functioning in compliance with the budget. If so, then the intended profit objective will be reached.
Cost controls are an essential function for all small business owners. Every business should start the year with a profit plan, and everyone needs to understand their role in achieving that profit objective. Cost controls are the mechanisms that an owner can use to monitor the performance of the business and improve its operations.
🛑Cost Control
Cost control involves targeted expenditure reductions in order to increase profits. Implementing this level of control can have a profoundly positive impact on profits over the long term. The following four steps are associated with cost control:
Create a baseline. Establish a standard or baseline against which actual costs are to be compared. These standards may be based on historical results, a reasonable improvement on historical results, or the theoretically best attainable cost performance. The middle alternative is generally considered to yield the best results, since it sets an achievable standard.
Calculate a variance. Calculate the variance between actual results and the standard or baseline noted in the first step. Particular emphasis is placed on the detection of unfavorable variances, which are those actual costs that are higher than expected. If a variance is immaterial, it may not be worthwhile to report the item to management.
Investigate variances. Conduct a detailed drill-down into the actual cost information to ascertain the reason for an unfavorable variance.
Take action. Based on the information found in the preceding step, recommend to management whatever corrective actions are needed to reduce the risk of continued unfavorable cost variances.
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