This document discusses ways to reduce indirect costs in manufacturing industries. It defines direct and indirect costs, with the latter including overhead expenses like administration, utilities, and insurance. The document recommends systematically reviewing organizational structures and staffing to identify unnecessary roles and layers. It also suggests improving technology use, evaluating capabilities, reshaping functions, consolidating services, and monitoring billing rates and benefits costs to further reduce indirect expenses. With tighter indirect cost management, the document argues that manufacturers can lower overall costs and gain a competitive advantage in the market.

1. ENGINEERING MANAGEMENT
REDUCING
INDIRECT
COST
IN
MANUFACTURING
INDUSTRY.

2. Before we proceed…
We will have to clear
some fundamentals
about Manufacturing industry
•Almost every organization is a PROFIT ORGANIZATION
it always tries to MAXIMIZE THE PROFIT
else they will be ultimately in loss.
MAXIMIZING PROFIT INCLUDES MANY METHODS ,it includes
REDUCING INDIRECT COST
AS ONE OF THE MOST VITAL FACTOR

3. We know that
PROFIT=REVENUE-EXPENSE
EXPENSE INCLUDES
1. DIRECT COST/EXPENSE
2. INDIRECT COST/EXPENSE
i.e.
“NET
COST=DIRECT COST + INDIRECT COST”
Now if we are succeeded to reduce indirect cost then
In turn our NET COST will be reduced
In this way we can make a tough competition in market
by offering a reasonable product price OR
By keeping sale price constant we can get more profit.

4. WHAT is DIRECT COST?
Direct costs are usually better recognized and
understood .
Managers can see the direct relationship
between the output and the efforts and
materials applied as an input.
Direct costs refer to materials,
salaries for project staff and expenses related
to the production of a product , without
which a finished product is unable to be produced.

5. WHAT is DIRECT COST?
Because these activities are easily traced to
projects, their costs are usually charged to
projects on an item-by-item basis.
FOR EXAMPLE
COSTS INVOLED FOR
Project staff, Project consultants, Project
supplies, Publications, Travel,
Project Labor, Raw materials e.t.c

6. WHAT IS INDIRECT COST?
•Indirect costs are not directly attributable
to a product.
• OR IN OTHER WORDS the costs not directly
assignable to the end product or process.

7. WHAT IS INDIRECT COST?
•Indirect costs do not vary substantially
within certain production volumes and so they
may sometimes be considered to be fixed
costs.
Major Indirect costs are
• A)for indirect supervision(INDIRECT
ADMINISTRATIVE ACTIVITIES )
and
.B)for overheads for example taxes ,
legal advisors, retirement plans, health and
Life insurance, office supplies, telephone,
Employee welfare, material handling e.t.c

8. steps IMPORTANT IN THIS CONTEXT are as follows:-
1)A SYSTEMATIC REVIEW OF THE STRUCTURE OF STAFFING, how
they are related and how many can control better, is an essential part of
any serious attempt to cut costs.
WHY COST OF STAFFING IS GROWING????
It is seen that in the last fifty years, just as productive processes have
been automated, manual accounting, manual typewriters, and the
calculation and payment (of wages and bills) in cash are all gone. And
the massive investment in computers is supposed to transform
administration, financial control, marketing and selling on buttons. So
why have the staffing and cost of supporting activities continued to
grow?

9. PROBLEMS AND THEIR SOLUTIONS RELATED TO EXPENSES
ON INDIRECT ADMINISTRATIVE ACTIVITIES
We have observed in our Local industries that
Since latest technology gives easy access to managerial information
and data on performance, Most managers, can now deal with the vast
majority of their ‘correspondence’ themselves in form of emails ,
IN VIEW OF THIS
1.)Organizations still contain so many secretaries and administrators.
2.) lengthy reports that repeat information get written, printed and copied by
supporting staffs.
3.) there is still so much duplication and overlap in activities.
.

10. IMPROPER USE of TECHNOLOGY for management 2/2
SO there is
Not only the technology not being
e x p l o i t e d f u l l y, i t i s s o m e t i m e s
unnecessarily modified to provide
so-called enhancements that on
closer examination turn out to be
unnecessary frills or even downright
distractions that waste effort and
money.

11. ORGANIZATIONAL CAPABILITIES ARE NOT TRIED TO
UNDERSTAND AND EVALUATED CORRECTLY IN OUR
LOCAL MANUFACTURING INDUSTRIES
Organizational capabilities specify what an
organization can do.
 Companies that want to remove indirect costs in the
long term must consider this factor repeatedly.
 If it has surplus staff present, it must utilize them to
increase productivity, else THIS SURPLUS STAFF
WILL BE CONSIDERED INDIRECT in context of
their wages and welfare.


12. SHAPE THE ORGANIZATIONAL CAPABILITIES TO
STRATEGY
Managers must examine the ‘what’ (the goal set by
each organizational unit) before analyzing the ‘how’
(the way the organization seeks to achieve that
goal). (must have a clear image of goal)
 There is no magic formula for spotting waste in
supporting functions (such as Finance,
Personnel, and IT). Only detailed scrutiny will
reveal which activities to keep and which to cut.
 Cost-cutting should sharpen a business’s focus and
must regenerate supporting functions that clearly
add value to the operating units.
 In this way we will reduce a segment of indirect
administration cost


13. IT IS BEST TO RESHAPE ORGANIZATIONAL
FUNCTIONS
To avoid resistance by workforce / unions, against
cutting indirect administrative staff, it is better to
reshape organizational functions to SET MORE
GOALS AND INCREASE PRODUCTIVITY.
 A company should tell its employees how the
reshaping of functions will help it to sustain itself,
survive, and grow, focuses attention on the positive
aspects of change. To undergo the discomfort
associated with any effort to reduce costs,
employees must understand what’s in it for them.
 In order to reshape functions a review of
organizational capability can highlight
opportunities to reshape functions radically.


14. REMOVING INTERNAL MANAGEMENT CENTRES
AND LAYERS

We observe in de-centralized manufacturing
industries that geographic expansion tends to
produce anomalies in reporting relationships and
spans of control . So De-layering by drawing the
staff into broader groups of pooled expertise
cuts costs and eliminates the need for
dispersed skills in diverse locations. It also
enhances the professionalism of the people
who remain.

15. HOW TO INCREASE EFFICIENCY OF REMAINING
NECESSARY INDIRECT ADMINISTRATION
Once managers have worked out which indirect
activities to cut and reduced demand for indirect
staff’s services, they should consider the efficiency
of the remaining indirect services.
 It to clear that indirect services include indirect
staff and indirect activities.


Indirect services that have many employees but
are used only part of the time can be
concentrated into shared services with fewer
employees, lower costs and higher efficiency.

16. MAKE APPROPIRATE LAYERS OF
ADMINISTRATION TO AVOID UNNECESSARY
ADMINISTRATION 1/3
In our local industries it is a common mistake to
assign one manager to each separate task or
type of task irrespective of the number of
managerial jobs(nodes) this practice generates.
 Too many nodes will result in too deep a
structure and narrow spans.
 For example, a design department of twenty people
might give rise to eight managers in four layers,
while a correctly shaped structure would be more
likely to have four managers in two layers. One
common feature of bad shape is one-to-one
reporting of the type shown overleaf.


17. MAKE APPROPIRATE LAYERS OF
ADMINISTRATION TO AVOID UNNECESSARY
ADMINISTRATION 2/3

18. MAKE APPROPIRATE LAYERS OF
ADMINISTRATION TO AVOID UNNECESSARY
ADMINISTRATION 3/3

An unnecessary number of managers creates
fertile conditions for an uncontrolled increase in
the whole staff – a ballooning of the numbers
employed – usually needlessly. So it is particularly
important that spans should not be allowed to
be too narrow or levels too numerous, because
the proliferation that follows inflates the size
and cost of the payroll.

19. CUT OUT ‘MANAGERIAL’ JOBS THAT HAVE NO
MEASURABLE OUTPUT
 Nearly
all objective reviews of
organizational structure reveal
managerial jobs that could be
eliminated. Some have indistinct
targets and no real accountability.
Others supervise few or no other
people – and are better classified (and
paid) as specialists. Think twice
before creating new managers.

20. REVIEWING ORGANIZATIONAL STRUCTURES

21. REVIEWING ORGANIZATIONAL STRUCTURES
 LAST
SHOWN STRUCTURE almost
certainly has too many layers and
arguably too large a staff as a
result. So it is possible to challenge
it and to consider an opportunity to
delayer by insisting on the correct
design of jobs. It could be reworked
as shown on the next SLIDE.

25. USING THE JAQUES’ LEVELS OF WORK
METHOD
The following steps can be taken to apply the
levels of work principle to the task of radically
reorganizing a structure or creating one from
scratch.
 Recognise the current problems: duplication, too
many levels, too many layers, too much
management (over-managed environment),
excessive cost.
 Examine the characteristics of every managerial
job.
 Define jobs by title, job code and function and map
them to levels of work.


26. REDUCING 2ND COMPONENT OF INDIRECT
COSTS I.E. OVERHEADS
It includes
 Costs of bills (telephone, electricity not involved
with production, food)
 Retirement Plans(pensions, land or houses)for
employees.
 Breakage of machines, products while handling.
 Suitable storage costs for products/shelter
 Insurance of Labour
 Any incident, Security , Deterioration of machines
 Unnecessary office facilities e.t.c.


27. CONTRACT BILLING

Billing rate estimates will affect the need for cost
adjustment during final contract pricing.

When a contract involves progress payments or
cost reimbursement, Management must monitor
contract billing rates to assure that payments or
reimbursements based on those rates are
reasonable.

28. CONTRACT BILLING

During each cost accounting period, rates should
become more accurate as more actual cost data
become available.

Has rate accuracy consistently improved
throughout the allocation cycle?

29. EMPLOYMENT BENEFITS
MANAGEMENT
Most Employment Benefits include
 Insurance
 Pension
 Health & Safety
 Transport and Residence

30. INSURANCE

It is a safety Guarantee for the employers working
in Probably Hazardous Environment by
Organization.
Management of this cost include steps such as
 Compensating such benefits in Pension etc. so that
no extra costs are involved.
 Proper Registration of industrial locality from
Concerned Departments or international
organizations for maintaining Standards of Safety.


31. PENSION AND OTHER SOCIAL BENEFITS

Usually the most expensive benefit is a pension.
Bright young people with the new skills, which you
might need for the future, will join you accepting
what is on offer now,& will not be concerned about
pension.
 However Many organizations have closed their
defined benefit schemes to offer a much less risky
and simpler defined contribution pension.


32. TAXES REDUCTION
Invest in dividend-paying stocks.
 Hold stocks for the long term.
 Reduce your income
 Deductions and credits for non-itemizers.
 Charitable contributions
 Mis-present facts and figures


33. BREAKAGE AND DETERIORATION
Deterioration In Machinery occurs with time or due
to Breakage.
 Cost reduction in Breakage and Deterioration
involves
 Breakage Guarantee of equipment must be
purchased if possible
 Replacement Warrantee
 Maintaining Deterioration reserve (Mostly Sinking
Fund reserve with appropriate rate of return)


35. CONCLUSION
Today indirect cost constitute most of the product’s
total cost.
 So, there is a clear need to improve their control
and management.
 We presented a systematic approach to
i.
Analysis and understanding the causes of indirect
cost.
ii.
An analysis of modern characteristics of
manufacturing environment.
iii. Formulation of general performance levels.


36. CONCLUSION
Tighter management and control of indirect cost are
a challenge for which the effort of every manager is
required.
 Management accountants must get down to
production floor and be fully involved in production
process.
 In present world the production cost is a challenge
and true differentiator between competitors.


37. CONCLUSION
Successful managers create a sustained pressure
and maintain the product cost.
 So by planned calculation and applying the
explained production methods indirect cost in any
industry can be reduced.

…………………….END……………………