Question

Possibility of a decrease in the cost of materials. How would this happen? How often do you think companies are reviewing the specific input costs in this area for possible changes?

Answer 1

Possibility of a decrease in the cost of materials:

There are numerous possibilities in any organization to reduce material cost ,some most common ways are following:

(1) Improve the production process by removing wastages if possible and finding new efficient ways of production so as to cut material costs

(2) Take benifit of Economy of Scale(buying in large amount on favourable prices) if sale can be increased flexibly.

(3) Set various stock levels like reorder Level,Minimum Inventory Level, Maximum Inventory Level etc. and determine Economic Order Quantity(EOQ) so as to avoid blockage of fund in excess inventory but maintaining stocks at the level where production process is not interrupted.

(4) Good knowledge of market helps choosing best vendors providing material at fair prices.

How often companies are reviewing the specific input costs in this area for possible changes:

There is no fixed criteria to decide how often companies review the cost, but there are some indicators which alarm

the organization to review the same like:

(1) Unfavourable Variances: Many variances are computed from the standards set by the company like Material Cost Variance, Material Usage Variance, Material Price Variance which tells us how much and in what diection our Total Cost of Material, Usage of Material, Price of material respectively vary from the standards already set by the company.

(2) Lower Profits: Lower Profits do also alarm the company to inter alia review it's costs including material cost.

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