Saving Costs With AIS

Lowering costs is an important objective in the furniture manufacturing business and in this respect, accounting information systems (AIS) can provide significant contributions. By Orhan Bozkurt, Uludag University

 

One of the subjects that manufacturing businesses put significant emphasis on today is lowering manufacturing costs or at least, making accurate estimations. In this respect, first of all, businesses should evaluate their costs well. There is an important measure in accounting literature. And that is the understanding that states that something that cannot be measured cannot be managed.

In order to manage costs well, it is necessary to use good estimation methods. At this point, accounting information systems (AIS) is considered as an important tool. AIS provides important solutions in determining and managing general production expenses.

There are many academic studies on the profitability, costs and productivity of the furniture industry around the world. For instance, a study focused on determining the factors that affect profitability in furniture industry and on measuring the relationship between input and output used in furniture industry. 

The furniture manufacturing around the world is almost US$220 billion and US$150 billion of this production is offered to the consumers in the country where they are manufactured and around US$70 billion is traded internationally. 

In a different study, how general production expenses could change when computer numeric control (CNC) machines, which are important for companies operating in furniture industry, are used was discussed. It revealed that there was an increase in the productivity and capacity of those businesses which buy this machine, the manufacturing process and periods shortened, wastages were reduced, costs were reduced and the size of the factory expanded in time. 

Importance Of Accounting

Accounting is defined as the art of recording, classification, summary and reporting of financial processed and events which can be expressed with money. Accounting is also defined as an information system which explains the increase and decreases to occurring resources and assets. 

Accounting fulfils significant functions in business life. Recording of transactions with an economic value enables such important functions as grouping the transactions that are carried out and interpreting the results of these transactions. 

While performing such functions, accounting takes when the transaction has been carried out, which is one of the general principles, into consideration. Main task of accounting is to show both revenue and expenses in the relevant period they belong to .There are many commercial and industrial activities in business world where business relations differ widely. These activities are both domestic and international activities. For example; while companies doing foreign trade use foreign trade operations accounting, others which are not involved in foreign trade are not required to use this accounting. 

Although there are quiet a big number of commercial activities, the field of accounting should be limited with certain standards. The most widely used accounting types today are:

a)Governmental accounting; it is used by public sector; 

b)Cost accounting; it is used by manufacturing businesses; 

c)General accounting; 

d)Bank accounting; 

e)Insurance accounting;

f)Agricultural cost accounting 

Additionally, management accounting, which is efficient in planning activities, in various decision processes, in interpreting events, in reflecting them to the managers on time and with adequate information through reports, is an important type of accounting. 

Although there are various types of accounting, it is general accounting that serves as a source to all other types of accounting. These accounting types take their data from general accounting, process them and transfer them to general accounting. 

These principles make up the theoretical structure of accounting. They are in unity with the main concepts of accounting and they help to establish a common system to be used by everyone. These principles explain how income and expenses will be transferred to nominal accounts, what should be taken into consideration in organising balance sheets and presents general standards. 

According to the regulation, the aim of developing and implementing these standards is to clearly identify the financial states of stakeholders who invest capital to the business and later, leave the profit belonging to them to the business. A second aim is to explicitly reflect the accounting records of the assets that these people provide to the business.

The Furniture Industry

In today’s world, the furniture industry is an outstanding dynamic market both in Turkey and around the world. According to the data from Faostat, the total wood product exports around the world in 2011 were US$ 245 billion.

When we look at the import structure of furniture industry, we see that the import trading volume is close to exports. According to world data, the total wood products import in the world in 2011 was US$259.4 billion.

According to CSIL (2011) data, 25 percent of world’s total furniture production is produced by China, while 16 percent is produced by other high-income countries, 15 percent by the US, 11 percent by other medium and low-income countries, eight percent by Italy, seven percent by Germany and three percent by each Japan, Canada and the UK. 

When it comes to consumption, China consumes 18 percent of the world’s furniture, while other high income countries consumes 19 percent, the US consumes 21 percent, other medium and low-income countries consumes 12 percent, Italy consumes five percent, Germany consumes seven percent, Japan consumes four percent, Canada consumes three percent and the UK consumes five percent.

General Expenses

Costs which are related to manufacturing but not included in labour and raw material costs and which are not directly included in direct production costs are called general production expenses. These costs differ from one sector to another but at the same time; they have common properties in all sectors. 

These costs can be listed as:

•Indirect material costs;

•Indirect labour costs;

•Employee costs and extras;

•Outsourced benefits and services;

•Various expenses; 

•Tax, duties and charges;

•Depreciation allowance and accumulated depletion

The share of general production expenses in total production costs is increasing every other day. Besides, general production expenses include the most convenient cost items in terms of cost reduction. Cost items among general production expenses are costs that are born to keep factory in operation. They should not be grouped among general production expenses. 

The reasons are as follow:

•General production expenses are indirectly attached to goods and service units. As a result, relating these expenses to certain work, service or goods becomes either very difficult or impossible.

•Expense costs that make up general production expenses are both too many and have different features from one another in terms of operating cost and variable costs.

•Although there are fluctuations in the level of output due to climate and some other factors, general production expenses tend to be stable in general terms. The reason behind this is the fact that large part of general production expenses seems to be stable in general.

AIS & Costing

AIS is a system where businesses record and report their processes by utilising the technological opportunities. These systems have become indispensable elements for businesses. There are many commercial software available.  

Business management might be hesitant about the cost of a new accounting program while buying one. Management is supposed to make cost and profit analysis. The adaptation of a new system, its cost and the level of efficiency it will provide should be identified well.

Therefore, the productivity to be provided via cash flow should be high for productivity. Besides, it is necessary to make a good analysis among programs that can be used in decision-making and centralisation of the business’s activities. While choosing a program, the ones with a low cost and which has a wide area of utilisation and which are functional should be chosen.

High-cost programs should be avoided while there are programs that could meet the needs of a business. Decision-making processes with regards to purchasing a new program is as follows: the sample business uses two programs. One of these programs belongs to the production department and the other belongs to the management. 

There are no connections between these programs. Each program makes report independently. However, the important point here is that business management evaluates these programs altogether. In other words, decision making, formation of product tree and taking management decision are possible by using these programs together. The problem is that each program provides a report according to its own system so more staff is employed. 

This situation affects decision making and the consistency of the decisions taken negatively. And the solution to the problem is to collect the works done in two different programs under one program. There are programs that easily do this in the existing applications. There are programs that can be used by order, production, sales and accounting and management.

When furniture manufacturing and consumption in the world is compared, it is seen that particularly most of the developed countries consume more furniture than they manufacture. This condition is the exact opposite in developing countries. Besides, furniture manufacturing ratio in medium and low income countries is around 40 percent while their consumption ratio is 32 percent.

It is seen that the importance of general production expenses is growing for furniture businesses. This shows that it is necessary to focus on these expenses in order to enable cost saving. Another thing is that cost advantage strategy can be used in reducing general production expenses. 

Although there is an additional cost to be given to the new programs, the increase in productivity in time could remove this cost. Particularly, in which account program expenses in purchasing accounting programs will be included is discussed and it is determined that such programs will be monitored under intangible assets account. Besides, it is seen that the paid amounts for these programs will be depreciated within three years.

As a result, while integrated use of information systems in furniture industry lowers the general production expenses, on the one hand, it increases productivity, on the other hand. Besides, it is seen that the staff using these program become more and more specialised in time and thus, increase efficiency.

 

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