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VALUE ANALYSIS A TOOL/ DEVICE OF COST REDUCTION

Sincere Thanks to, Dr. Prof. P K Rathod (Head of the department) (For guidance)

UNIT 2: VALUE ANALYSIS A TOOL/ DEVICE OF COST REDUCTION

Sr. No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Topic Rationale of Value Analysis Meaning of Cost control Meaning of cost reduction Cost Reduction vs. Cost Control Cost Reduction Committee Tools and Technique of cost reduction Meaning of Value Value Analysis vs. Value Engineering Value Analysis vs. Work Study Objectives of Value Analysis Items Value Analysis Organization Value Analysis Steps/Phases of Value Analysis Techniques of Value Analysis Benefits Limitation Value Analysis in India

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(1) Rationale of Value Analysis Value analysis aims at a systematic identification and elimination of unnecessary costs resulting in the increased use of alternatives less expensive material, cheaper designs. Less costly methods of manufacturing etc, to provide the same performance, quality and efficiency and in a decrease of overall unit costs and consequently greater profits. We can convert a stainless steels part into steel or even fibred-glass and thus save costs. TVS Suzukis choice of fibred-glass for Spectra has reduced its product-cost. Value Analysis is, in essence, a study of function. The function of a part, or material, or service is the job it does. Value is the price we pay for a product process, material or service required to perform a specific function in an efficient way. We get the best value when we incur the least cost for an essential function or service with the required quality and reliability. The task of Value Analysis is to ensure that all the elements of cost whether for labour, for material, for designing or for services, contributes proportionately to the function. Value Analysis is a cost reduction technique and perhaps the most potent of all such techniques. Cost reduction is a very dynamic concept unlike, for example, cost control. In cost control we are aiming to keep cost within predetermined standards while in Cost Reduction our objective is to attack the costs themselves and eliminate them where possible. Value Analysis parses a product into the functions performed by different components and then looks for the cheapest way to have that function performed. Definition There are various definitions of Value Analysis. Stated very simply: Value Analysis is an organized procedure for identification of unnecessary cost. Another definition states: Value Analysis is the study of the relationship of design, function and cost of any product, material or service with the object of reducing its cost through modification of design or material specification manufactured by a more efficient process, change in source of supply (external or internal), or possible elimination or incorporation in a related item. A more elaborate definition of Value Analysis as given below throws more light on the subject. Value Analysis is the organized and systematic study of every element of cost in a part, material or service to make certain it fulfills its function at the lowest possible cost; it employs techniques which identify the functions the user wants from a product or service: it establishes by comparison the appropriate cost for each function; then it causes the required knowledge, creativity and initiative to be used to provide each function for the lowest cost. Value Analysis (VA) is also known as Value Engineering (VE), Value Assurance and Value Management (VM). It is an approach for improvement in the performance of the products, systems or procedures and reduction or elimination of costs, without affecting the function. L.D. Miles defined VA as organized creative approach which has for its purpose the efficient identification of unnecessary cost i.e. cost which provides neither quality, nor use, nor life, nor appearance, nor customer features. VA was traditionally used in the area of hardware projects but is now a days applied in software projects too. In non-traditional areas like customer service plans in banks, slum development, motivational techniques, VA can be of great use. (2) Meaning of cost control The basic objective of accounting is to provide information which is useful for persons inside the organization (i.e. owners, management and employees) and for persons or group outside the organization (i.e. investors, creditors, government, consumers etc.) According to Slavin and Reynolds Professors of Accounting, Conceptually, accounting is the discipline that provides information on which external and internal users of the information may base decisions that result in the allocation of economic resources in society. The needs of majority of the users of accounting information can be satisfied by financial accounting. Financial statements are concerned with the past where as managements main interest lies not in past but in future. It is mainly concerned budget, cash budget, capital expenditure budget etc. is an important part of planning and preparing various budgets is an important aspect of Cost Accountancy. Controlling is the function of seeing that programmers laid down in various budgets are being actually achieved i.e. actual performance is compared with the budgeted performance, enabling the management to exercise control in case of weak performance. Page | 3 PREPARED BY: HASTIN SHUKLA &

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Now-a-days managements are facing problems of survival because of acute competition. Only those organizations can meet the competition effectively and have a hold on the markets which are in a position to keep their cost minimum. Cost accounting can be instrumental in this regard by eliminating all inefficiencies and wastages by exercising cost control. The Chartered Institute of Management Accountants, London defines cost control as: The regulation by executive action of the cost of operating an undertaking particularly where such action is guided by cost accounting. The terms regulation and executive action indicate conscious attempt of regulating the cost on the basis of predetermined ideas about what cost should be. It is only when costs are predetermined i.e. a system of standard costing is in operation, that cost control measures can give their best. Thus, cost control aims at reducing inefficiencies and wastages and setting standards or norms or targets and comparing actual performance therewith a view to ascertaining deviations from set targets or norms or standards and taking corrective action to ensure that future performance conforms to the set standards or norms or targets. Elements of a Cost Control Scheme The following are the elements (i.e. major steps) of a cost control scheme: 1. Set down a norm or standard or target. 2. Select a yardstick for measuring the standard or target. 3. Ascertain the actual performance by applying the yardstick which was used for measuring the standard or target. 4. Compare the actual performance with the standard or target and compute the variances. 5. Analyses the variances by causes and fix responsibility for variances. 6. Take corrective action to eliminate the causes of variances so that future performance conforms to standards or targets laid down and cost may be controlled to achieve the maximum efficiency. 7. Periodically review the standards or targets and revise them in the light of changed circumstances. Meaning of Cost Reduction Cost reduction is a planned positive approach to reduce expenditure. It is a corrective function by continuous process of analysis of costs, functions, etc. for economy in application of factors of production. The Chartered Institute of Management Accountants, London defines cost reduction as follows: 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: 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. 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. 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 this a view to improving the Page | 4 PREPARED BY: HASTIN SHUKLA & (3)

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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. Broadly speaking reduction in cost per unit of production may be effected in two ways: 1. By reducing expenditure but the volume of output remains constant. 2. By increasing production viz. increasing the out turn, but the level of expenditure remains unchanged. (4) Cost Reduction Vs, Cost Control Cost control involves predetermination of targeted costs measuring the actual costs, investigating into the causes of variations and instituting the corrective action, whereas cost reduction is the achievement of real and permanent reduction in unit cost of goods manufactured or services rendered without impairing their suitability or diminution in the quality of the product. Cost reduction in values saving in unit cost such saving is of permanent nature and the utility of the goods and services remain unaffected. Thus cost control and cost reduction are two efficient tools of management but their concepts and procedures are widely different. The main points of differences between the two are the following: 1. Aim. Cost control aims at achieving the predetermined costs, whereas cost reduction aims at reduction of costs by finding new ways or methods to have continuous economy on costs. 2. Exercise. Cost control is a routine exercise which is carried out for attainment of operational efficiency whereas cost reduction aims at permanent and real savings by a continuous search for improvement. Thus, cost control follows a conservative procedure and lacks a dynamic approach whereas cost reduction is dynamic and innovative in nature. 3. Concerned with. The process of cost control is to lay down a target, ascertain actual performance, compare it with the target and take corrective action. On the other hand, cost reduction is not concerned with maintenance of performance according to the predetermined standards. 4. Approach. Cost control seeks adherence to standards whereas cost reduction is a challenge to the standards themselves. Cost reduction assumes that there are chances of improvements in predetermined standards. 5. Function. The aim of cost control is to see that actual costs do not exceed the predetermined costs; so it is a preventive function. On the other hand, cost reduction is a corrective function because it challenges the predetermined costs and seeks to improve the performance by reducing cost of increasing production. It is a continuous function of self-analysis for making more and more improvement in performance. 6. Applicability. Cost control is generally applicable to items of costs which have standards where as cost reduction is applicable to every activity of the business. 7. Tools of Techniques. Budgetary Control and Standard Costing are important tools of cost control whereas cost reduction makes use of techniques like value engineering/value analysis, work study, operation research, simplification and standardization, ABC analysis, etc. 8. When Achieved. Cost control is achieved once the costs do not exceed the standards whereas cost reduction is never ending. In fact cost reduction begins when cost control ends. 9. Operation/Research Oriented. Cost control is operation oriented whereas cost reduction is research oriented, always trying to reduced costs through planned research. 5) Cost Reduction Committee In some organization, a cost reduction committee is set up for the purpose of obtaining permanent savings in expenses. This usually consists of departmental heads and some technicians who are experts in their fields. The committee locates the areas of potential savings and gives direction and coordination. It determines priorities and naturally picks up the areas of higher costs or low efficiency first. A cost reduction programme succeeds only when clear-cut targets are laid and effort is made to achieve them. Page | 5 PREPARED BY: HASTIN SHUKLA &

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(6) Tools and Techniques of Cost Reduction According to G. Kantharaj. In the particular context of a developing economy, it becomes predominantly important to emphasize on cost reduction in agriculture, industry, public administration, etc. Cost reduction cannot be ushered in by a magic wand. Cost reduction is everybodys concern. The motto of every industry and every organization should be to produce more goods and to render efficient services. Spiraling up of prices and inflationary trends seem to have reached a point of No Return in the country. The situation cannot be salvaged unless every responsible individual wages a war vehemently to curtail the wastages and delays in his own jurisdiction. Cost reduction is a continuous process and for this purpose the organization is to divided into, preferably, responsibility canters so that necessary action can be taken by the top management on the responsible executives in respect of the controllable items in order to achieve the objective and cost reduction. A suitable program for cost reduction should be laid down by the management. Further there should be close co-operation amongst the responsible executives connected with the scheme of cost reduction. The various techniques covered by the cost reduction are indicated below. 1. Simplification, standardization and improvement of design of the product. 2. Value Analysis. 3. Higher productivity. 4. Inventory control. 5. Labour cost control. 6. Overheads controls-factory, administration, selling and distribution. 7. Budgetary control. 8. Installation of standard costing system. 9. Work study and Time study. 10. Organization and methods procedure i.e., simplification and standardization of office procedures thereof. 11. Simplification and variety reduction. 12. Economic batch quantity for the production runs. 13. Coding and classification 14. Substitute material utilization. 15. Automation. 16. Operations research. 17. Market research. 18. Quality control. 19. Production, planning and control. 20. Job evaluation and merit rating. 21. Training schemes. 22. Incentive schemes. 23. Business forecast. 24. Management audit. 25. Cost benefits analysis. 26. Contribution analysis. 27. Use of new machines, equipment, processes, materials and methods in place of old and obsolete ones. 28. PERT. (7) Meaning of Value INTRODUCTION: The present era is of competitiveness. There are number of industries / companies producing same item, having different characteristics and they also tries to provide best quality at low price. Therefore no Page | 6 PREPARED BY: HASTIN SHUKLA &

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business is having monopoly. The management has to try continuously for survival. They have to reduce and control cost of production to achieve low cost. If purchase of material is made properly then it can be helpful to support directly for increase in profit and reduction in cost. There are so many techniques but the value analysis is the concept that developing for Indian industries which provides support to the cost control. The best managed materials department has continuing cost-reduction programmers. They would have them even if it were possible to negotiate the lowest price for every purchased items as possible as. Price negotiation is only one of many contributions the materials department can make to reduce costs. Others includes such as, Changes in design Material substitution Reduction in number of items which are not necessary Application of analytical operations research techniques Purchase of machinery and equipment and avoidance of excess labour. Etc. Concept of Value Analysis Meaning of Value:The term Value is synonym for the term worth. It can be also termed as a fair equivalent, intrinsic worth, relative worth that which renders something useful, etc. Nothing can have value without being an object of utility. Since product or service does something for the customer, it gains some value for him due to the function that performs. A product or service may have following kinds of value for the customer. 1. Use / Function Value: - Properties which accomplish a use, a work or a service. For Example: - An automatic watch that gives fairly correct time has a use value. 2. Esteem Value: - properties that make the ownership of that object very desirable. As the worth has its use values but if that For Example: watch having gold chain and dial with demands in it than it will have esteem value. It is related to desire of a person to show his wealth. 3. Cost Value: - Cost Value is the sum of the material, labour and overhead required to produce something. 4. Exchange Value: - The barter value expressed as the sum of use value and esteem value. Properties that make an object possible of being traded for other items. For Example: - purchase price paid by a customer for a product or any other thing is given for that purchase. 5. Scrape Value: - The money that can be recovered when the item is no longer needed. For Example: When the life of machine is ended, it have scrape value. The concept of value is dynamic and it changes with time. An item which has functional value today will have esteem value after sometime and finally as the time passes; it may have only scrape value. Meaning and definition of Value Analysis: - Value Analysis (VA) is aimed at a systematic identification and domination of unnecessary cost results in the increased use of alternative, less expensive materials, cheaper designs, less costlier methods of management etc. to provide the same performance, quality and efficiency in a decrease of overall unit costs and which result in to increase in profits. Example related to Value Analysis: - When housewife go out for shopping for vegetables say tomatoes. In market, suppose, there are four type of tomatoes costing rs 1.50, rs 2.00, rs 2.25 and rs 3.00 per price. All tomatoes having good quality. Now if she wants to make tomatoes costing rs 1.50. But if the boos of his husband is come for dinner at home than for salad she will select tomatoes costing rs 3.00. By analysis this example we can understood that the choice will be depends on the function that the tomatoes have to perform. All the four varieties have its own value depend up on their function expected to accomplish. Thus, this simple example illustrates the approach of value analysis. There four in value analysis it is essential to study the function of a service for any job. As we all knows value is the price paid for a product process, material or service required to perform a specific function in an efficient way. Page | 7 PREPARED BY: HASTIN SHUKLA &

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We can get best value when we get function or service at required quality by incurring least cost. The task of value analysis to ensure that all the elements of cost whether for labour, for material, for designing or for services, contraries proportion atelic to the function. Cost represents sacrifices of resources for a particular objective. So the aim of value analysis is to improve relationship between function and cost. Cost of product or service must be investigated, analyses and reduced lay using value analysis. Definition of Value Analysis:1. Dean aimer defines value analysis as, value analysis is the study of the relationship of design, function, and cost of any product, material or service with the object of reducing its cost through modification of design or material specification, manufactured by a more efficient process, change in source of supply (external or internal), or possible elimination or incorporation into a related item. Example:- at present we can see that all automobiles companies have change major body parts of their vehicles by fiber instead of metal which is light weight, durable, cheap, replaceable, qualitative and attractive. For Example:- Suzuki Max bikes by this way oil able only in Rs 28-29000. According to Frank J. Johnson, Value analysis is an objective study of every item of cost in every component part, subassembly, or piece of equipment. This includes a study of the design, the material and the process in the continual search for other possible materials and new process. 3. According to Patel, Chunawala and Patel:Value analysis is an organized procedure for efficient identification of unnecessary cost. In short, we can say that, value analysis is an organized effort, it is an creative approach aimed at identifying unnecessary costs and eliminating them from the system without affecting the functional utility, performance, reliability and safety of product or service. (B) Value Engineering Value Engineering is usually done by Design Engineers whereas Value Analysis is usually done by the Purchase Department. Value Engineering can be defined as an intensive appraisal of all the elements of the design, manufacture, inspection, procurement, installation and maintenance of a product and its components, including the applicable specifications and operational requirements in order to achieve the necessary performance, reliability and maintainability of a product at minimum cost. The purpose of value engineering is to make certain that every element of cost (design, labour, materials, supplies and services) contributes proportionately to the function of the product. The following are the 9 elements of value engineering methodology:i. Product selection ii. Analysis and Determination of functions iii. Collection of information concerning the production such as relating to the present cost, quality, reliability, development history, etc. so that cost can be curtailed. iv. Development of alternatives v. Cost analysis of alternatives vi. Testing of the alternatives vii. Proposal submission viii. Follow-up ix. Implementation phase (8) Value Analysis Vs. Value Engineering Value Analysis and Value Engineering were developed in the mid 1940s after a time of world was 2 when minimum costs at optimum use of material were essential. Page | 8 PREPARED BY: HASTIN SHUKLA & 2.

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A two stage attack is made on cost by use of value engineering and value analysis. Value engineering attaches cost in design stage and value analysis attaches cost in production stage. In both the techniques effort is made to render the same improved product function at lower cost without impairing value to the customer. Actually value analysis is the present and developed concept. It comes after attempt made on concept such as value engineering, value control, value assurance and value management.

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(9)Value Analysis Vs. Work Study Value Analysis 1) VA subjects each and every component of a product to equitable examination so as to ascertain: (a)its utility, (b)its cost,( c) whether its cost is commensurate with its utility,(d) whether it can successfully be eliminated,(e) whether it can be replaced by a more economical item, (f) the substitute used by a competitor and (g) whether anybody else is buying it cheaper. 2) It envisages rationalizing and simplifying a product so that without impairing the utility, the cost comes down. 3) A small item may be added to an existing product in order to amplify its use but the cost of that item should be less than the increase in price i.e. Cost Benefit Analysis. 4)It concentrates on material cost savings. Work Study 1) Work study takes the product specification for granted; it concentrates on conversion of material into finished products. It involves the study of all minute processes and Operations including the evaluation and measurement of the work. 2) It improves the methods of working by economizing efforts and reducing fatigue while maintaining and improving efficiency. 3) Further materials will not be added. 4) It mainly relates to the area of labour cost. It helps in assessing the labour requirements correctly, fixing right wages and introducing effective incentive schemes. (10) Objective of Value Analysis Value Analysis seeks answer to the following questions which may be asked about a complete product, a component or process: 1. What must this item or process do? What is its function? (This can usually be expressed in two words e.g. a bulb provides light or a plant provides protection, or enhances appearance. 2. What else does the item do? (If the item performs functions that are not needed, then it may be a symptom worth investigating to find out if there is a waste). 3. What does it cost? 4. What else could perform the same function? 5. What will be a possible substitutes cost? (11) Items Value Analysis Every companys product passes through five stages of product life cycle 1. Conception 2. Development 3. Growth 4. Maturity 5. Decay Company earns different levels of profits at all different stages. Then companys return on investment is also varied from one type of product to another. Product with decreasing return on investment, reaches at maturity stage, competitors enters in market with an improved version of a product and this will force that company for make try for its survival. So when the product reaches at maturity stage it is considered ideal for value analysis or many products having over design can also be chosen for value analysis. Items having high consumption during whole year or items of high cost are selected for value analysis.

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Now the efforts for cost reduction are made and started from design stage and is continued in the production system by adopting process modification, change of tools, material substitution, etc. Many organizations have reduced purchasing cost by adopting Value Analysis technique on packing material. Mostly firms identify products for value analysis by the help of ABC method. ABC analysis ranks products on basis of their annual consumption or on basis of revenue generated by it. So this type of study help in increasing profit and any other possible benefit by increasing value in comparison to cost of that part or product or services. (12) Organization Value Analysis While every firm can benefit from value analysis (VA), only the bigger company can afford fulltime VA. At present no more companies have full time value analysts. As the full time value analysts are so costly for the company a common question arises as to who should carry out VA in a company. There are two main areas for research, they are: 1. Product improvement 2. Product design By its nature VA is a company wide effort. Because of individual company differences 3 basic staffing approaches to VA are employed: i. Staff function ii. VA committees iii. Staff training approach 1. Staff function: Anyone can apply VA principles: buyers, manufacturing engineers, design engineers and other. Ideally, VA is a team work and it requires inter disciplinary approach. Inter disciplinary teams of four or five individuals are selected. They may be drawn from the key departments, such as marketing, design, purchasing, cost accounting, research, quality, packaging, safety, maintenance and manufacturing. The analysts doing VA have to face a number of disturbances from other duties assigned to them. For this reasons VA is organized as a separate staff activity except in small firms that cannot afford to hire a fulltime analyst. Typically, the chief analysts usually work on VA activity of other materials personnel. The typical value analyst has several projects of his own to work on at all times. He periodically reports his progress on existing projects and also suggests new projects. In addition, he might instruct other materials personnel in VA techniques and assists in getting their ideas approved by all the departments involved. When a VA project is completed, a written report is usually is submitted to all interested parties. Before the change was approved, it was analyzed by the laboratory and the accounting department audited the savings estimates to make certain it was realistic. Limitations: Management must be very careful to refrain from relying unduly on staff analysis as a control over operating personal. Such a procedure will frustrate attempts to secure the staff line cooperation that is vital to the success of analysis. 2. Value Analysis Committees :The committee approach to value analysis is particularly well suitable to the small company that cannot afford a fulltime analyst. The value analysis committee includes members from the purchasing, production product engineering, management engineering, and cost departments. It might meet once or twice a month.

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Specific projects for example, a commodity group such as a steel stem pings or scientific products are selected for value analysis at each meeting. Each member of the group studies the project in advance of the meeting. The combined and wearied skills of the group frequently lead to ideas that cut costs. The committee form of organizes works well in value analysis. It helps generate ideas that no individual member of the group could probably come up with on his owner. However, after the committee meets, someone must see that those ideas are thoroughly investigated and, if possible, applied. If a company has fulltime value analysis, they can handle the necessary follow through. Otherwise the chairman of the committee must administer the program to make certain that the committees recommendations are acted on. Value Analysis projects often takes months to bring to a successful conclusion. In some cases, almost every major dept in the or, must approve suggestions before they are incorporated. As a result, committee members cannot simply meet dream up new ideas, and than go back to their regular jobs and forget all about value analysis until the next meeting. Someone must follow through ideas if anything is to be accomplished. Limitations 1. The most serious weaknesses in the committee arrangement that decisions are difficult to reach because of departmental self- interest or the lack of vigorous leadership by the coordinator and that no one may accept personal responsibility for a joint decision. 2. The related difficulty is that even after decisions are reached, implementation is a major problem, since operating personnel are inclined to resist change. These defects can be partially overcome by a strong coordinator. 3. Therefore, though the committee approach is simple and inexpensive method of implementing value analysis, it may be seriously limited in reaching decisions and in putting recommendations in to action. 3. Staff Training Approach :This third approach to installing a value analysis program is designed to instill an awareness and appreciation of value analysis principles heath in the existing organizational structure. An attempt is made to instill an understanding of the concept and its techniques among the personnel that purchase, specify and use production materials. It is hoped that operating personnel, when apprised of the techniques and benefits of value analysis procedures will employ them in their day to day routines. Most companies using this approach do not have a value analysis staff but rely on personnel within each functional area to conduct regular value analysis reason. On occasion outside consol tents may be used to introduce recent advances in the area and to act as a source of outside stimulus. Although the content of value analysis training varies according to firms need, such programs generally includes information regarding techniques, cases illustrating successful cost reduction applications, recognition to individuals who have been responsible for successful projects, the creation of a cost reduction attitude and a cooperative approach to value analysis. 13. Steps/Phases of Value Analysis:Value Analysis is the process having a sequential phases that the product or material has to valued and applied. The first and crucial question in value analysis is what is the function of the product, process or service. Here the importance of that particular past or product is analyzed. The next question is how to enhance the quality or value with lowest cost. In this process the following eight phases or sequential steps are considered:1. Information Phase :In this phase all relevant facts/data about a particular troublesome product / part / process are gathered, organized and analyzed. Each product or process is taken up its function considered and all bade ground information and relevant facts. Data like drowning design, tolerance, material specifications, material, labour, overheads and other costs, market, competitive product etc., are obtain proceeding further with the job or value analysis. 2. Functional Phase:Page | 12 PREPARED BY: HASTIN SHUKLA &

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In this phase a few items of poorest value i.e. they cost far more than they should are identified. The different functions performed by the product are inspected & checked. Then after that functions are classified in to different categories. 3. Creative Phase;After identifying & classifying the functions performed by an item poorly creative phase is applied. In this phase the ways to solve the problem are collected, for both probable & improbable. Different new ideas are generated to perform the functions identified for the poor value items. 4. Judicial Analysis Phase;The ideas generated in the creative phase are now evaluated in a practical, pragmatic and analytical made. There are no. of ideas are collected for solving the poor item but several ideas are selected and ranked in the order of their importance. 5. Development Phase;There are teams of value analysis for making the value analysis, so these teams make efforts to redefine, reshape and develop the ideas in the best creative and practical ways. The coat factor is added here and applied to reality. This is the consolidation of what the team thinks. 6. Presentation;The proposed changes are put in final form to be presented to the mgt decision makers. This proposal describes two or three ideas for performing the function of the original basic and very expensive item with a workable alternative of better value. 7. Implementation and follow-up Phase:After the ideas have been accepted by the management, the changes are implemented, monitored and followed through proper periodical reviews. While developing an idea, it is important to sell it to the top mgt. It has been noted that a sizable percentage of the proposals does not see the light of days only about 50% of the valuable ideas generated in the team workshop are accepted for practical implementation. 8. Master Phase:During this phase one new idea from the list of ideas that have been initially turned down by mgt is taken and, with additional sophisticated fine-tuning analysis and description, presented to the mgt in such a way that mgt can understand it and implement. Source: - The Chartered Accountant, Jan 1990. Article by P. Gopal Krishnan. 14. Techniques of Value Analysis:Lawrence D. Miles of the General Electric Company who is known as the father of value analysis has developed a number of techniques after considerable work in this field. This skilful application of these techniques is helpful in the identification of unnecessary costs and exploring channels of performance improvement. There techniques are as follows: 1. Work in Specifics 2. Obtain all Available Costs 3. Seek information from the most authentic source 4. Evaluate function by comparison 5. Discuss with specialists and take advantage of their expertise knowledge 6. Use Real Creativity 7. Consult your suppliers for new ideas 8. Use standard parts whenever possible 9. Refine ideas 10. Identify and overcome all road-blocks 11. Get the maximum co-operation 12. The value analysis should always ask him this question

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1. Work in Specifics:Very often people at the top in an organizing are likely to say, This is the only methods to make this item. We have tried other methods but failed. The best way of tacking such a situation is to be very specific and not to make a vague statement. People at the top will be influenced by the specific proposal and it is possible that the right mfg process may be developed after careful examination. Hence, avoid generalities because they serve only to prevent changes and protect the status quo. 2. Obtain all Available Costs:Information about all available costs should be obtained. It is possible that specific method may slightly increase cost in one department but may lead to substantial reduction in cots in other depts., resulting in an overall reduction of costs. Value Analysis mainly concerned with comparing costs. Therefore relevant costs for each function as may be required for the analysis should be obtained; and if costs are not readily available, these should be developed as accurately as possible. 3. Seek information from the most authentic source:Information on any aspect of cost, methods of manufacture, finishing, packing etc, should be obtained from the most reliable source. To get the correct information a question are should be developed while collecting information, the particular questions that the value analyst is to ask are:1. What is the precise function of the product? How important is this function? 2. What is the cost of the product? Is it not proportionate with its utility? 3. Dew the design of product contributes to value? Is it not possible to eliminate a par or a component without reducing its use or esteem value? Will a change in the design of the product head to lower cost? 4. Are all the features of the product essential? 5. Is any better substitute available? 6. Is it possible to reduce cost of material? 7. Are all the labour operations necessary? 8. Is standardization and simplification of products possible. 9. Is it possible that a number of products use common standard parts? 10. Can a standard item be substituted for a non-standard item? 4. Evaluate function by comparison:After identifying the function of an item, the natural questions to ask are How do other concerns perform the same function? What is their cost? Will the value of the function be reduced by eliminating unnecessary costs? This probe will head to a number of alternatives which can be examined to see if any of then is likely to result in a cheaper but reliable alternative. 5. Discuss with specialists and take advantage of their expertise knowledge:Now-a-days, technology is advancing so rapidly that it is almost not possible for engineers and others. Working in an organizing to keep abreast of the latest developments. It, therefore pay to be in touch with a specialist suitable for the specific problem and get his specialized knowledge without such expertise knowledge status quo will be continued and opportunity of improving value and reducing cost will be lost. 6. Use Real Creativity:Value involves a creative approach for finding out unnecessary costs. The human mind is capable of developing new ideas which lead to cost reduction by simplifying the existing part or item to do the same function. 7. Consult your supplies for new ideas:As your suppliers are dealing with many others who are in the same line of business, their ideas and suggestions will be of great help to you. 8. Use standard parts whenever possible:Page | 14 PREPARED BY: HASTIN SHUKLA &

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Standard parts are in changeable and cheaper than specially made parts because standard parts are generally made by mass production method leading to reduced costs. Specially made (non-standard) parts should be used only when it is unavoidable to do so. 9. Refine ideas:Only acceptable alternative remains. 10. Identify and overcome all road-blocks:Road-block are the difficulties created by ones colleagues and others who resist change and fed secure in the existing ways. The resistance to change to new methods and techniques is principally from ignorance and carefully explaining the proposed method or technique to the individual concerned who is opposed to change. 11. Get the maximum co-operation from your colleagues in other departments with. Whom you have to deal. The value analysis should be polite and friendly with every one so that he may get the fullest co-operation. 12. The value analysis should always ask him this question, Would he spend his money in this way? Such an approach will be helpful in thinking of alternatives that are less costly. PRODUCTIVITY:One of the inevitable goals of mfg mgt is increased productivity. Many org, ranging from small business to giant corporations, are experiencing productivity frustrations and losses. Due to inflation and competition the mgts efforts for progress, growth and stability have been shadowed with doubt, restlessness and disillusionment. The org, have become crisis oriented. All this in industrial climate has forced the mgt consider whether traditional way of going the things is working well. Everywhere there is talk of crisis. Managers face difficult choices and how well they choose will determine how the org will continue. In brief, managing productivity in org is in crisis. For thus reasons productivity has become most important mgt issue of present era. Higher levels of productivity are required to serve the depressing trends in the org. Productivity & production both are different things. Production is the output of the productive forces, where as productivity is a measure of the output resulting from a given input such as the number of radios assembled by a crew in one hour. Production performance and results are components of productivity effort, but they are not equivalent terms. Productivity is the measure of how well resources are brought together in org and utilized for accomplishing a set of results. The concept of productivity relates outcomes. For this reason, it has been referred to as the ratio of output to input. i.e. the amount of output per unit of output. Productivity is a measure that reflects the extent of combination of effectiveness and efficiency. By increasing the productivity one will reach the highest level of performance with the least expenditure of resources. How well resources are brought together and utile is indicated by comparing the magnitude or volume of results often called output with the magnitude and volume of resources, often called. This ratio of output to input becomes an in day of the definition and measurement of productivity. Productivity Index= Output obtained Input expended = Performance achieved Resources consumed = Effectiveness Efficiency The following two parts of the definition of productivity need clarification:1) Effectiveness 2) Efficiency 1) Effectiveness:Effectiveness refers to accomplishment of a set of targets. Productivity concept emphasis the accomplishment of set targets. Without a set result there is no productivity. The accomplishment of targets Page | 15 PREPARED BY: HASTIN SHUKLA &

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has to be attempted with regard to costs incurred in the process. The idea of productivity highlights that accomplishment of targets might have been possible at the disproportionate sacrifice of input resources. The use of concept of productivity stresses the accomplishment of set targets but, this effectiveness is only part consideration of the concept of productivity. It demands to find the cost of input resources which made the set target possible. 2) Efficiency:Efficiency stresses how well resources are being used for accomplishment of set targets. High productivity suggests minimum use of resources. The idea of efficiency and effectiveness is relatively clarified by following two examples: a) A fly is killed by sledge hammer. The object is accomplished. The effectiveness is there, but it is not the efficient way of accomplishing this target. b) A product is to be delivered a few blocks away. Because a man who need it, it waiting for it to go to airport. The packet can be delivered by taxi or by foot. The decision is taken to send it by foot. It package arrives too late and the individual needing the package has left. The delivery of package is efficient but not effective. For this reasons productivity relates outcome with the means, which produce these outcomes. Improvement in productivity means that accomplishment of resources has resulted with relatively lower sacrifice of input resources.

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Illustration of Productivity: Calculate productivity per machine hour from the following information: Month Production(Units) Machine hour used January 50000 5000 February 57000 6000 March 63000 7000 Solution: Productivity = Output i.e., Output Input Machine hour used Productivity per machine hour: January = 50000 = 10 units 5000 February = 57000 = 9.5 units 6000 March = 63000 = 9 units 7000 It will be clear from the above illustration that the production is not the increase during the period of 3 months while productivity per machine hour has declined. Measurement of Productivity: Measurement of productivity means calculating productivity taking all input factors together or the productivity of the business as a whole. As material, labour and overhead effect productivity of the business as a whole it is difficult to express these factor by a common denominator for measuring overall productivity ,to overcome this differently cost of different units of input is adopted as convenient measure of productivity. Overall productivity can be measured by the following formula: Value of output = Total cost + net added value = 1 + Net added value Cost of input Total cost Total cost Overall productivity is also measured by: Return on capital employed = Profit Capital employed = profit x Sale x 100 Sales capital employed x 100

Here, profit = profit before providing on long term borrowing and income and income tax Capital =fixed assets + CA - CL

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Factorial productivity Factorial productivity means the productivity of individual factors which contribute to the overall productivity and it may be of the following types: Labour productivity: Where most of the work is done by hand labour ,measurement of labour productivity essential to know the efficiency of labour while calculating labour productivity all factor labour both direct and indirect should be included some of the wars of measuring labour productivity or as follows: 1. 2. 3) i) In term of hours: Output per man hour =Total output Total man hour Man hour per unit of production =Total man hour Total output in units

Labour productivity or efficiency = Production in std hours Actual man hour 4) Long time % = Man hour lost x 100 Possible man hour Added value per unit of labour cost = Add value Wages Here, Add value = Sales value Material cost i.e. total of wages, overhead and profit Material Productivity: Some of the ways of measuring material productivity are given as follows: i. Material productivity = Material Cost No. of units produced ii. Ratio of wastages of material = Wastages of material Total material consumed MATRIX:In matrix method the most suitable alternative is chosen with the help of an objective numerical evaluation by simultaneous comparison of suppliers with factors. All the alternative factors for different suppliers, are given marks by a team of evaluators in various scales and each scale is given a weight age. The weighted average of the marks obtained under various scales then gives an objective the following basic steps:a. Identify the emphasis factor for the product / item: - These are the marks given to the item under various performance quality categories and indicate how efficiently the alternatives are grinded against each other in the various functions. Obviously the number of sets of emphasis factors is equal to the number of functions. b. Emphasis coefficients:- Each function is given a weight age according to its usefulness and this is called the emphasis coefficient and it determined by the group after a lot of discussion. c. The sets of emphasis factors are then multiplied by the respective emphasis coefficients and the respective emphasis coefficients and this product is summed for all the functions for an alternative. The alternative with the highest score is then chosen as the product to be purchased. Page | 18 PREPARED BY: HASTIN SHUKLA &

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A product with decreasing return on investment particularly in the maturity stage, is considered ideal for value analysis. Suppose we have four samples or four suppliers. A, B, C & D. of an item and that we have to rate them by value analyzing them in respect of the following fine attributes which the most important in determining the overall utility or value of the sample:1. Price 2. Quality 3. Yield 4. Reliability of the supplier 5. Lead time of supply. The first thing to do is to compare these five factors or attributes between themselves in pairs, and give relative weight ages to the various factors. For instance: while campaign price and quality if quality is considered more important than price by the evaluating committee more weight age, say.1, is given to quality and less, say 0, to price. Price is than compared with each of the remaining factors and the relative weight ages are recorded in the form of a table or matrix. Similarly, each factor is compared in turn with each of the others and the relative weight ages are recorded. In this case the number of comparisons made in pair will be (5 * 4) / 2= 10 (in general if there are n attributes, the number of comparisons will be n(n-1)/2. weight age given to the different attributes are added up for each attributes and divided by the total no, of comparisons made to give the attributes weight age coefficient, (A*W/C) for each attribute. The next step is to compare the samples, in pairs, in respect of each of the attributes, giving the superior sample weight ages of 1 and the other 0. As before, the weight ages of each sample, in respect of the attribute under consideration are recorded in a table and added up and divided by the no. of comparisons, which will in this case be (4*3)/2= 6, as there are only four sample weight age coefficient (S*W/C) in respect of this particular factor or attribute. This generates as many materials as there are attributes, in this case five. In final step the two types of weight age coefficients are combined by multiplying the attribute weight age coefficient for each attribute by the sample weight age coefficient for each sample in respect of all the factors taken together that is its acceptability. The total weight age coefficients or the acceptability of the samples, can then be ranked for final decision. The various attributes are listed horizontally in the table and their average weight age coefficient entered under each. The samples are listed vertically at the left and their sample weight age coefficient in respect of each attribute entered under the appropriate average weight age coefficient. The weight age of each of the sample in relation to each of the attributes is obtained by multiplying the everage weight age coefficient and entered against each sample in the different attributed columns. These weight ages are taken totaled for the final ranking of the samples. On the basis of the total weight age or over all acceptability the ranking is made. LEARNING CURVE:Learning curve is a powerful techniques in value analysis, that offsets increasing costs, particularly in labour intensive items. It shows the relationship of the no. of units produced with the labour hours required to produce them and permits the prediction of future costs. This curve is based on the concept that complex operations become simpler on repetition due to learning. Each time the total quality of units produced is increased, the cumulative average hours required to produce the new total quality is a percentage of the original average. As the quality increases the workers require less time to analyses the job before starting the work and the operators physical motions become more efficient. The costs go down due to improvement in operational sequences, machine feeds, decreased rejections, better mgt control, less waste and fewer Page | 19 PREPARED BY: HASTIN SHUKLA &

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engineering changes. The 1st step is to identify the learning factor which may vary between 70% and 90% for most industries. The learning curve is a formulation of the common sense realization that the per unit cost of production of a new item decreases as additional unit of that product are manufactured. The cost should decline with each succeeding unit produced, as the supplier becomes more skilled, or learns how to make the product. The oftener a worker repeats an operation the more he improves in speed and efficiency until he reaches the optimum. This leads to reduced labour costs, and the more complex the process the greater the reduction and the longer the learning will contrive. The same reasoning applies within limits to materials used in the product with experience there is less waste or off-fall in the process. off-fall is the team used for materials that remain after a piece or pattern is cut from a material not being large enough to provide material for a second piece or pattern. Scheduling becomes more efficient exertive supervision is reduced. Tooling improvement may be expected. In fact, all elements will be lowered according to some learning curve. Although the concept was developed in connection with new products, one might expect that to a lesser extent the learning curve also exist for products in which a company has had a long history of production. The American productive genius has always prided itself on constantly improvement curves, progress curves, production functions, and efficiency curves. The learning curve concepts originated during World War 2 in connection with studies of aircraft production. Those making the studies developed the hypothesis that as the production quantity of an item was doubled the man-hour required for unit declined by a constant percentage. Crawford and stares in their study of aircraft production found a curve with an 80% slope. Later studies have arrived at some what comparable conclusions. In adapting the learning curve concept to an analysis of costs, one must first identify the factors that bring about a lowering of costs (i.e. factors that affect the slope of the curve) and then determine the importance of each of the factors. The factors most commonly found in such analysis are:a. Job familiarization and task learning (workers & supervision) b. Improvement in shop organization & production control. c. Type of work & methods in use. d. Product (stage of development & complexity) e. The ratio of assembly hours to machine hours. f. Tooling quality and co-ordination g. The extent of pre-production planning. (15)Benefits / Advantages of Value Analysis:The following are the main advantages of Value Analysis. 1. It is Powerful Tool for Cost Reduction because its basic objective is the identification of unnecessary costs in a product or service and efficiently eliminating then without impairing its quality and efficiency. 2. It is a Scientific Tool for Increasing The Productivity of a Concern because it aims at exploring various alternatives for efficient use of all types of resources in employment and making available goods and services of the kind and quality most wanted by customers at lower and lower costs. In this way, the manufacture of most suitable production is facilitated because value analysis aims at giving highest use value and esteem value to customers.

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3. It helps to keep management abreast of the halest technology and other developments because value analysis aims at examining new methods and techniques of doing things with a view to reducing the cost and increasing the value of the items. 4. If ensures the fullest possible use of resources because it aims at eliminating all unnecessary costs. 5. It includes the creative ability of the staff because it involves a creative approach for finding out unnecessary costs. Creativity develops new ideas which in turn, make available the least expensive alternative to do the same function. 6. It creates proper atmosphere for increased efficiency because it aims at a continuing search for improvement in efficiency. 7. It is helpful in any drive for improvement substitution because it explores new methods and serves the same purpose which imported goods serve. Thus, it is helpful in saving previous foreign exchange. 8. It can be apply at all stages from the initial design stage of an item right up to the final stage of its padding and dispatch because it aims at identifying unnecessary costs at all levels with a view to eliminating than systematically. 9. Customers needs are best served with the help of Value Analysis because it aims at production of the most suitable products. 10. Value Analysis helps in the implementation of the marketing concept because it tags emphases on the constant linking of production function with the marketing function. 11. Management effectiveness can be measured with the help of Value Analysis because any saving in cost is treated as increased efficiency. (16) Limitations Of Value Analysis:Like any other cost reduction techniques Value Analysis also has its limitations. The common limitations to using Value Analysis techniques and implementation are as follows:1. Lack of Motivation 2. Resistance to Change 3. Inertia 4. Lack of Knowledge 5. Lack of Patience 6. The felling that it went work in India 7. We are too Small 8. We are to Big 9. We have tried it before 10. It is too radical a change 11. If it is so goods let our competitors try it first 12. Difficult to get the team meeting for achieving consensus However, these inhibitions are encouraged only in the initial stages in many organizing. In view of the inherent potential of cost reduction, there is a growing awareness in many Indian organizing about this important approach. But Value Analysis should not be considered as a panacea for all the ills of an organizing or a substitute for the existing technical incompetence. It should be considered as an aid for cost reduction. Result achieved in one dept should be given adequate publicity so that more people are interested in Value Analysis. (17)Value Analysis in India:Several organizing have used Value Analysis and are making sizable savings every year. It brings the much needed technique of plain common sense into the operations by bringing out on a voluntary basis the best talent in people. Value Analysis is a team work and if requires inter disciplinary approach. It uses a confidence building and creative process that results in the generation of value ideas by tapping the creative human Page | 21 PREPARED BY: HASTIN SHUKLA &

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power. It makes emphasize on total system concept and the studies should be carried out keeping the interests of producers, customers, employees, traders and the society. The value analysis team in one steel plan in India found that many of the rigid material and process specification in some of the intermediate stages were not required for the tasks for which the steel products are ultimately expected to perform. This has enabled the organizing to reduce over design. The electrical engineering industry has substituted indigenously available aluminum for imported copper a major break through resulting in substantial savings. The DGS & D which boys materials worth about is 3000 crores per year, has through value analysis saved substantially on just one supplier of inspection lamps. In one engineering firm value analysis was applied at the design stage of the machines and it resulted in considerable reduction in maintenance cost. Value analysis has been practiced by many firms as a policy for import substitution. In the padding of customer goods like tooth paste, instant coffee, soap, cigarettes, biscuits etc. Value analysis techniques have been profitably used to bring about economy in packing. Thus value analysis helps to maximize conservation of scare materials resources and to achieve cost reduction. REFERENCE A textbook of Cost Accountancy M N Arora Vikas Publishing House Pvt. Ltd. New Delhi Second Revised Edition, 1998 Manufacturing organization and management - Harold T Amrine - John A Ritchey - Oliver S Hulley Prentice Hall of India Pvt. Ltd. , New Delhi Third Edition, January 1982 Cost Accounting Principal and Practice - S P Jain - K L Narayan Kalyani Publishers, New Delhi Fifth revised edition, 1999 Cost Accounting Text Book V K Saxena C D Vashist Sultan Chand and Sons Fourth Edition,1999( Reprint 2000) Cost Accounting and Financial Management P V Rathnam Smt. P Lalitha Third edition, 2005 Kitab Mahal Advanced cost Accounting - B M Lall Nigam - G L Sharma Himalaya Publishing House Sixth revised edition, 1998

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