May/June 1989
In spite of lessons learned during the first half of the decade, many firms glide along with little thought to cost control. Instead of being tossed about by the winds of unpredictable influences, read about how using the basic elements of a cost control program puts your company’s steering wheel in your hands.
By Paul Green
Paul Green is director of membership services for the Institute of Scrap Recycling Industries, Washington, D.C.
Has your recycling firm kept its promise from the lessons learned during the depressed-market years of the early and mid-'80s? Those lessons decimated some firms, caused downsizing in others, and had long-established firms questioning their return on equity and agonizing over whether to remain in the industry.
The watchwords were "run lean and efficient": analyze, sanitize, homogenize, and control costs. During this time of crisis--in many cases personal crisis--firms evaluated what they were doing, how they were doing it, what they could do better, what they could give up, which staff members they could let go, and how they could improve their banking relations, seek new markets, or save what they had. In essence, they sought ways to keep that institution running over the near term, hang on for markets to turn, and look toward the future. During those turbulent times just a short while ago, firms were forced to concentrate on the elements of the business they could control.
I sometimes wonder whether the hurricane flags that flew over the industry then have been all but forgotten. Many firms have not positioned themselves for the possibility of any further onslaught of serious market adjustments. Is your firm trying to improve on what it is accomplishing now, and looking toward the future rather than solely at the near term?
There is no question that the onerous dragon of environmental and governmental regulations facing the industry is of primary importance right now; but you need a profitable business to be able to face the dragon tomorrow.
The increase of business activity over the last year and a half has made it difficult for firms to stay as lean as they like because of increasing demands for production. This particular development is connected to the separate issue of adequate and competent staffing, particularly at the mid-management level. Along with a growth in staff size has come an increase in associated variable and fixed costs. Now is as good a time as any to identify and control your company's costs.
Over the last several years, the industry has made great strides in trying to understand and control costs. But can you honestly tell yourself that your firm has a sound cost program in place that accomplishes these goals: Does your cost system allow you to generate timely financial data on your business, such as a monthly profit/loss statement? Can you examine information by cost center, such as a shear or nonferrous sorting operation, and make decisions about things like buying equipment or servicing accounts based on that information?
Cost System Components
Collecting financial information and using it in the decision-making process has been a problem area for the recycling industry. Though a manufacturing process, processing scrap just isn't the same as making a product on an assembly line, where it is easier for supervisors to collect information. The nature of the scrap operation makes the cost control process trickier, but it is essential nonetheless.
Creating a productive costing system for a scrap operation has not changed much over the last few years, though recent directives by the Internal Revenue Service regarding full cost-absorption accounting principles as applied to a manufacturing environment should cause further refinements in some systems.
Some companies have sophisticated means of collecting cost information and methods for examining that data to aid in management decision-making. That system allows management to examine such items as solvency and liquidity ratios, debt-to-worth ratio, gross profit and net profit margins, sales-to-assets comparisons, return on assets, return on net worth, and information on inventory control. But most firms do not need a highly sophisticated system. There is a comfortable medium--a basic plan any company can implement to develop the same management decision-making apparatus that larger firms might have in place.
The cost system components that, at the least, your firm should concentrate on are listed on the next page.
Cost Center Development: Identify cost centers that encompass the scope of your operations. A cost center might be a shear or baler, which you can define in terms of the personnel and equipment required for it to function, including the supervisor and the types of material processed at that cost center.
Budgeting: The debate on this issue for the recycling industry has raged on for years. The vast majority of companies voice strong opinions that budgeting for the recycling industry can't be done. Yet there are firms in the industry that budget based on a number of years experience collecting information and comparing it from year to year. Some firms are able to compare data over a 15-year period. No matter what size firm you have, you should be able to estimate profit and expenses for each phase of your operation. A budget helps outline objectives, measures operating activity against results, and identifies employees responsible for performance. It also helps to develop cost-consciousness among employees.
Responsibility Reporting: This allows the person responsible for each cost center to evaluate results of expenses versus planned expenses and examine any variances. Actual costs are examined against budgeted items.
Product Costing: This is an essential ingredient in any system. It shows what it costs to process each type of material and helps figure the value of inventory. With knowledge of product and processing costs, decisions can be made on scrap purchases. Product costs are determined through information on raw material used, yield of that material, and variable and fixed costs.
Variable costs include:
direct labor wages
direct labor benefits
energy expense
repair and maintenance
inter-cost-center charges
other variable expenses
Fixed costs include:
supervisory salaries and benefits
insurance
depreciation
rental expense
other fixed expenses
Inventory Accounting: This helps to properly value inventory. To gather information in this area, prepare the reports below.
Daily Production Report. This type of report is filled out by the shift supervisor of each processing cost center and includes information on equipment, labor, and daily production. Information from these reports allows for additions and subtractions from the inventory account of each item processed. The reports allow scrap firms to account for inventories, better understand cost flow, determine cost of freight in and out, and account for any byproducts.
Productivity Report. Productivity reports are filled out at each cost center and help track utilization of major pieces of equipment and labor for the cost center.
Two other important areas that should be monitored in your cost system are maintenance costs and transportation costs, particularly trucking. Maintenance costs are accumulated through maintenance work orders broken into three segments:
preventive, breakdown, and capitalized projects. A work order system also enhances control of vehicle parts inventory.
Anyone who has installed a cost system will tell you that it is not easy-things that have a tremendous benefit do not come easily.
So if you have no cost system in place, here is your starting point: a management commitment to make it happen and then to stay the course-even when the desired results don't appear to be just over the horizon. Once that commitment is established, you can take the first step of identifying and defining cost centers.
The process of refining and examining a system never stops. Even those firms in the recycling industry that have systems in place continually seek ways to better understand their costs and be as prepared as they can for any bumpy roads in the future.
Cost Center Definition
Cost Center: Baler
Equipment Assigned: Baler
Overhead crane (also used by the shear)
Personnel Assigned: 3
L. Barnes
W Ortega
S. Payne
Responsible Individual: A. Simmons
Material Processed:
Sheet iron
Sheet steel
No. 1 bundles
No. 2 bundles
Cost Center Budget Preparation
Requirement: Estimate the total monthly cost center expenses segregated as follows:
Direct Labor Payroll and Fringe
Energy Costs
Repair and Maintenance Costs
Inter-Cost-Center Charges
Miscellaneous Variable Costs
Supervision Payroll and Fringe
Insurance Costs
Depreciation
Rental Costs
Miscellaneous Fixed Costs
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