BRIEF REVIEW OF PAKISTANS ECONOMY: Economy of Pakistan has some

miserable facts which cannot be denied. Energy and Power crises, continuously
deteriorating law and order situation, ceaseless uplift in the prices of petroleum and
other consumable products, non-stop fiscal deficit in annual budgets, deathless decline
in the value of rupee and icing on the cake is that crises of governance make the
Pakistans economy worst and poked the Economy into Hyper inflationary situation.

In this situation, Business community faces lot of problems in surviving there

businesses in Pakistan, thus shrink their investments out from the country. Following
are some major problems which business community is continuously facing:
Increasing Cost of Production:The rise in the prices of petroleum products gives
a huge uplift to the cost of Production. Due to this, the price of raw materials,
considered as the major direct cost of production of any manufacturing industry, rises.
The skilled workers demand more in compensation of the inflationary impacts on their
lives. The overhead like electricity and gas consumptions costs more due to rise in the
prices of each consumable unit. The uncertain taxation policy of the government adds
fuel to the fire and enhances the problems of the whole business community.

Power and Energy Crises: The second major issue that Pakistans industries are
facing is the crises in power and energy sector.

According to the article published in Express Tribune dated 12-June-2013, National

Transmission and Dispatch Company (NTDC) forecasted the growth of 5% to 6% in the
demand of electricity consumption over next 10 years and with the current expansion
program the crises will never seems to be ended in the many years to come.
This creates the alarming situation for the business community survival.
Lack of Technological Development and Infrastructure: Another major
issue is the lack of responsiveness towards the technological advancement. Business
community on the basis of self-help tries to adopt the recent changes in the global

advancement in technology
but due to the
current account deficits and balance of payments control government imposes tough
import tariffs. On the other hand, due to bad infrastructures the technology could not be
generated locally.
Law and Order Situations: Another major threat is the law and order situation in
the country which wipes out the new foreign direct investment and push existing
investors to shrink their funds from the Pakistans market.
Due to all these problems, Cost of doing Business in Pakistan becomes quite high and it
becomes challenge for the Management accountants how to control the cost in this
hyperinflationary situation.

COST MINIMIZATION VS COST OPTIMIZATION:

Most of the people have misconception about the cost minimization and cost
optimization, these are considered as synonyms while there is huge difference among
them. Cost minimization focuses on short term approach of cutting cost on the expense
of everything like the quality, market reputation, employee morale, business
relationships etc. While, the cost optimization, on the other hand, leads to a long term
strategy for playing smartly to reduce the overall cost without compromising on the
quality, business stake, employee morale etc. I think, we need to understand why the
firms go for cost cutting? The grass root for the cost reduction in any firm is declining in
its revenue and dilution in the profits and when the revenue declines the firms starts

looking for the cost minimization.

Lets
discuss some examples of each case: Labor cost (the cost of employees) pinches the
employers when the revenue as well as profits declines and they starts downsizing
while few employers treat their employees as asset and consider them as investment
and try to utilize their expertise to reboots there business. The former strategy is short
term thus a cost minimization strategy and the later one is long term thus the cost
optimization strategy. Lets take another example, in the period of declining profits the
firms look for cutting the research and development expenditures first in order to remain
in target profitability situation but again it is short term strategy and to boost the
businesses you should have to be focused on long term strategy so, the results of
R&Ds needs to be identified, if it predicts the long term solvency of the firm then cutting
R&D expenditures are not viable. So, in my thinking the firms should go for the cost
optimization rather than cost minimization.

HOW MANAGEMENT ACCOUNTANTS CAN PLAY THEIR ROLE IN COST

OPTIMIZATION:
In the Economy like Pakistan where there is a distinct feature of hyperinflation exist, it is
really a big challenge for all management accountants to discharge their responsibilities
in relation to cost optimization but I think it is not impossible. Some issues are
controllable and others are uncontrollable, In case of controllable issues, we need to
reduce it to zero and in case of uncontrollable issues, effective planning is need to be
made in order to reduce the worse impact of it on costs. In my perspective, following are
the roles that the management accountants can play for cost optimization:
Effective Tax Planning: The taxation policy in Pakistan is uncertain and
unpredictable; Federal Board of Revenue changes the policies continuously via
updating SROs on FBRs web portal. Therefore, management accountants must keep
their eye on the changes made and plan their firms taxation accordingly.

Because bad tax planning means you will be

running out of cash in the future as the taxation policies hits the cash flow and bad cash
flow means you need to raise the additional finance for other business activities which
means the additional cost. Therefore, a very aggressive adoption is needed from
management accountants side to tackle this problem.
Effective Waste Management: Another area where management accountants
can guide the firms regarding the waste management. The steps that should be
followed for effective waste management are as follows:
To prevent wastage (Most favorable).
To minimize wastage by introducing some policies regarding waste
management.
To reuse it as raw material.
To recycle it or turn it into a new product or material.
To turn the material into energy by applying some process like
pyrolysis.
To dispose of the waste (least favorable)
Effective Production Planning: Major costs exaggerate due to bad production
planning. Bad production planning leads excess stockholding costs, results in the sales
returns, excessive material usage, huge wastages, difficulty in meeting customer orders
etc. Management Accountants should emphasize on the effective production planning

as it helps in reducing operational costs, improving customer services, and using the
resources effectively and efficiently.
There are two approaches for production planning; Make to order and Make to
inventory.Both approaches have some benefits and drawbacks in relation to cost, which
approach to follow depends on the nature of the product.
Make to order means production will start after receiving the sales order.It will reduce
the inventorys holding cost but not appropriate if the customers not willing to pay more
for the customized products, not willing to wait enough for production period after
placing the order, and if setup cost is high than make to order will not be appropriate.
Make to inventory means production will start on the basis of forecast demand rather
than sales order. It is appropriate only when the demand will be forecasted accurately
otherwise it will lead to the excessive stocks in the warehouses or stock out situation.
Effective Supply Chain Management: Management Accountants need to be
emphasized on effective supply chain management i.e. delivering products and services
to the customer at the lowest possible cost by minimizing the total operating expenses
that includes inventory, distribution, transportation and manufacturing
expenses.Effective Supply chain management helps in minimizing the inventory levels
but quantifying the amount of inventory and determining the difference in the carrying
cost of inventory is not any easy task. Therefore, Management Accountants should
divert the attention of investors to install the technologies that they will be able to keep
an eye on the inventory throughout their supply chain process.
Benchmarking: Another approach that management accountants can use is to set
the benchmarks for different expenses from the other firms of similar capacity in the
industry. For-example, production cost, wastage percentage, and operating cost of other
companies in the industry could be set as benchmark for their own firms (if the other
firms with similar resources can obtain a particular level of cost advantage than why our
firm cannot?)
Accountability on the basis of Cost Centers: Management Accountants can
introduce the policy of assigning the accountability on the cost centers. Because it is
very difficult to impose the responsibility of cost heightening for example if the
production cost of a business unit increased from period to period, it is challenging to
determine the cause of that increase i.e. whether this is because of the mismanagement
of the production department or because of the external circumstances. Therefore,
assigning accountability on cost centers will help in cost optimization as the manager of
each business unit will identify the ways to manage the future costs effectively.
CONCLUSION:Cost optimization will be achieved if we as management accountants
commit to perform our roles in the industry and Pakistans Economy will prosper again.