COUNTING BEANS

These days, controlling and reducing costs is one of the most important challenges facing the Canadian mining industry. Gone are the days when a mine manager could offset poor cost performance by dipping into some of his high-grade ore reserves.

Today, we are in an era of aggressive competition for markets. We are competing with other countries that have significantly lower labor costs and, often, higher-grade ore. As technology advances, we are also competing with other materials that threaten to overrun traditional markets for many metals.

Our best line of defence is cost reduction. Yet, despite this urgent need to address costs, some mining operations still use methods of measuring and controlling costs that were designed decades ago.

An old Inuit recipe for snowy owl reads: “Take off feathers. Clean owl and put in cooking pot with lots of water. Add salt to taste.” What this recipe is to French cooking is what past cost control systems in many mining operations are to truly effective systems.

In the past, most cost collection and reporting systems at mines were not of sufficient detail nor designed properly to be used as an effective tool to control costs. These systems were designed for financial reporting to head office for the use of company directors, bankers and shareholders.

This concept is called custodial accounting, and it represented the main purpose of accounting when it first developed in Europe hundreds of years ago.

Today, we realize the importance of cost collection and reporting systems as a tool for supervisors working right at the mine site to help them control costs.

An effective cost report is one that is eagerly awaited by all supervisors at a mine and that points them in the right direction to improving performance.

There are several basic components to an effective cost control system. First, there must be a list of objectives or targets for performance to be used when working toward the plan. It is important that objectives be set that specify both quantities and timing. Objectives must be very specific and measurable. As well, they must be achievable and those who must attain the objectives should have a large input into their design. Objectives must also be written down on paper and not be merely abstract notions.

Second, an operating budget must be prepared for the short-term plan, based on the objectives set. Traditionally, in the mining industry, budgeted dollars shown each month on the cost report were fixed and did not allow for actual production variances from budgeted production.

Today, flexible budgets, which reflect changes in production tonnages, are popular, as these flexible budget allowances reflect the expected efficiency of production rather than the expected volume of production. Budgets must also have the following elements:

* They must be prepared in detail for each working area. This allows costs and revenue to be determined during the year for each work area.

* They must be able to show the performance of each supervisor’s area of responsibility. This helps in delegating decision-making.

* They must be prepared with ample input from those supervisors responsible for achieving the budgets.

The third essential component of a good cost system is the reporting of actual costs and variances from budget. Cost reports must be structured in the same manner as the budget, to show performance by work area and responsibility centre. Reports must also show variances from a flexible budget allowance to indicate where actual performance suffered from poor efficiency.

With a detailed set of objectives and a well-designed and informative cost-reporting system, mine supervisors can focus on specific cost problems. Obviously, supervisors want to concentrate their efforts where the most benefit can be realized.

In order to help managers place, in priority, areas of concern, a concept known as Pareto’s Law has been devised. In the context of cost savings, this law says that most of the possible cost savings at an operation can be achieved by attending to a minor number of cost areas. Cost-savings programs are most effective if they are focused on reducing expenses in those few key areas.

Several other points should be remembered when addressing cost- savings:

— Think of new ways of doing things. Don’t just assume that since it has always been done one way, there isn’t a better way.

— Get everyone involved in reducing costs. Make people aware of the importance of cost control and listen to their suggestions. Cost control programs should be conducted regularly and imaginative ways of encouraging ideas in cost savings should be pursued.

Another area of concern in controlling costs is capital cost control. An effective program to control capital costs should include the following:

* a capital-budgeting process;

* an effective process for evaluating requests for capital expenditures;

* regular reporting of expenditures that have been made and the amount remaining until project completion.

* a post-completion review to determine if actual expenditures and project results were as budgeted; and

* a policy and procedure for fixed asset disposal.