Financial Management of a Small Handicraft Business (Oxfam, 1988, 43 p.)
 I. Cost calculations in the handicraft industry
 (introduction...) I. 1. Production costs I.2. Overhead apportionment I.3. Selling and distribution costs I.4. Ways to reduce costs

### I.4. Ways to reduce costs

The objective of a social production unit is to maximize the earnings of the artisans. This emphasises the need to seek all possible means to keep other costs to a minimum. A number of possibilities might exist, and should be considered.

(i) Materials

Prices of raw materials tend to fluctuate according to the season. Cost might be saved by buying up stock at times of low prices and storing it. Price will also normally vary according to quantity purchased; again, bulk purchase might be beneficial.

Production units usually appreciate these factors, but sometimes lack the capital to finance stocks of materials. It should be checked whether this difficulty could not be overcome by taking a bank loan, which might be worthwhile, even at a high interest rate (Figure 4).

Figure 4. Decision Making on Bulk Purchase of Materials

Problem: Fibre costs 6 money units per kg for 9 months of the year, but for 3 months the price drops to 4.5. Production requires 200 kg per month. Storage is not available and would have to be rented at 0.05 money units per kg per month. Moreover, the production unit is short of capital, and would have to borrow money at the rate of 2% per month. At present, it buys its requirement month by month. Should it instead buy up all the fibre at the lower price and store it for the rest of the year?

Solution: N.B. ignore the 3 months when material is anyway bought at the lower price.

1. Present monthly cost of material for 9 months

Purchase price: 9 x 200 x 6 = 10,800

2. Monthly cost of material for 9 months on bulk purchase basis (assume purchase during last month of low price)

Purchase price: 9 x 200 x 4.5 = 8,100

 Storage: Reducing per month by 450 200 kg, from 1800 kg in first.month Interest: 8100 money units loan 808 required payed back evenly over 9 months Total cost = 9,358

Therefore it is preferable to purchase in bulk when the price is low if loan finance can be obtained.

One further consideration regarding materials is whether wastage can be either used to make other small items, or alternatively sold. This option would not normally be available in fibre or grass products, but might well be in leatherware or woodwork.

If full allowance for the material has already been made in the costing of products for which it is principally used, then other small items could be made from the wastage at zero material cost.

(ii) Organization of work

The method by which production is organized should be carefully examined for efficiency. In some handicrafts production units artisans make the complete article; in others, a part only. Where division of labour applies, the artisan does not have the benefit of seeing the finsihed product but total output might be greater. The major objective being to generate income for the producers, there is rarely justification for producing in an inefficient way unless as part of a training programme.

The work location should be examined. Often, handicrafts work is done in the home, and it may be that communal working is impracticable. However, the relative advantages of each should be looked at financially. There may be good reason to place financial considerations below social ones, but at least production units should always know the cost of doing so. They might even be able to attract funding to cover the identified additional cost of operating inefficiently for worthwhile social reasons. It could work either way. It might be more expensive to run on a home industry basis because of transport costs for distributing and collecting materials and finished products; yet this could be necessary in order not to disrupt the other activities of the artisans. By contrast, it might be more expensive to build a communal work area; yet this might serve as a centre for education, awarenessbuilding, medical care etc which could not be built into the enterprise if the artisans worked at home.

It is often true that small handicrafts units do not run in the most efficient way, and that there is scope for cost saving if analysis of the costs and work patterns is undertaken. Whilst the motivation for production might not be profit-orientated, nevertheless the production activity must be controlled as in any business, precisely in order to enable it to fulfil the income-generation objective. Human concern and the business mentality need not be incompatible.

It might finally be possible to complete the costing sheet on the basis of different levels of production (Figure 5).

Figure 5. Fibre Mat Costing Sheet According to Production Level
Money unit

 Per piece Per 100 pcs Per 1000 pcs Direct costs As per Figure 1 35.00 35.00 35.00 Material saving (1.00) (2.50) Labour surcharge (overtime) 0.50 Variable overheads As per Figure 3 2.00 2.00 2.00 Fixed overheads Apportionment as per Figure 2 5.00 5.00 5.00 Distribution & selling costs Apportionment of transport costs 0.50 0.50 0.50 Saving on bulk orders (0.20) (0.301 Total cost 42.50 41.30 40.20 Less sale of waste fibre (0.10) (0.10) (0.10) Final production cost 42.40 41 20 40.10