Cost control is a control of all the costs of enterprise in order to achieve cost effectiveness in business operations. Cost ca be classified as: fixed cost, variable cost, semi-variable cost. The fixed costs are incurred over a period of time and are not directly related to production. These costs remain the same even if there is an increase or decrease in production.
Cost control: Variable costs, on the other hand, change in the proportion of output. Semi-variable costs are fixed as well as variable in nature. Some costs may be incurred continuously, others now and then and still others only deemed to be incurred (depreciation).
There may be different methods of recording cost for various products. In each method, classification, recording and allocation of expenses may be done differently. In each method there will be a system where deviations in standard or budgeted costs and actual costs will be reported to the concerned officials for taking corrective measures.
The cost standards are fixed for each product or activity and actual cost records are also sent to the in-charge of the product or activity. In case of any deviation in cost, immediate remedial measures are taken up. The regular cost control system will help in keeping cost under check.
Cost Control Merits
1. Cost Control System helps in discovering efficient and inefficient operations. The activities which are not profitable can either be closed or efforts for improving them may be made. On the other hand, profitable activities can be encouraged.
2. Cost control records provide valuable information for submitting tenders or quoting prices of products or services.
3. It helps in pinpointing the factors leading to losses. If the causes of losses are pinpointed then it will become easy to control them.
4. The reasons for variations in profit can be ascertained.
5. It helps in keeping a check on inventories. There will be a proper system of receiving, storing, issuing and using of materials and other stores.
6. Cost records become a basis for planning future production policies.
Production Planning and Control
Production planning and control is an important task of production manager. It has to see that is the function of looking ahead, anticipating difficulties to be faced and the likely remedial steps to remove them. Production control, on the other hand, guides and directs flow of production so that products are manufactured in a best way and conform to a planned schedule and are of the right quality. Control facilitates the task of manufacturing and see that everything goes as per the plans.
Techniques Production Planning and Control
Following techniques are helpful in production planning and control.
(a) Routing. It is the determination of exact path which will be followed in production. It is the selection of the path from where each unit will have to pass before reaching the final stage. Route determines the best and cheapest sequence of operations to be followed.
(b) Scheduling. It is the determining of time and date when each operation is to be commenced and completed. The time and date for manufacturing each component is fixed in such a way that assembling for final product is not delayed in any way.
(c) Dispatching (Implementation). It refers to the process of actually ordering the work to be done. It involves putting the plan into effect by issuing orders. It is concerned with starting the process and operations on the basis of route sheets and schedule charts.
(d) Follow up and Expediting. It is related to evaluation and appraisal of work performed. This is an important function of production control. If goods are to be produced as per the plans then a proper follow up of work is essential to see whether production schedule is properly adhered to or not. In case there are any bottlenecks then these must be removed in time.
(e) Inspection. The purpose of inspection is to see whether the products manufactured are of requisite quality or not. It is carried on at various levels of production process so that pre-determined standards of quality are achieved. In case the products are not of proper quality then immediate steps are taken to correct things.
Inventory Control
Inventory control or materials management connotes controlling the kind, amount, location and timing of various commodities used in and produced by the industrial enterprises. It is the control of materials in such a manner that it ensures maximum return on working capital. Inventory control is necessary for the smooth and uninterrupted functioning of production department. It’s main purpose is to maintain an adequate supply of correct material at the lowest total cost. Inventory control is exercised at three stages.
(i) purchasing of materials (ii) storing of materials (iii) issuing of materials.
Inventory control can be exercised by establishing various parameters:
(i) safety inventory level i.e. the stock which must be maintained at all time so that uninterrupted production is carried out. (ii) maximum inventory level i.e. the stock limits beyond which materials should not be stored. (iii) re-ordering level is the point at which fresh orders for purchasing inventory should go. (iv) danger level i.e. the level of stock at which extra effort should be made to replenish stocks so that production is not discontinued for want of materials.
Break Even Analysis
These days a great deal of importance is given to cost-volume-profit relationship. An effort is made to study the general effect of the different levels of activity upon total revenue and total cost with the help of revenue output function and cost volume function respectively. This technique measures profits corresponding to the different levels of output. The study of cost-volume-profit relationship is frequently referred to as break-even analysis.
The term break-even analysis is used in two senses-narrow sense and broad sense. In its broad sense, break-even analysis refers to the study of relationship between costs, volume and profit at different levels of sales or production. In its narrow sense, it refers to a technique of determining that level of operations where total revenues equal total expenses i.e. the point of no profit, no loss.
Assumptions
The break even analysis is based on the following assumptions:
(1) All elements of cost i.e. production, administration and selling and distribution can be segregated into fixed and variable components.
(ii) Variable cost remains constant per unit of output and thus fluctuates directly in proportion to changes in the volume of output.
(iii) Fixed cost remains constant at all volumes of output.
(iv) Volume of production is the only factor that influences cost.
(v) There is a synchronization between production and sales. Some words which are generally used in break-even analysis:
Break-even Point
It is a level of production at which revenue and costs (fixed and variable) are the same, at this point there is neither profit nor loss. Every concern tries to reach this level of production at the earliest and profit starts only when production increases beyond this level.
Contribution
It is the difference between sales and variable cost or marginal cost of sales. It may also be defined as the excess of selling price over variable cost per unit. Contribution is the amount that is contributed towards fixed expenses and profit.
Profit/Volume Ratio (P/V Ratio)
It establishes the relationship between contribution and sales and is of vital importance for studying the profitability of operations of a business. It reveals the effect on profit or changes in the volume. The concept of P/V ratio is useful to calculate the break-even point, the profit at a given volume of sales, the sales volume required to cam a given profit and the volume of sales required to maintain the present profits if the selling price is reduced by a specified percentage.
Break even point is an indicative of effectiveness and control. The production targets are fixed in advance and break even point helps in this fixation. In case there is an adverse change in break-even point then the causes for it are properly analysed. Break even point is a yard stick for measuring the performance of management. Break-even analysis is based on certain assumptions which may not always be correct so it cannot always be used as reliable standard for performance.
Profit and Loss Control
Profit and loss control is a simple and commonly used overall control device to find out the immediate revenue or cost factors responsible for either the success or failure of an enterprise. As a control device it is regarded very effective in certain respects because it enables the management to influence in advance revenues, expenses and consequently even profits.
The sales, expenses and profit of different departments or for different products are compared with that of other departments or products. The department or product becomes a cost centre. The in-charge of the department is responsible for its performance. Even historical comparison is done to assess the performance. In case there are deviations in performance then immediate steps are taken to rectify them.
Statistical Data Analysis
Statistical data analysis is an important control technique. This analysis is possible by means of comparison of ratios, percentages, averages, trends etc, of different periods with a view to pinpoint deviations and causes. This method of control is very useful in case of inventory control, production control and quality control.
The minimum and maximum control limits are fixed and deviations within these limits are allowed but if variations go beyond prescribed parameters then immediate steps are taken to correct them. Statistical control charts are prepared with the help of collected data and permissible limits are plotted. A look at the chart will give an idea to the viewer if everything is going as per the plans or not. So analysis of data is a good device of control.
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