BASICS OF COST CONTROL AND ANALYSIS

Costing - Phase (I & II) Basics of Cost Control and Analysis

What is Cost Control ?

Cost Control is concerned with measuring variances from the cost baseline and taking effective corrective action to achieve minimum cost overruns. Procedures are applied to monitor expenditures and performance against the progress of a project. All changes to the cost baseline need to be recorded and the expected final total costs are continuously forecasted. When actual cost information becomes available, an important part of cost control is to explain what is causing the variance from the cost baseline. Based on this analysis, corrective action might be required to avoid cost overruns.Cost control by management means a search for better and more economical ways of completing each operation. Cost control is simply the prevention of waste within the existing environment. This environment is made up of agreed operating methods for which standards have been developed.

Business firms aim at producing the product at the minimum cost. It is necessary in order to achieve the goal of profit maximization. The success of financial management is judged by the action of the business executives in controlling the cost. This has led to the emergence of cost accounting systems.

Cost control by management means a search for better and more economical ways of com-pleting each operation. Cost control is simply the prevention of waste within the existing environment. This environment is made up of agreed operating methods for which standards have been developed.
These standards may be expressed in a variety of ways, from broad budget levels to detailed standard costs. Cost control is the procedure whereby actual results are compared against the standard so that waste can be measured and appropriate action taken to correct the activity.
Cost control is defined as the regulation by executive action of the costs of operating an undertaking. Cost control aims at achieving the target of sales. Cost control involves setting standards. The firm is expected to adhere to the standards.
Deviations of actual performance from the standards are analysed and reported and corrective actions are taken. Cost control emphasis is on past and present. Cost control is applied to things which have standards. It seeks to attain lowest possible cost under existing conditions. Cost control is a preventive function.

Characteristics of Cost Control

The characteristics of cost control are presented below:

1. Delineation of Centers of Responsibility: Overlapping operations and responsibilities destroy the very essence of cost control.

2. Delegation of Authority: If persons are charged with responsibility without authority, the cost control will be ineffective. Hence, proper or adequate delegation of authority is necessary for proper cost control.

3. Measurement of Performance: A performance is to be measured with the help of reasonable criteria. Standard costing can be used as reasonable criteria. The person whose performance is being measured should participate in setting the standards.

4. Relevance of Controllable Cost: Only few costs are controllable at different levels of management. The management evaluates the performance of an employee with the help of costs incurred that are controllable.

5. Cost Reporting: Cost report provides a basis for effective cost control. Hence, if the cost reports is not prepared and submitted in time, the cost control cannot be exercised.

6. Constant Efforts: The measurement of performances, knowing functioning of manufacturing department and analysis of costs require constant efforts. This type of constant efforts leads to cost consciousness and result in cost control.

7. Policies and General Objectives: All the employees of the organization are communicated the policies and general objectives. If so, cost control is very easy.

Steps involved in Cost Control

The following steps have been adopted to exercise cost control.

Planning: Planning may be done as in the form of budget, standard, estimate and the like. The past events have been considered for proper planning. The planning is expressed both in physical as well as monetary terms. The standards are used as yardsticks.
Communication: The planning and policy should be communicated to the employees. If so, they can assume the responsibility and do the work properly. Communication has two directions. They are upward direction and downward direction. Instructions flow from the top level to lower level. Likewise, report on performance move towards upwards.
Motivation: The performance is evaluated; costs are ascertained and reported to the management regarding the results of performance. Such report may be act as motivating force and leads to better performance in the days to come.
Appraisals and Reporting: The actual performance is compared with preplanned standard and find the deviations. The causes for such deviations are also analyzed. Finally, the deviations with reasons are reported to the top level of management for cost control.
Decision Making: The top management may review the report on many directions. Lastly, the management takes necessary corrective actions. Finally, the existing standard or budget may be revised according to the prevailing situations.

The responsible executives can exercise physical control for the successful implementation of cost control system. In the manufacturing place, the supervisor can exercise control over the amount of expenditure incurred as in the form of cash or in the utilization of labour, material and other resources. If minimum materials are used, cost of material may be controlled to some extend.

Labour is employed on time rate basis. If so, maximum work can be completed within short spam of time. Thus, cost of labour is exercised. A machine is also used to produce a product. Increasing productivity may use minimum machine hours. In this way, the supervisor can exercise control in physical terms i.e. labour hours, machine hours and quantities of material, wastage and spoilage.

Advantages of Cost Control

The chief advantages of cost control are briefly explained below:

1. Return on capital employed may be increased.

2. The volume of profit is also increased with minimum output and sales.

3. Management can increase the productivity with available resources.

4. The employees are getting job continuously.

5. The employees can get reasonable remuneration with bonus.

6. The available factors of production and resources are effectively used.

7. The credit worthiness of the company is increased.

8. There is a possibility of prosperity and economic stability of the industry.

Difference between Cost Control and Cost Management?

Cost management and cost control are two terms that often get mixed up. If you think about the words, what sounds better? Would you rather be in control or manage your costs?
It turns out that cost management and cost control really are two different things, and yet they are equally important to have in place. In this article, we look at the difference and how they relate.

Cost Management

Cost management is concerned with the process of planning and controlling the budget of a project or business. It includes activities such as planning, estimating, budgeting, financing, funding, managing, and controlling costs so that the project can be completed within the approved budget. Cost management covers the full life cycle of a project from the initial planning phase towards measuring the actual cost performance and project completion.
Cost management is a continuous process that takes place during the project to determine and control the resources needed to perform activities or create assets:

Resource Planning

In the initial phase of a project, the required resources to complete the project activities need to be defined. Work Breakdown Structures (WBS) and historical information of comparable projects can be used to define which physical resources are needed. You can think of the required time, material, labor, equipment, etc. Once the resource types and quantities are known the associated costs can be determined.

Cost Estimating

Several Cost Estimating methods can be applied to predict how much it will cost to perform the project activities.

The choice for the cost estimation techniques depends on the level of information available. Analogous estimating using the actual cost of previous, similar projects can serve as a basis for estimating the current project. Another option is to use parametric models in which the project characteristics are mathematically represented. Estimates can be refined when more information becomes available during the course of a project. Eventually, this results in a detailed unit cost estimate with a range of accuracy. Remaining uncertainties in estimates that will likely result in additional cost can be covered by reserving cost (e.g. using escalation and contingencies).

Cost Budgeting

The cost estimate together with a project schedule forms the input for cost budgeting. The budget gives an overview of the periodic and total costs of the project. The cost estimate defines the cost of each work package or activity, whereas the budget allocates the costs over the time period when the cost will be incurred. A cost baseline is an approved time-phased budget that is used as a starting point to measure actual performance progress.

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