A Project Report On,

“A Study On Cost Controlling.”

A Project Submitted to
University of Mumbai for partial completion of the
degree of Master in Commerce

Under the Faculty of Commerce

By

Sajjad Aslam Rawoot

Under the Guidance of

Prof. Sumaiya Farooque Ansari

Mangaon Shikshan Prasarak Mandal’s

D. G. Tatkare Mahavidyalay, Mangaon-Raigad
At Old Mangaon Near District Court
Tal - Mangaon, Dist.- Raigad. 402104
 CERTIFICATE
This is to certify that Sajjad Aslam Rawaoot has worked and duly
completed her/his Project Work for the degree of Master in Commerce under
the Faculty ofCommerce in the subject of Commerce and her/his project is
entitled, “A Study On Cost Controlling.” under my supervision. I further
certify that the entire work has been done by the learner under my guidance
and that no part of it has been submitted previously for any Degree or Diploma
of any University.

It is her/ his own work and facts reported by her/his personal findings and
investigations.

Name and Signature

Prof. Sumaiya Ansari

Date of submission:
 DECLARATION BY LEARNER

I the undersigned Sajjad Aslam Rawoot here by declared that the

work embodied in this project work titled “A Study On Cost Controlling.’’
Forms my own contribution to the research work carried out under the
guidance of prof. Sumaiya Ansari is result on my own research work and
has not been previously submitted to any other university for any other degree
to this or any other university.
Wherever reference has been made to previous work others at has been
clearly indicated as such and included in the bibliography.

I, here by further declared that all information on this document has been
obtained and other presented in accordance with academic rules and ethical
conduct.

Name and Signature of the

learner

Certified by

Prof. Sumaiya Ansari

 Acknowledgment

To list who all have helped me is difficult because they are so numerous and
the depthis so enormous.

I would like to acknowledge the following as being idealistic channels and

freshdimensions in the completion of this project.

I take this opportunity to thank the University of Mumbai for giving me

chance todo this project.

I would like to thank m y Principal, Dr. B.M.Khamkar for providing the

necessaryfacilities required for completion of this project.

I take this opportunity to thank our Coordinator Prof. Amrin Adkar, for
her moral support and guidance.

I would also like to express my sincere gratitude towards my project guide

Prof. Sumaiya Ansari whose guidance and care made the project successful.

I would like to thank my College Library, for having provided various

referencebooks and magazines related to my project.
Lastly, I would like to thank each and every person who directly or indirectly
helped me in the
completion of the project especially my Parents and Peers who supported me
throughout my project.
 INDEX

PAGE
CHAPTER CONTENTS NO
NO

1 INTRODUCTION 6

2 RESEARCH AND 8
METHODOLOGY

3 LITERATURE REVIEW 42

4 DATA ANALYSIS AND 65

INTERPRETATION

5 SUGGESTION 86

6 CONCLUSION 87

7 BIBLIOGRAPHY 88
 INTRODUCTION

The concept of lean construction was initially put forward by a Finland professor, Lauri
Koskela (1993) based on National Construction and management Conference. He deemed
that construction industry should learn from and take advantage of the basic principles,
technology and means of lean manufacturing, adopt a new product theory, improve production
efficiency of the construction process by eliminating waste and non-value-added activities
and thus enhance the overall competitiveness of enterprises. And he believed that this
introduction can make substantial progress in the construction industry in these years . BIM
technology is a kind of information technology used for the establishment and management
of construction project information; meanwhile, it can integrate multiple building information
databases, and realize modeling and parameterization of the entire construction project.
However, that BIM was treated as a process to explore the interaction between it and lean
construction principles, was not a research focus until recently. Hamdi, Olfa and Leite,
Fernanda IGLC (2012) believed that in building information modeling process,lean thinking
had been used alone as a key method for the overall construction projectto improve its models.
And the combination of BIM technology and lean constructionhas been further validated in
many cases of projects . Bhargav A. et al., (2009) based on key technologies of lean
construction and the core functions of BIM, created the coupling matrix of BIM technology
and lean construction and concluded that BIM can contribute to the implementation of lean
construction with high efficiency and reduce waste during project construction process and
promote continuous improvement . Yong-woo Kim et al., (2011) through case studies,
considered that Lean Construction and BIM are the influencing factors of the overall delivery
of the project. There is a link

between the two and they can enhance each other and make the construction project team more
integrated and collaborative . Chinese scholars also affirmed the role collectively played by
BIM technology and lean construction in construction projects.For example, Xu et al., (2012)
thought that only based on the BIM application platform, can the concurrent engineering, pull
production, value engineering, team work and other technologies and concepts of lean
construction system be carried out substantially . Accordingly, the progress of the project, its
cost, quality and objectives can be realized; meanwhile, under the guidance of the lean
construction system, the application environment of BIM is optimized constantly and a win-
win result is realized. Each function of BIM supports several lean principles and a single lean
principle can guide the application of several BIM technologies. However, only by repeatedly
exploration and discoveries in practices, can we give full play to the comprehensive benefits
of lean construction and BIM technology and bring maximumvalues to the projects . In recent
years, with the vigorous development of China’s construction industry, the construction
projects increases with each passing year, and the project cost increases sharply accordingly.
Therefore, how to reasonably control costs, shorten the construction period and reduce waste
and simultaneously ensure thequality of construction and building products so as to meet the
growing consumer demand to the greatest extent has become an issue of construction which
the
contracting companies must face and solve. Lean construction and BIM is an emerging
construction management technology. And when they work together, they can reduce
construction costs and improve labor productivity, and thus create the greatest value . They
are strategic models and supporting systems in the reformative development of construction
industry later and their application will bring great effects to the construction industry. In this
paper, the lean construction theory and lean cost control theory and methods are put into
reasonable application to control the actual cost of construction projects. Then, with the help
of BIM technology platform, an in-depth discussion and analysis of the lean cost control
methods in the project is made. Next, a systematic structure of cost control that is based on
the lean construction theory and BIM technology is established. By doing so, the paper aims
toprovide references for the construction projects to maximize the value and minimize the
waste, control and reduce the cost of construction project.
 RESEARCH METHODOLOGY

This paper adopts the case analysis method. Firstly, the paper introduces the collectiverole of
lean construction theory and BIM technology in improving the construction drawings and
construction schemes so that the problems in constructions can be discovered in advance.
Secondly, the combination of the two can inspect the interior support, set aside holes
beforehand and manage and control the progress so as to ensure the quality, safety and duration
of the project. Thus realizing the cost control ofthe construction project. The case used in this
paper is from the J2-5 project of Pearl River New City, which is located in the juncture of Hua
cheng dadao Revenue and Xiancunlu Street in there. The project is positioned to be a CBD
which integrates catering, banquets, high-end office buildings and supporting facilities into
one. The project covers a total area of 7,470 m2 , with a total construction area of 149,689.4
m2
Out of it, the ground floor area is 123,619.0 m2 , and underground construction areais
26,070.4 m2 . In structural style, it is a framecore tube structure. On the ground, there are 53
floors; and underground, there are four floors. The total height of the building is 252.10 m.
Besides, the basement is underground garage; the 1-5 layers areused for dining building,
banquet hall and other ancillary facilities; 6-53 layers are used for office buildings and
ancillary facilities (Fig. 1). The project has a large amount of construction volume and a tight
time schedule. Besides, the available construction site is extremely narrow, and it is rather
difficult to conduct the planar organization and management. Therefore, at the earlier stages
of the project, the lean concept and theoretical methods, together with the BIM technology
were introduced. Lean theory and BIM technology were combined to work jointly on the cost
control of the construction project.
 What is Cost Control

Cost control is the method of reducing business expenses by managing and analyzing
financial data. Collecting costs in a consolidated format allows organizations to make more
accurate and informed projections, know where they can minimize costs,
and identify areas of overspending.

This is why cost control and vendor management often go hand-in-hand, since optimizing
how you interact with vendors can produce significant cost savings for your business. You
may look to streamline contract renegotiations to lock in favorable prices,work to build
sustainable relationships with vendors and customers, and create partnerships that
complement both businesses.

After all—the goal of cost control is to give your company a powerful framework that’s
designed to improve visibility and keep you in control of your cost

Project schedules can be divided up into components and steps, and most managers
allocate the overall budget to each part according to its needs. Making an effort to
control costs helps:

 Track progress and KPIs (key performance indicators) and take corrective action
when costs rise too high.
 Maintain expected profit margins.
 Set clear expectations and prevent scope creep.
 Achieve transparency with management, stakeholders, and clients.
 Generate useful metrics for handling future projects.

Having a proper budget in place directly impacts critical decisions like what new employees
to hire, what features to include, and how much time should be spent on eachpart of the
job. A well-kept budget that follows and organization’s business rules essentially shows you
where the project is going and how it will end up. Project performance in this case is directly
tied to its budgeting.
 Characteristics and principle of cost control

According Backer and Jacobe, characteristic of effective cost control as under:

A cost center represents a relatively (uniform) homogenous activity for which a clear
definition of authority exists. Overleaping of operation and responsibilities undermine the
very essence of cost control should be delineated.

Effect to achieve cost control is appropriable to collapse if individual charged with

responsibilityare denied the authority to discharge these responsibility.

Cost control presumes the existence of reasonable criteria for measuring performance.
These costs standard should be attainable under normal efficient operating conditions. The
individuals whose performance is being measured should participate in the setting of the
standard. (13)

All cost are not controllable at different level of management. The fluctuations are supply
prices may be beyond the control of the management. Only those cost which are controllable
directly by an individual relevant in the evaluation of this performance.

Effective cost control requires timely and meaningful cost report. These reports should
contain a comparison between the standard and actual result.

Cost control reaches cost reduction is highest level of sophistication with a form plan
exists for elementary unfavorable deviation for cost standard
 Principal of effective cost control as under

1. Participate and scientific management is must for cost control.

2. Cost control is a continuous process.

3. The report of accountant or cost controller must be such that they really help the leader in
controlling cost.

4. The estimated cost or targeted cost should be taken as challenge to meet instead of
contesting the accuracy of its.

5. Everymember of concerned must be cost conscious.

6. The principle of Management by objectives(MBO) Management by exception (MBE) and

management by communication (MBC) are the prerequisites of cost control.

7. Everyone concerned with cost control must be motivated by the top management so as to
create an atmosphere in right direction

Element of cost control

In practically all cases as 'cost' is the sum of three groups of components. The purchase or
transfer price of material, the cost of the hire
of labour, and the value of other disbursement made or expenditure incurred in achieving the
desired product or result. Generally the cost is divided according to their nature under three
broad heading, namely material cost, wages and other expenses. In other word the total cost
of a product may be divided into three elements: Material, Labour and Expenses. The elements
further analyzed into direct and indirect. Material= Direct material + Indirect material
Labour= Direct labour + Indirect labour Expenses= Direct expenses + indirect expenses
Aggregate amount of direct cost i.e. direct material cost, direct labour cost and direct expenses
is known as prime cost, other hand the aggregate amount of indirect cost i.e. indirect material
cost, indirect labour cost and indirect expenses in known as overhead.
Overhead further analyzed into factory administration, selling distribution overhead. For the
purpose of cost control the most suitable analysis of cost elements may be material, labour
and overhead. Thus the element of cost control may be classified as under
 Tools and techniques for cost Control

Many management techniques are used for the purpose of cost control. Such techniques
can be distinguished as informal and formal techniques. Informal techniques are based
on alert observation of physical conditions during daily operations. Whereas formal
techniques are the result of careful accounting and statistical analysis or engineering study.
In this sense liesthe art of management, which enhances on making a balanced assessment
of the factory involved and applying the appropriate remedy. No one technique can be used
individually. Acombination of techniques is used to complement each other in groups
appropriate to the problem at hand. Some of such techniques are studied below and some
other is discussed in the following chapters.

1. Budgetary Control :

Budgetary control may be defined, as in the words of J.A.Scoot, as "The system of

management control and accounting in which all operations are forecasted and as far as
possible planned ahead, and the actual results compared with the forecasted and planning
ones". Budget is the fundamental accounting model for cost control. It implies setting of
goals in advanced the operating mangers will stick to performing them. This consists in
establishing some functional budgets relating to the responsibilities of executives and an
overall master budget too. The actual performance then is compared continuously with the
budget plan or the targets expressed in money terms. Budgeting serves as a valuable aid to
management throughplanning co-ordination and control. Budgets are drawn on the basis
of will-defined plans of action. In the preparation of plans, the knowledge, skill and
experience of managerial personnel are combined. As a results, problems can often be
anticipated inadvance and their solutions found after a careful consideration of all aspects.
At the same time, it provokes evaluation of past performance, policies and procedures.
Weaknesses and deficiencies come to light and proper steps can be designed for
improvement. It is through coordinated planning that management secures optimum
combination of the factors of production for achieving maximum efficiency. The budget
serves as a instrument of communication through which action of different departments
and division are coordinated.

Differences of opinion and conflict of interest between executives and personal can more
be easily reconciled at an early stage. The usefulness of budgeting in cost control is equally
important. At the time of plan formulation, all department and division have to analyses
theirand justify their requirement before these are included in this budget. After the
department plan is approved, they become standards and thus set limits of expenditure. At
periodical intervals the actual expenses and performance of work are judged against
standards.
Deviations if any have to be accounted for by those who are responsible for the same.
 Step in Budgeting

Budgeting and budgetary control require the following steps to be taken:

1. Forecasting sales, indicating what quantity and quality of goods should be made
available.

2. Determining management policy with regard to the range of products, stock

levels, channels of distribution, investments, etc.

3. Preparing a production budget in accordance with the forecast and policies,

planning the needs for materials, labour, production and service facilities, along
with the costs involved

4. Preparing financial estimates as regards cash requirements for planned operations

5. Preparing a master budget combining and co-coordinating the individual budget.

6. Preparing statements and reports, evaluating current position and the budget.

Type of budget

Different type of budgets have been developed keeping in view the different purposes.
Some of the important budgets, which are related to the cost of production, have been
discussed in the present study as below:

Material budget:

Materials may be direct or indirect. Materials budget deals with direct materials.
Indirect materials are deal with under the works overhead budget. In some cases,
however, it may be desirable to include indirect materials and supplies in the material
budget. The budget should be related other production budget and the period of the
budget should be short duration because this has an important bearing on the cash
budget. Materials budget can be classified into material requirement budget and
material procurement of purchase budget. The former gives information about the total
quantity of materials required during the budget period to attain the production target;
while the letter provides information about the material to be acquired from themarket
during the budget period. Materials to be acquired are estimated after considering the
closing inventory and the opening inventory of the materials for which orders have
already been placed. Consideration must also be given the lag between the placing of
the order of the purchase of materials and the receipt of materials, the seasonal nature
in the availability of raw materials and the price trend inthe market. The buying
department should proceed to find the most profitable means of procuring the requisite
quantity and quality of raw material Calculation of the percentage of raw materials to
total cost of products will sometimes be useful for this purpose.
 Direct Labour Budget:
The direct labour budget embodies the estimates of direct labour requirements necessary to
carry out budgeted production, specifying either direct labor cost only or both direct labour
recruitment budgets. The former is developed on the basis of requirement of the production
budget given and detailed information regarding the different classes of labour required for
each department, their scales of pay and hours to be spent. This budget is prepared with a view
to enable the personnel department to carry out programs of training and transfer and to find
out sources of labour needed so that every effort may be made to remove difficulties arising
in production through lack of suitable personnel. Labour recruitment budget is prepared on
the basis of labour requirement budget the expected changes in the labour force during the
budget period due to the labour turnover. This budget gives information about the personnel
specifications for the jobs for which worker are to be recruited the degree of skill and
experience required and the rates of pay. In preparation of direct labour budget records ofthe
percentage of labour cost to total cost of each product/group or department will be
considerably helpful.
Factory Overhead Budget
Factory overhead budget is a forecast of all manufacturing overheads-fixed, variable and semi-
variable to be incurred during the budget period. Fixed manufacturing overheads can be
esdmated without much difficulty on the basis of the past information and knowledge of any
changes which may occur during the budget period. Variable overheads are changes which
may occur during the budget period. Variable overheads are estimated after considering the
scheduled production and operation conditions in the budget period. Factory overhead budget
has been visualized as an instrument to meet, to the extent possible, the unique challenge
presented by factory overhead accounting- the dual problem of allocation of factory overhead
to products and control of overhead which present different difficulties and require different
approaches
Administration Expenses Budget
Administration cost is by and large fixed in nature and, therefore, these budgets are prepared
for a given capacity on the pattern of fixed cost budgets. Preparation of administration budget
involves budgeting for top management information services, internal audit and taxation. The
budget can be prepared with the help of past experience and anticipated changes. Budget may
be prepared for each administration department so that responsibility for increasing such
expenses may be fixed related to the different executives.
Selling and Distribution Cost Budget
The selling and distribution costs budget, which is closely related to the sales budget, is the
forecast of the cost of selling and distributing, for the budget period. The budget includes all
expenses relating to selling, advertising, delivery of goods to customers etc. it is better if such
costs are analyzed according to product, types of customers, territories and the sales
departments in the organization itself Formation of this budget is the responsibility of the
executives of the sales departments. There must be a co-ordination of selling expenses with the
volume of sales expected and an effort should be made to control the costs of distribution.The
preparation of the budget would depends on the analysis of the market situations by the
management, advertising polices, research programs and the fixed and variable elements.
 Research and Development budget
Research activities include development of new products, betterment of existing products and
improvement of processes. The expenditure of research depends on nature of company's
products, economic condition, competition, technological development in related industry and
the policy of management. In large companies involved in multi product activities, expenditure
on research and development expenditure. For this reason, research expenditure is often based
on an established percentage of sale or estimated amount expected to be available during the
fourth coming budget period. This difficulty is experienced because there is no direct
relationship between benefits and research and development expenditure. The research and
development expenditure is based more on managerial judgment than quantitative data
available with the company. Here, control over research and development cost may be
exercised through a system of budget. Like all other budget, research and development budget
provides an effective tool for planning and balancing the research and development
programmed. The budget coordinates the cost of the programmed with the otherplans and
project of the company and also provides a means to the management for looking head about
the important aspects of the programmed and its problems involved.
Master Budget
Integrating all budgets into harmonious programme, the master budget is designed to project
the activities of a business entity during the budget period. It usually takes the form of budgeted
profit and loss account and balance sheet. It is prepared by the budget officer after all the
fimctional budgets have been prepared. The budget committee considers all the detailsand
adjudges it as satisfactory or otherwise. It is the company's individualized key to successful
financial planning and control. It sets out a basis for readily computing cost, profits and
financial conditions resulting from any sales volume and product mix. It provide the basis for
computing the effect of any changes in any phase of operations, such as sales volume, product
mix, prices, labour cost, material costs or change in facilities. It segregates income, costs and
profits by areas of responsibility. Master budget present all this information to the depth
appropriate for the top management's action. Any further breakdownthan this is available in
the detailed budget, and these detailed budgets support the summariesgiven in the aster budget
Fixed and flexible Budgeting
A fixed budget is so called because it is drawn on the assumption of a fixed level of activity.
It remains unchanged even when the level of activity (volume of production of sales) actually
attained is different from the one assumed for budgeting purposes. This budget sounds good
for fixed costs, which are not always affected by variation in activity level. From this point
arises the limitation of this budget, as it is not suitable for variable and semi-variable cost,
which varies in relation to the volume of production and sales. Thus, fixed budgeting is hardly
of any use for purposes of budgetary control. As a result of this limitation, flexible budget was
bom. Flexible budgets are schedules of costs or expenses that indicates how each cost or
expense should change with changes in volume or activity, i.e. what individual costs should be
at various volumes rather than at one specific or fixed volume. The Institute of Cost and
Management Accounts, London, defines flexible budget as "a budget, which by recognizing
the difference between fixed, semi-fixed and variable costs, is designed to change in relation
to the level of activity attained". The primary purpose of flexible budget, as
touched in the above definition, is to provide for unexpected circumstances as a result of the
shifts in economic currents permeating the economy in the wake of changes in physical,
political and social forces that are likely to detract from the role of budget as tool of planning
and control. The control mechanism will be more effective if the company succeeds in
adopting the concept of flexible budgeting. When the financial plan is embodied in flexible
budgets, success is further ensured

Standard Costing
One of the most important objectives of cost accounting is to provide necessary information
to management for cost control. Standard costing is one of the ways of planning cost by which
control fiinction of management can be effective. The word "Standard" simply means some
norm, specification or target. Standard cost is a predetermined or expected cost, which
determines what each product, or service should cost under given condition. The costing
terminology of the Institute of Cost and Management Accounting, London, defines: "Standard
cost is a predetermined cost based on a technical estimate for material, labour, andoverhead
for a selected period of time and for a prescribed set of working conditions".
Standard costing is a technique of costing which compares the standard cost of a product with
the actual cost. The Institute of Cost and Management Accountants, London, defines standard
costing as "the preparation and use of standard costs, their comparison with the actual costs,
and the analysis of variance to their causes and the points of incidence". Standard costing is a
technique, which is complementary to the actual costing or historical costing system.
Standard costs serve as a yardstick against which actual costs are compared to know the reasons
of inefficiencies. So, actual costing system cannot be ignored even if standard costingsystem
is adopted.
Establishment of Standards
Cost control can be touched in a standard costing process where inefficiencies are often
disclosed and corrected. Therefore, establishing cost centers, defining lines of authority and
assigning responsibilities to employees are considered to be the preliminary steps in setting
standards. Standard costs are established after a detailed study of all ftanctions, including
manufacturing, administrative, selling and distribution. Such a detailed study of operations
may also lead to improvement of methods and reduction in costs. Standards are set for the
three basic elements of cost and, therefore, the following standards are prepared:
(A) Direct material Cost Standards

Such a standard is closely related to the quantities and prices of materials to be used in
production. Hence, two related standards are set with a view to minimizing the material cost
of production:

Material Quantity (usage) standards:

This presumes the existence if adequate materials planning and controls procedures through
the use of materials whose quality, design and specification are standardized.The standard
quantity should take into consideration allowances for unavoidable factors as waste, spoilage.
shrinkage, evaporation, leakage, etc. A detailed listing of
all materials required for a product is made on a standard material specification card,which is
prepared by engineering department after consulting the past records.

Materials Price Standards:

Setting of material price standards is often quite difficult because price used for themare
controlled more by external factors rather than the internal management of business firms.
Therefore, standard price for each item of material is fixed by carefully studying the definite
ftiture period and after a due consideration of the efficiency of purchasing and storekeeping
function. The aim of setting material pricesstandard is to achieve maximum efficiency in those
Sanction and to minimize direct material cost through discount on purchases, economy of
bulk purchasing, anticipatedchanges in market price and such other factors. Hence, purchase
department is ultimately responsible for development of these standards.

(B) Direct Labour Cost Standards

In a standard cost system, there are two different types of labour cost standards- ratestandard
and time standard. The standard time for each operation multiplied by the standard labour
rate gives the standard labour for the operation.

Labour Time Standards:

These are also known as labour quantity or performance standards. They indicate theprecise
time (Hours) that labour of a particular grade should take to perform a given operation. They
are developed after standardizing the time to be taken for each category of labour and for
each operation involved. It is also desirable to standardize factory methods for every
operation to be performed. The pre-standardization of operations affects not only such factors
as plant layout, lighting, work place arrangement and selection of equipment but also the
systems for scheduling work, routing materials, providing helpers and instructing operators.
The main object of setting standard labour time is to derive maximum efficiency in the use
of labour.

Time standard is based on the following methods:

1. Time and Motion study

2. Average of past performance
3. Test runs
4. Work sampling. The first method proves to be more scientific
Labour Rate Standards:
The rate standard refers to the wage rate expected to be paid to different grades of labor
employed to perform different operations in an organization. Fixation of such standard requires
consideration of past records, present status of the labour market and the estimated future trends
with the object to plan the actual wages to be paid. However, it is very difficult to generalize
the procedure for developing standard rate for labour each situation requires special study and
regard to the factors involved, and therefore, different methods of setting standards may be
required in each case. There is not much scope for the control of labour rates by departmental
heads because the rate are the result of collective bargaining negotiations with union and ruling
of Government bodies. Thus, the part played by labour rate standards in the control of
production operations is very much limited. Hence, it does notcommand particular managerial
attention
(c) Overhead Cost Standards:
Overheads can be classified as manufacturing, administration, selling and distribution
overheads. They may also be further classified as fixed and variable. Setting of standard
overhead rates are much more complicated exercise than the establishment of standards for
direct material and direct labour which are also variable in nature. However, fixation of
standard overhead rate requires first determination of level of production / activity, which can
be attained with reference to any of the capacities such as maximum capacity and then reduced
to a common base such as direct labour hours, machine hours, direct labour cost, units of
production, etc. The second step is the determination of standard overhead estimate with the
help of a system of budgetary controls, particularly, flexible budget. Finally, is the
classification of overheads into fixed, variable and semi- variable. Standard overhead rate
should be determined for fixed as well as variable expenses. The standard overhead rate is
determined on the basis of past records and future trend of prices. It can be calculated as per
the following formula:
The overall aim of setting such standard overhead rates is to minimize the overhead costs
chargeable to production because on the basis of this the overhead would be absorbed into the
product cost. The use of standard cost for fixed factory overhead is meaningless for purpose of
control of production operations, as the responsibility of incurring such costs lies with the top
management level. Therefore it is said that the utility of standard factor overhead is in planning
and product costing rather than management control. However, the use of factory overhead
rate as a control technique can be arrived at by separating the elements of factory overhead into
fixed and variable and applying different rate for each. Similar is the case with most
administrative costs, which are determined by policy rater than by the volume of production
or sales. Yet, the administrative functions must be carefully watched and controlled so that
they may not grow out of proportion to the services received. Hence, setting standard
administrative costs is considered to be very useful. In case of selling and distribution expenses,
which are related primarily to the sales volume, preparing sales forecast is considered to be
must for the purpose of determining selling and distribution overhead standard. After fixing
the standards for direct material cost, direct labour cost and overhead cost separately, the total
standard cost of manufacturing a product or taking up a specific operation can be known by
just aggregating the different costs. Cost control is more effective under standard costing if the
standards are reviewed at intervals with a view to improvement. Prompt action can be taken
when deviations from standard are noticed. This leads to cost control and improvement of
efficiency to the best advantage of the organization as a whole. Standard costing serves also as
a valuable aid to management in formulating production and prices being charged due to
inefficient production.
Analysis of variances Cost variance is the different between standard cost and the comparable
actual cost for a particular period. According to the Terminology of the Chartered Institute of
Management Accountants, London, "A variance is the difference between planned, budgeted
or standard cost and actual costs". In situation where actual cost exceeds standard costs, it is
said to be unfavorable or debit variance and viewed as losses. But in a reverse case it is
favorable or credits variance and considered as saving. Another method of classifying the
variance may be as controllable and uncontrollable variances. If a variance is due to
inefficiency can be corrected by taking a suitable action. On the other hand uncontrollable
variance is not amenable to control by individual or departmental action. Such a variance is
caused by external factors, like change in market conditions. They indicate whether, and to
what extant, standards set have been achieved. This enables management to correct adverse
tendencies, if any. In a standard cost system, variance analysis refers to an examination of the
conditions of operation, which gives rise to any cost variance along with explanation. It also
involves determination of the contribution of each casual factor to the overall variance and
implies devising suitable steps for the control of cost wherever necessary. Therefore analyses
of variances are helpful in controlling the performance and achieving the profits planned for.
Variances are to be computed distinctly for different elements of cost. Hence, the main types
of variances that can be analyzed are presented in the following chart, as in fig. 1.2 most of
these variances play a vital role in the system of cost control if are properly investigated. On
the findings of such investigation corrective action is taken, and better performance rewarded.
 Cost Control Ratios

Ratios have always played an important role in exercising operational and cost control. Such
ratios are indications of the overall health of an organization through expressing the
relationship between two or more variable. This is will highlighted in making a link between
the activity, capacity and efficiency of an organization because one such ratio will not reveal
satisfactory for control purposes. The three together will provide enough attention on
production volume, capacity utilization and productivity. Normally, rations are expressed in
terms of percentages. If particular ratios are 100% or more, the trend is taken as favorable.
However, it is unfavorable if the ratio is less than 100%. While making such ratios production
standards are set in units of output per hour. The output is expressed in terms of standard
hours i.e. the actual production is translated into standard hours irrespective of the actual hours
taken to achieve it. Three important ratios are commonly used by the management to find out
whether the deviations of actual from budgeted results are favorableor otherwise:
Activity Ratio
Level of activity or production volume refers to the volume of output of a manufacturing
concern. Such volume may differ each year depending upon the production facility available
subject to sales and inventory factory. Therefore, the actual volume does not necessarily be
the budgeted volume. This has emerged the calculation of activity ratio, which is a
measurement, and expression of actual volumes as compared to budgeted volume. Thus
activity ratio measures the level of activity at which the firm is operating. It show the extentto
which production facilities have been utilized as compared with that contained in the budget.
The standard hour's equivalent to actual production is expressed as a percentage of the standard
hour's equivalent to budgeted production, as per the following formula:

If the ratio attained, for example, is 80%. This means that the company has achieved 80% of
the target that it planned to achieve. That is, 20%) of budgeted production has been lost.
Capacity Ratio
The term capacity refers to the total facility available in a factory, and is usually expressed in
terms of hours the plant is planned to work rather than the unit it is planned to produce.
Capacity ratio, therefore, is a measure of the use of resources in a given plant. It indicates the
extent to which the capacity of the factory has been actually utilized. Thus, the ratio presents
the relationship between actual number of working hours and the budgeted working hours.
This ratio highlights the extent of any idle capacity

If for example, the ratio is 70%. That means that the factory is operating with only 70% of the
budgeted capacity, so there has been under utilization of capacity available by as much as 30%
Efficiency Ratio
Efficiency ratio also called production ratio. It indicates the degree of efficiency attained in
production. It shows the time taken for production is better or worse than the time allowed by
standards. It is arrived at when the standard hours for actual production are expressed as a
percentage of the actual hours spent in producing the same work.

If such ratio is favorable, i.e. more than 100% this means that the labour has worked much
more efficiently than the standards laid down. The opposite will be if the ratio is adverse, i.e.
less than 100%. It is worth nothing here that if the actual production per hour is the same as
budgeted, and then the activity and capacity ratios will also be the same. Moreover, under nay
circumstances, the value of activity ratio will be equal to the value of capacity ratio into the
value of efficiency ratio (i.e. Activity Ratio= Capacity Ratiox Efficiency Ratio)
 Value Analysis

Value Analysis is a recent powerful technique of reducing costs whose essence is to analyze
the value of goods and services purchased in relation to their use. Value analysis consists in
the increased use of alternative, less expensive materials, abilities of specialized suppliers,
cheaper designs and purchasing, and newer methods of manufacture. The basis idea of value
analysis is to analyze and examine the functions of product or service with a view to
improving the value. Thus, value can be improved by either improving the function or by
reducing the cost and most economically by reducing cost and improving function both
simultaneously. Hence, value is a relationship between function and cost as expressed by the
following formula:

Value analysis in an exercise whose purpose is to optimize resources utilization and make, as
far as possible, cost equals to worth. This aim has invited analytical and creative techniques in
order to accomplish the functions, which make a product's value at the lowest overall cost. It
is in this context that functions have to be continually examined and indentified as basic or
secondary as it is the secondary functions, which are often found unnecessary. Here, the
relative importance's of different functions have to be organized in an ascending order starting
from the higher order function to the lower order function. This practice will throw light on
those areas where cost should really be incurred for good vale. Thus, creative is the basis in
the functional analysis. Maximum creative energies are exercised in the identification of
unnecessary cost involved in different function and in elimination of them. From all mentioned
above, it could be remarked that the two key feature of value analysis are function and
creativity. The Charted Institute of Management Account, London, defines value analysisas "a
systematic, interdisciplinary examination of factors affecting the cost of a product or service
in order to devise means of achieving the specified purposes most economically at therequired
standard of quality and reliability" The operation of a value analysis programme willdepend
heavily on two conceptual tools- Design analysis and cost analysis of the required material-
which will help the industry to save money that can be passed on to the consumer through a
reduction in the selling price
Design analysis
This is study of all facets of the design of a given part in relation to the function it performs. It
does not deal with the appraisal of any given part; rather, in a broader point of view it considers
whether that part performs the required ftinction both as efficiently and inexpensively as
possible. This aim can be arrived at by eliminating some parts without actually affecting the
operation of the complete unit, by simplifying the design of the part andproduction method to
reduce its basic cost or by using less expensive but equally satisfactorymaterials in the part. As
a result of design changes, most expensive operations requiring special setup are substituted
with standardized production operation.
Cost Analysis
Many manufacturers do not set the selling prices of their products entirely on cost incurred.
This might be due to the difficulties in arriving at the exact cost of specific products in case of
multi-product cost accounting or might refer to the pricing policy the company adopts or else,
it is just tot follow the industry leader in establishing product prices. All this shall leave the
industrial buyer in an atmosphere of hesitation whether he is paying a fair price or not. Tohelp
the purchaser in this context, the concept of a supplier's probable cost of producing a given
product. It is an estimation of the analyst, with the use of wage data, material price listsand
various industry time standards can determine a total theoretical cost, which reasonably
approximates the actual cost. To this figure is added a reasonable profit margin to arrive at, as
far as possible, the selling price. This provides the buyer with power-negotiating tools.
Moreover, cost analysis has become an extremely useful mean of locating high cost parts,
which should be subjected to design analysis. Subsequent design analysis after isolating high-
cost elements often leads to specification and production modifications and ultimately to
reduce costs. The complete value analysis study is concluded in seven stepsproduct selection,
information, speculation, analysis, decision and action, evaluation and presentation,
speculation, analysis, decision and action evaluation and presentation. All of them studied
together careftilly will lead to maximum economy in the value of product with optimum
utilization of resources with the lowest overall cost.
 Quality Control

Quality control is a system of testing and inspection through which the product comes up as
per the standards and specifications required. The objectives of such quality control system
are to provide the customers with quality products according to their preferences, to have a
control over the performance efficiency of a manufacturing operation or process, and to
prevent and eliminate waste. Lesser rejections result in lower cost and simultaneously cheaper
price. Thus, quality control is a technique of cost control through inspection, which highlights
sub-standard or less efficient work, so that corrective action can be taken to improve it. Cost
reduction, too, may be effected through an efficient system of quality control. This can be
illustrated by stage wise or operation wise inspection so that substandardwork is detected in
the earlier stages of manufacture. This result in saving fiirther cost could be incurred on
subsequent operations.
In any business organization, profit is the ultimate goal. To achieve this, there are several
approaches. Profit may be maximized by cutting costs for the same selling price per unit. If it
is a monopolistic business, without giving much of importance to the cost reduction programs,
the price may be fixed suitably to earn sufficient profit. But, to survive in a competitive
business environment, goods and services produced by a firm should have the minimum
required quality. Extra quality means extra cost. So, the level of quality should be decided in
relation to other factors such that the product is well absorbed in the market. In allthese cases,
to have repeated sales and thereby increased sales revenue, basic quality is considered to be
one of the supportive factors. Quality is a measure of how closely a good or service conforms
to specified standard. Quality standards may be any one or a combination ofattributes and
variables of the product being manufactured. The attributes will include performance,
reliability, appearance, commitment to delivery time, etc., variables may be some measurement
variables like, length, width, height, diameter, surface finish, etc.
 The Role of Cost Control Software

It’s no secret that cost management and control are data and analysis-heavy fields, and
it’s no surprise then why software developers have found an application for automation
here. Software-based management optimizes the process in multiple ways:

 Tedious calculations and other quantitative tasks are almost instant and immuneto
human error through software.
 Analysis is much easier when the data is clearly reported through dashboards andeasy-
to-use user interfaces.
 Standardization of data is automatic this way, which can be useful for projects onan
international scale that must use multiple currencies.
 Third-party integrations with other management solutions help pool data more
effectively.

Cost Management vs. Cost Control

You may hear terms like “cost management” and “cost control” used interchangeably.
While they are heavily related and equally important, there’s a subtle distinction that might
be worth knowing whenever you’re talking with your teams about them.

Cost management primarily deals with all the processes regarding budget planning, including
estimation, financing, and funding. To manage costs requires attention from the planning
phases to final completion, ensuring the project as a whole stays within approved budgetary
limits. A critical step of cost management is making both indirect and direct costs more
predictable through strong accountability, control, and informationgathering.

By comparison, cost control mainly deals with projects during their execution phase and
relies on cost management practices for success. Having planners work with each other to
achieve proper budgeting is how cost controls work.

When talking about cost controls, business owners first put down a “baseline” and then
measure the variance between it and the actual cost, taking corrective action to minimize
unexpected spikes.
 Control Process Steps

Handling business expenses is definitely not a “set it and forget it” consideration. Rather,
think of it as a continuous, cyclical process that involves the following steps:

1. Resource Planning

Cost control starts by implementing project controls; predicting the upcoming costs of a project,
whether it’s for equipment, materials, staff, or even just time spent. The resourceplanning
step occurs before the actual work begins.

Companies often use the work-breakdown structure to examine each subtask in the
schedule and decide on what skills or equipment are necessary for each. Historical financial
data for comparable projects and feedback from team members are importantpoints to
consider for this task.

2. Estimating Cost

Next approximate the overall cost of resources needed for the work. Cost estimation is a
complicated matter that depends on your current budget and how much information you have
available. We’ll talk more about cost estimation later.

3. Budgeting

Once the work is underway, the next step is allocating the budget to each task. Cost budgeting
is a combination of applying the estimated costs to project scheduling. Everyactivity in
the workflow gets its own specific amount of the budget here.

4. Cost Monitoring

Finally, project management needs to cover handling changes in the budget. Cost control
measures the variance of the actual costs from the predetermined baseline cost and takes
action whenever necessary. This step also requires you to check the actual results of those
actions.
 Cost Estimation Techniques to Consider

We’ve mentioned estimation as an important step in managing costs. Let’s dig deeper by
talking about some exact techniques for making accurate estimates, especially since budgeting
for complex workflows can be a challenge.

Factor Estimation

Projects are almost never fully “figured out” when they begin. The scope might not be fully
defined, and certain features may still need some work. It would be a waste of timeto form
a detailed budgetary analysis now since it would likely change quickly.

The factor estimation method is the fastest way to get a general overview of what to expect.
The industrial sector is familiar with one convenient trick known as the sixth-tenths
rule, where the expected cost goes up by six-tenths as the size of the manufacturing
facility increases.

Parametric Estimation

Past financial data is an invaluable tool for accurately predicting new expenses. Parametric
methods involve analyzing previous contract prices and values and findingout the
relationships between materials and labor in previous works.

For instance, you might notice that the thickness of the sheets of metal used in an engineering
project consistently correlate to higher costs. Think about ways you can use that
information the next time a similar project begins.

Quantitative Factor

As the workload progresses, you will slowly gain more insight and have a clearer picture
in your mind of how it will finish. The quantitative factor estimation builds on the “factor
estimation” step from earlier by attaching empirical data you gain during projectexecution to
figure out more precise estimations.

Resource-Based Estimation

The resource-based technique is an option if time is considered a sensitive asset. Here, the
team will estimate and manage the amount of time it takes to complete a certain portion of
the work and schedule it to a calendar. Keeping the duration of the workloadunder control
can be just as important as keeping monetary costs low.
Unit-Rate

It may seem obvious, but simply extrapolating the entire cost by using a smaller unit of cost
as a benchmark is an effective method. For instance, a short pipe might cost $15 andrequire
an hour of installation time. If you’re using 20 of these pipes, you can expect the cost to be
around $300 and 20 hours of work.

While not always accurate (installation time may be shorter the more units you install at
a time, for example), unit-rate will always be a tool on the table of any cost engineer.

Cost Control Takes Time

You can’t pick up everything you need to know about cost control in an hour. The process
is actually multifaceted and requires you to work closely with your employeesand
project managers. But you can be sure this effort will ultimately lead to increased
productivity.

Finding the Baseline

Start the process by first establishing a baseline to compare against actual costs. Use
historical financial data to find a realistic target and find a theoretical “ideal” final cost
of the project.

Target Net Income

Target net income is a metric calculated by taking the reported profits from sales and
subtracting the fixed costs and the variable costs. Reaching this amount is important, especially
for public companies with investors who expect earnings growth over time.

As an example, imagine a business wants $15,000 in net income from $80,000 sales each
month. The management looks at the fixed and variable costs and attempts to reduce the
costs until the target net income is reached.

Variable costs include things like inventory, which can be reduced by switching to cheaper
suppliers. Fixed costs are usually more difficult to change, as they are often things like
lease payments that are on contract. Fixed costs also include the salaries usedto pay
employees.
Variance Analysis

Variance is the difference between budgeted and actual financials. When the actual cost
is much higher than the expected figure, this high, negative variance deserves investigation
to identify the cause and figure out solutions.

Variance analysis allows you to prioritize essential areas by discovering which ones need
corrective actions the most.

Earned Value Management

One of the most popular approaches to cost analysis, earned value management (EVM)
should be explained through example. Say that you have a task that you expect to be halfway
done by the end of the week. The budget for it is $5,000.

If, however, the task is only 25% complete after one week, what implication is there for
the project? We can say that the planned value is the project budget multiplied by theexpected
completion, which in this case is $5,000 x 50% = $2,500.

The actual value, however, is only $5,000 x 25% = $1,250. We can now calculate the
scheduled variance by subtracting the planned value from the actual value: $1,250 –
$2,500 = -$1,250.

Because the variance is negative, we can tell that this project is falling behind
financially, signaling management to take corrective action.

Working Without a Budget

Not all businesses operate on an exact budget. However, you can still do cost control by
plotting individual costs on an income statement. If there’s a sudden spike in prices, investigate
it for potential fixes.
 Common Challenges of Cost Control

Even experienced companies occasionally have missteps during cost control operations.
It’s worth going over a few pitfalls and challenges to the process as well. They include:

Mistaking cost analysis with accounting: Accounting deals mainly with just counting up
the costs among other tasks, whereas cost control goes deep into aproject and plans
out the funding.
Consistently analyzing budget and predictions: Calculating the budget and predicting
cost control is often performed by separate employees, resulting ininconsistent
analyses that could compromise the reliability of the results.
Aligning data from multiple sources: Relevant financial data can come from a variety of
subcontractors and content management systems. It takes a degree oforganization and
skill to ensure all this data is usable.
Aligning time and money: In the same vein, there’s a discrepancy between project
schedulers who schedule the workload according to activities and tasks and costanalysts who
use transactions and fiscal periods. Making these two sources comparable is another
challenge of cost control.
Accommodating project changes: As a project goes along, the scope, features, or goals
may change over time. How does cost control, which relies on predictingfuture
expenses, work around this challenge?
Controlling the cost of cost control itself: It can be time-consuming and error- prone to
perform cost control, from the data collection to the analysis to executing the corrective
actions. What results is another form of cost to consider.

Regardless of the setbacks, a well thought-out cost control system can set an
organization up for success. Standardizing the process and giving the company
flexibility is the best way to deal with complicated or changing projects.

Investing in technology is one of the best steps to take to boost the chances of projectsuccess
and minimize risks.

Implement a Cost Control System Built Around Best Practices

You now know the basics of cost control, key benefits, and potential challenges you may
encounter when implementing a cost control system.

It’s important to remember that to have a competitive advantage, cost control requires
constant communication and collaboration among everyone in your team. A successful
initiative means starting small, defining your expectations early, understanding your costs
and risks, and leveraging the right cost management software.
 The Cost Control Problem

During the execution of a project, procedures for project control and record keeping become
indispensable tools to managers and other participants in the construction process. These tools
serve the dual purpose of recording the financial transactions that occur as well as giving
managers an indication of the progress and problems associated with a project. The problems
of project control are aptly summed up in an old definition of a project as "any collection of
vaguely related activities that are ninety percent complete, over budget and late." [1]The task
of project control systems is to give a fair indication of the existence and the extent of such
problems.

In this chapter, we consider the problems associated with resource utilization, accounting,
monitoring and control during a project. In this discussion, we emphasize the project
management uses of accounting information. Interpretation of project accounts is generally
not straightforward until a project is completed, and then it is too late to influence project
management. Even after completion of a project, the accounting results may be confusing.
Hence, managers need to know how to interpret accounting information for the purpose of
project management. In the process of considering management problems, however, we shall
discuss some of the common accounting systems and conventions, although our purpose is not
to provide a comprehensive survey of accounting procedures.

The limited objective of project control deserves emphasis. Project control procedures are
primarily intended to identify deviations from the project plan rather than to suggest possible
areas for cost savings. This characteristic reflects the advanced stage at which project control
becomes important. The time at which major cost savings can be achieved is during planning
and design for the project. During the actual construction, changes are likely to delay the
project and lead to inordinate cost increases. As a result, the focus of project control is on
fulfilling the original design plans or indicating deviations from these plans, rather than on
searching for significant improvements and cost savings. It is only when a rescue operation is
required that major changes will normally occur in the construction plan.

Finally, the issues associated with integration of information will require some discussion.
Project management activities and functional concerns are intimately linked, yet the techniques
used in many instances do not facilitate comprehensive or integrated considerationof project
activities. For example, schedule information and cost accounts are usually kept separately. As
a result, project managers themselves must synthesize a comprehensive view from the different
reports on the project plus their own field observations. In particular, managers are often forced
to infer the cost impacts of schedule changes, rather than being provided with aids for this
process. Communication or integration of various types of information can serve a number of
useful purposes, although it does require special attention in the establishment of project control
procedures.
 The Project Budget

For cost control on a project, the construction plan and the associated cash flow estimates can
provide the baseline reference for subsequent project monitoring and control. For schedules,
progress on individual activities and the achievement of milestone completions can be
compared with the project schedule to monitor the progress of activities. Contract and job
specifications provide the criteria by which to assess and assure the required quality of
construction. The final or detailed cost estimate provides a baseline for the assessment of
financial performance during the project. To the extent that costs are within the detailed cost
estimate, then the project is thought to be under financial control. Overruns in particular cost
categories signal the possibility of problems and give an indication of exactly what problems
are being encountered. Expense oriented construction planning and control focuses upon the
categories included in the final cost estimation. This focus is particular relevant for projects
with few activities and considerable repetition such as grading and paving roadways.

For control and monitoring purposes, the original detailed cost estimate is typically converted
to a project budget, and the project budget is used subsequently as a guide for management.
Specific items in the detailed cost estimate become job cost elements. Expenses incurred
during the course of a project are recorded in specific job cost accounts to be compared with
the original cost estimates in each category. Thus, individual job cost accounts generally
represent the basic unit for cost control. Alternatively, job cost accounts may be disaggregated
or divided into work elements which are related both to particular scheduled activities and to
particular cost accounts. Work element divisions will be described in Section

In addition to cost amounts, information on material quantities and labor inputs within each job
account is also typically retained in the project budget. With this information, actual materials
usage and labor employed can be compared to the expected requirements. As a result, cost
overruns or savings on particular items can be identified as due to changes in unitprices, labor
productivity or in the amount of material consumed.

The number of cost accounts associated with a particular project can vary considerably. For
constructors, on the order of four hundred separate cost accounts might be used on a small
project. These accounts record all the transactions associated with a project.
 Forecasting for Activity Cost Control

For the purpose of project management and control, it is not sufficient to consider only the
past record of costs and revenues incurred in a project. Good managers should focus upon
future revenues, future costs and technical problems. For this purpose, traditional financial
accounting schemes are not adequate to reflect the dynamic nature of a project. Accounts
typically focus on recording routine costs and past expenditures associated with activities.
[4] Generally, past expenditures represent sunk costs that cannot be altered in thefuture and
may or may not be relevant in the future. For example, after the completion of some activity,
it may be discovered that some quality flaw renders the work useless.
Unfortunately, the resources expended on the flawed construction will generally be sunk and
cannot be recovered for re-construction (although it may be possible to change the burden of
who pays for these resources by financial withholding or charges; owners will typically attempt
to have constructors or designers pay for changes due to quality flaws). Since financial
accounts are historical in nature, some means of forecasting or projecting the future course of
a project is essential for management control. In this section, some methods for costcontrol and
simple forecasts are described.

An example of forecasting used to assess the project status is shown in Table 12-4. In this
example, costs are reported in five categories, representing the sum of all the various cost
accounts associated with each category:

 Budgeted Cost
The budgeted cost is derived from the detailed cost estimate prepared at the start of
the project. Examples of project budgets were presented in Section 12.2. The factors
of cost would be referenced by cost account and by a prose description.
 Estimated total cost
The estimated or forecast total cost in each category is the current best estimate of costs
based on progress and any changes since the budget was formed. Estimated totalcosts
are the sum of cost to date, commitments and exposure. Methods for estimating total
costs are described below.
 Cost Committed and Cost Exposure!! Estimated cost to completion in each category
in divided into firm commitments and estimated additional cost
or exposure. Commitments may represent material orders or subcontracts for whichfirm
dollar amounts have been committed.
 Cost to Date
The actual cost incurred to date is recorded in column 6 and can be derived from the
financial record keeping accounts.
 Over or (Under)
A final column in Table 12-4 indicates the amount over or under the budget for each
category. This column is an indicator of the extent of variance from the project budget;
items with unusually large overruns would represent a particular managerial concern.
Note that variance is used in the terminology of project control to indicate adifference
between budgeted and actual expenditures. The term is defined and used
  quite differently in statistics or mathematical analysis. In Table 12-4, labor costs are
running higher than expected, whereas subcontracts are less than expected.

The current status of the project is a forecast budget overrun of $5,950. with 23 percent of the
budgeted project costs incurred to date.

For project control, managers would focus particular attention on items indicating substantial
deviation from budgeted amounts. In particular, the cost overruns in the labor and in the "other
expense category would be worthy of attention by a project manager in Table 12-4. Anext step
would be to look in greater detail at the various components of these categories.
Overruns in cost might be due to lower than expected productivity, higher than expected wage
rates, higher than expected material costs, or other factors. Even further, low productivity
might be caused by inadequate training, lack of required resources such as equipment or tools,
or inordinate amounts of re-work to correct quality problems. Review ofa job status report is
only the first step in project control.

The job status report illustrated in Table 12-4 employs explicit estimates of ultimate cost in
each category of expense. These estimates are used to identify the actual progress and status
of a expense category. Estimates might be made from simple linear extrapolations of the
productivity or cost of the work to date on each project item. Algebraically, a linear estimation
formula is generally one of two forms. Using a linear extrapolation of costs, the forecast total
cost, Cf , is:
where Ct is the cost incurred to time t and pt is the proportion of the activity completed at time
t. For example, an activity which is 50 percent complete with a cost of $40,000 would be
estimated to have a total cost of $40,000/0.5 = $80,000. More elaborate methods of forecasting
costs would disaggregate costs into different categories, with the total cost the sum of the
forecast costs in each category.

Alternatively, the use of measured unit cost amounts can be used for forecasting total cost.
The basic formula for forecasting cost from unit costs is:

where Cf is the forecast total cost, W is the total units of work, and ct is the average cost perunit
of work experienced up to time t. If the average unit cost is $50 per unit of work on a particular
activity and 1,600 units of work exist, then the expected cost is (1,600)(50) =
$80,000 for completion.

The unit cost in Equation (12.2) may be replaced with the hourly productivity and the unit
cost per hour (or other appropriate time period), resulting in the equation:

where the cost per work unit (ct) is replaced by the time per unit, ht, divided by the cost per
unit of time, ut.

More elaborate forecasting systems might recognize peculiar problems associated with work
on particular items and modify these simple proportional cost estimates. For example, if
productivity is improving as workers and managers become more familiar with the project
activities, the estimate of total costs for an item might be revised downward. In this case, the
estimating equation would become:

where forecast total cost, Cf, is the sum of cost incurred to date, Ct, and the cost resulting
from the remaining work (W - Wt) multiplied by the expected cost per unit time period for
the remainder of the activity, ct.

As a numerical example, suppose that the average unit cost has been $50 per unit of work, but
the most recent figure during a project is $45 per unit of work. If the project manager was
assured that the improved productivity could be maintained for the remainder of the project
(consisting of 800 units of work out of a total of 1600 units of work), the cost estimate would
be (50)(800) + (45)(800) = $76,000 for completion of the activity. Note that this forecast uses
the actual average productivity achieved on the first 800 units and uses a forecast of
productivity for the remaining work. Historical changes in productivity might also be used to
represent this type of non-linear changes in work productivity on particular activities over time.
In addition to changes in productivities, other components of the estimating formula can be
adjusted or more detailed estimates substituted. For example, the change in unit prices due to
new labor contracts or material supplier's prices might be reflected in estimating future
expenditures. In essence, the same problems encountered in preparing the detailed cost
estimate are faced in the process of preparing exposure estimates, although the number and
extent of uncertainties in the project environment decline as work progresses. The only
exception to this rule is the danger of quality problems in completed work which would require
re-construction.

Each of the estimating methods described above require current information on the state of
work accomplishment for particular activities. There are several possible methods to develop
such estimates, including [5]:

 Units of Work Completed

For easily measured quantities the actual proportion of completed work amounts can
be measured. For example, the linear feet of piping installed can be compared to the
required amount of piping to estimate the percentage of piping work completed.
 Incremental Milestones
Particular activities can be sub-divided or "decomposed" into a series of milestones,
and the milestones can be used to indicate the percentage of work complete based on
historical averages. For example, the work effort involved with installation of
standard piping might be divided into four milestones:
o Spool in place: 20% of work and 20% of cumulative work.
o Ends welded: 40% of work and 60% of cumulative work.
o Hangars and Trim Complete: 30% of work and 90% of cumulative work.
o Hydrotested and Complete: 10% of work and 100% of cumulative work.

Thus, a pipe section for which the ends have been welded would be reported as 60%
complete.

 Opinion
Subjective judgments of the percentage complete can be prepared by inspectors,
supervisors or project managers themselves. Clearly, this estimated technique can be
biased by optimism, pessimism or inaccurate observations. Knowledgeable estimaters
and adequate field observations are required to obtain sufficient accuracy with this
method.
 Cost Ratio
The cost incurred to date can also be used to estimate the work progress. For example,
if an activity was budgeted to cost $20,000 and the cost incurred at a particular date
was $10,000, then the estimated percentage complete under the cost ratio method would
be 10,000/20,000 = 0.5 or fifty percent. This method provides no independent
information on the actual percentage complete or any possible errors in the activity
budget: the cost forecast will always be the budgeted amount. Consequently, managers
must use the estimated costs to complete an activity derived from the cost ratio method
with extreme caution.

Systematic application of these different estimating methods to the various project activities
enables calculation of the percentage complete or the productivity estimates used in preparing
job status reports.
 Estimated Total Cost to Complete an Activity

Suppose that we wish to estimate the total cost to complete piping construction activities on a
project. The piping construction involves 1,000 linear feet of piping which has been divided
into 50 sections for management convenience. At this time, 400 linear feet of piping has been
installed at a cost of $40,000 and 500 man-hours of labor. The original budget estimate was
$90,000 with a productivity of one foot per man-hour, a unit cost of $60 per man hour and a
total material cost of $ 30,000. Firm commitments of material delivery for the $30,000
estimated cost have been received.

The first task is to estimate the proportion of work completed. Two estimates are readily
available. First, 400 linear feet of pipe is in place out of a total of 1000 linear feet, so the
proportion of work completed is 400/1000 = 0.4 or 40%. This is the "units of work completed"
estimation method. Second, the cost ratio method would estimate the work complete as the
cost-to-date divided by the cost estimate or $40,000/$ 90,000 = 0.44 or 44%. Third, the
"incremental milestones" method would be applied by examining each pipe section and
estimating a percentage complete and then aggregating to determine the total percentage
complete. For example, suppose the following quantities of piping fell into four categories of
completeness:

complete (100%) 380 ft

hangars and trim complete (90%) 20 ft
ends welded (60%) 5 ft
spool in place (20%) 0 ft

Then using the incremental milestones shown above, the estimate of completed work would
be 380 + (20)(0.9) + (5)(0.6) + 0 = 401 ft and the proportion complete would be 401 ft/1,000
ft = 0.401 or 40% after rounding.

Once an estimate of work completed is available, then the estimated cost to complete the
activity can be calculated. First, a simple linear extrapolation of cost results in an estimate of
$40,000/0.4 = $100,000. for the piping construction using the 40% estimate of work
completed. This estimate projects a cost overrun of 100,000 - 90,000 = $10,000.

Second, a linear extrapolation of productivity results in an estimate of (1000 ft.)(500 hrs/400

ft.)($60/hr) + 30,000 = $105,000. for completion of the piping construction. This estimate
suggests a variance of 105,000 - 90,000 = $15,000 above the activity estimate. In making this
estimate, labor and material costs entered separately, whereas the two were implicitly
combined in the simple linear cost forecast above. The source of the variance can also be
identified in this calculation: compared to the original estimate, the labor productivity is 1.25
hours per foot or 25% higher than the original estimate
 Estimated Total Cost for Completion

The forecasting procedures described above assumed linear extrapolations of future costs,
based either on the complete experience on the activity or the recent experience. For activities
with good historical records, it can be the case that a typically non-linear profile of cost
expenditures and completion proportions can be estimated. Figure 12-1 illustrates one possible
non-linear relationships derived from experience in some particular activity. The progress on
a new job can be compared to this historical record. For example, point A in Figure 12-1
suggests a higher expenditure than is normal for the completion proportion. This point
represents 40% of work completed with an expenditure of 60% of the budget. Since the
historical record suggests only 50% of the budget should be expended at time of 40%
completion, a 60 - 50 = 10% overrun in cost is expected even if work efficiency can be
increased to historical averages. If comparable cost overruns continue to accumulate, then the
cost-to-complete will be even higher.
 Financial Accounting Systems and Cost Accounts

The cost accounts described in the previous sections provide only one of the various
components in a financial accounting system. Before further discussing the use of cost
accounts in project control, the relationship of project and financial accounting deserves
mention. Accounting information is generally used for three distinct purposes:

 Internal reporting to project managers for day-to-day planning, monitoring and

control.
 Internal reporting to managers for aiding strategic planning.
 External reporting to owners, government, regulators and other outside parties.

External reports are constrained to particular forms and procedures by contractual reporting
requirements or by generally accepted accounting practices. Preparation of such external
reports is referred to as financial accounting. In contrast, cost or managerial accounting is
intended to aid internal managers in their responsibilities of planning, monitoring and control.

Project costs are always included in the system of financial accounts associated with an
organization. At the heart of this system, all expense transactions are recorded in a general
ledger. The general ledger of accounts forms the basis for management reports on particular
projects as well as the financial accounts for an entire organization. Other components of a
financial accounting system include:

 The accounts payable journal is intended to provide records of bills received from
vendors, material suppliers, subcontractors and other outside parties. Invoices of
charges are recorded in this system as are checks issued in payment. Charges to
individual cost accounts are relayed or posted to the General Ledger.
 Accounts receivable journals provide the opposite function to that of accounts
payable. In this journal, billings to clients are recorded as well as receipts. Revenues
received are relayed to the general ledger.
 Job cost ledgers summarize the charges associated with particular projects, arranged
in the various cost accounts used for the project budget.
 Inventory records are maintained to identify the amount of materials available at any
time.

In traditional bookkeeping systems, day to day transactions are first recorded in journals. With
double-entry bookkeeping, each transaction is recorded as both a debit and a credit to
particular accounts in the ledger. For example, payment of a supplier's bill represents a debit
or increase to a project cost account and a credit or reduction to the company's cash account.
Periodically, the transaction information is summarized and transferred to ledger accounts.
This process is called posting, and may be done instantaneously or daily in computerized
systems.

In reviewing accounting information, the concepts of flows and stocks should be kept in
mind. Daily transactions typically reflect flows of dollar amounts entering or leaving the
organization. Similarly, use or receipt of particular materials represent flows from or to
inventory. An account balance represents the stock or cumulative amount of funds resulting
from these daily flows. Information on both flows and stocks are needed to give an accurate
view of an organization's state. In addition, forecasts of future changes are needed for
effective management.
Information from the general ledger is assembled for the organization's financial reports,
including balance sheets and income statements for each period. These reports are the basic
products of the financial accounting process and are often used to assess the performance of
an organization. Table12-5 shows a typical income statement for a small construction firm,
indicating a net profit of $ 330,000 after taxes. This statement summarizes the flows of
transactions within a year. Table 12-6 shows the comparable balance sheet, indicated a net
increase in retained earnings equal to the net profit. The balance sheet reflects the effects of
income flows during the year on the overall worth of the organization.

In the context of private construction firms, particular problems arise in the treatment of
uncompleted contracts in financial reports. Under the "completed-contract" method, income
is only reported for completed projects. Work on projects underway is only reported on the
balance sheet, representing an asset if contract billings exceed costs or a liability if costs
exceed billings. When a project is completed, the total net profit (or loss) is reported in the
final period as income. Under the "percentage-of-completion" method, actual costs are
reported on the income statement plus a proportion of all project revenues (or billings) equal
to the proportion of work completed during the period. The proportion of work completed is
computed as the ratio of costs incurred to date and the total estimated cost of the project.
Thus, if twentypercent of a project was completed in a particular period at a direct cost of
$180,000 and on a project with expected revenues of $1,000,000, then the contract revenues
earned would be calculated as $1,000,000(0.2) = $200,000. This figure represents a profit and
contribution to overhead of $200,000 - $180,000 = $20,000 for the period. Note that billings
and actual receipts might be in excess or less than the calculated revenues of $200,000. On the
balance sheet of an organization using the percentage-of-completion method, an asset is usually
reported to reflect billings and the estimated or calculated earnings in excess of actualbillings.

As another example of the difference in the "percentage-of-completion" and the "completed-

contract" methods, consider a three year project to construct a plant with the following cash
flow for a contractor:
The supervising architect determines that 60% of the facility is complete in year 1 and 75% in
year 2. Under the "percentage-of-completion" method, the net income in year 1 is $780,000
(60% of $1,300,000) less the $700,000 in expenses or $80,000. Under the "completed-
contract" method, the entire profit of $100,000 would be reported in year 3.

The "percentage-of-completion" method of reporting period earnings has the advantage of

representing the actual estimated earnings in each period. As a result, the income stream and
resulting profits are less susceptible to precipitate swings on the completion of a project as
can occur with the "completed contract method" of calculating income. However, the
"percentage-of-completion" has the disadvantage of relying upon estimates which can be
manipulated to obscure the actual position of a company or which are difficult to reproduce
by outside observers. There are also subtleties such as the deferral of all calculated income
from a project until a minimum threshold of the project is completed. As a result,
interpretation of the income statement and balance sheet of a private organization is not
always straightforward. Finally, there are tax disadvantages from using the "percentage-of-
completion" method since corporate taxes on expected profits may become due during the
project rather than being deferred until the project completion. As an example of tax
implications of the two reporting methods, a study of forty-seven construction firms
conducted by the General Accounting Office found that $280 million in taxes were deferred
from 1980 to 1984 through use of the "completed-contract" method. [6]

It should be apparent that the "percentage-of-completion" accounting provides only a rough

estimate of the actual profit or status of a project. Also, the "completed contract" method of
accounting is entirely retrospective and provides no guidance for management. This is only
one example of the types of allocations that are introduced to correspond to generally accepted
accounting practices, yet may not further the cause of good project management. Another
common example is the use of equipment depreciation schedules to allocate equipment
purchase costs. Allocations of costs or revenues to particular periods within a project may
cause severe changes in particular indicators, but have no real meaning for goodmanagement
or profit over the entire course of a project. As Johnson and Kaplan argue: [7]

Today's management accounting information, driven by the procedures and cycle of the
organization's financial reporting system, is too late, too aggregated and too distorted to be
relevant for managers' planning and control decisions....

Management accounting reports are of little help to operating managers as they attempt to
reduce costs and improve productivity. Frequently, the reports decrease productivity because
they require operating managers to spend time attempting to understand and explain reported
variances that have little to do with the economic and technological reality of their operations...

The managagement accounting system also fails to provide accurate product costs. Cost are
distributed to products by simplistic and arbitrary measures, usually direct labor based, that
do not represent the demands made by each product on the firm's resources.

As a result, complementary procedures to those used in traditional financial accounting are

required to accomplish effective project control, as described in the preceding and following
sections. While financial statements provide consistent and essential information on the
condition of an entire organization, they need considerable interpretation and
supplementation to be useful for project management.
 Literature Review

By reviewing the literature there is a different approach to this issue, a new way of thinking
and acting towards cost management as a beneficiary of multiple opportunities and provides
assurance of significant success. Various authors, after detailed research and supporting facts
have reasonably concluded that the strategic way of managing cost in most cases is an
undisputed necessity which reference should definitely order to achieve the required effect and
gained competitive advantage in today's dynamic business environment. Academic authors
have stressed that the importance of strategic cost management has grown dramatically in
recent years due to intensified competition. Kaplan and Norton (1997); Shankand Govindarajan
(1997), in general, are honor authors cited most when it comes to achieving competitive
advantage through strategic cost management. Strategic cost management in the literature is
discussed from many aspects. Many authors in their research have studied and paid attention
to the various instruments used for strategic…show more content… Hinterhuber interviewed
executives of European companies about strategic cost management and concluded that
strategic cost management should be part of business strategy in order to achieve a radical and
long-term growth of the company value. According McIlhattan (1992), strategic cost
management is the ability of management costs. While Horngren (2000: 3) noted that cost
management is not applied in particular. Cost management has a broad focus.
Marketing Literature Review This section is based on a selection of article abstracts from a
comprehensive business literature database. Marketing-related abstracts from over 125 journals
(both academic and trade) are reviewed by JM staff. Descriptors for each entry are assigned by
JM staff. Each issue of this section represents three months of entries into the database. JM
thanks UMI for use of the ABI/INFORM business database. Each entry has anidentifying
number. Cross-references appear immediately
scheduling, and information management; concurrently the traditional methods of
construction management cannot solve the clash which mentioned above may due to the
various kinds of interrupting factors. Meanwhile, D. Bryde et al., (2012) has stated that all
level development projects have the nature of fragmentation. ‘All generated information by
different parties is often not retained and used on future projects.’ More importantly, there is
an ever-growing generic literature emphasizing the entire tenor
facilitated a conscientious evaluation of the effectiveness of telemedicine across multiple
attributes: patient satisfaction, hospital readmissions, the number of physician and emergency
department visits, the maximum length of hospital stay, cost-effectiveness, self-management,
health outcomes, morbidity, and mortality. Surprisingly, there are many positive effects of
using telemedicine in managing chronic heart failure patients. A total of 23 articles were
deliberately analyzed and interpreted for common.
 1. Introduction of Literature Survey
Literature survey is a surface level of literature review, which typically a major part of the
introduction of a research paper. The literature survey can be defined as “the process of
analyzing, summarizing, organizing, and presenting novel conclusions from the result of
technical review based on scholarly articles that has been published” (Espanta, 2013). Bydoing
the literature survey it will help the researcher to identify their research topic.
Literature survey is the way how the researchers make their research. According to Oxford
Dictionaries, research means “the systematic investigation into and review of materials and
sources in order to establish facts and reach new conclusions”. Most of the researchers define
that the literature review is a collection of summaries of papers or an elaborated annotated
bibliography of multiple research manuscripts. Other than that, a quotation from Levy and
Ellis (2006) said that literature survey is “the use of ideas in the literature in order to justify
the particular approach to the topic, the selection of methods, and demonstration that this
research contributes something new”.
In this case, project cost management is the topic of my literature survey and as a sub-topic in
project management. It is important for me to view literature which is appropriate to my topic
and at the same time will help me to know and learned about project cost and why it is important
in project management.

2. Objective of Literature Survey

The purpose of the literature survey is “to draw on and critique previous studies in an orderly,
precise and logical manner” (Coughlan, 2013). Most of the literature survey is shown the
research fits in the existing knowledge that helping the researcher to understand the topic of
the survey, the strength and the weaknesses of the research. Besides that, the reason why we
do the literature survey is to substantiating the problems from the previous research which
related to what is needed to be known.
Other than that, some of the problems in the research paper are not totally solved by the
researcher due to the lack of information and sources from the participant. Because of that, a
good literature survey will help to extract and evaluate the issues that have emerged from
previous work in order to overcome the problems.
The objective of literature survey in the project management subject is to analyze and identify
the previous work on project cost management in order to produce a summary of the knowledge
on this topic. Once an initial overview has been done, it is necessary to critique and framing
the new research methodologies, approach, goals, and research questions for the proposed
survey of this topic.
 3. Approach of Literature Survey
Before starting the literature survey, we need to determine the types of approaches that we
want to use in our study. There are two approaches in the literature survey which is
quantitative and qualitative studies.
“Quantitative research studies are usually driven by the context of previous knowledge, with
specific research questions in mind based on conducting a broad literature review before data
collection commences” (Coughlan, 2013).
While the “qualitative studies is typically adopt a less structured approach to do a literature
review at the outset” (Coughlan, 2013). To get a broad of information about research question
or topic of interest, we must be honest in using the input based on data that has been collected.
This approach is more focusing on emerging of the data rather than pre-existing knowledge.
The approach that I will use in this literature survey is more quantitative studies. Quantitative
studies are easier and faster compared to qualitative studies where need a lot of time to
complete the task. By summarizing, comparing and contrasting the findings of the previous
task, and offering new idea is much easier to evaluate rather than describe it.

2. Discussion of the selected review topic:

1. Introduction of project cost management
Almost all the projects that have been planned by an organization need to be guided properly
in order to receive the expected output and can achieve the goals at the end of the project. In
project management there are has of triple constraint that must be faced by the project team
especially project manager. The three constraints in project management are scope goal, cost
goal, and time goal. The control of various costs is a very important task for any project where
the project manager needs to oversee. The project manager’s is the person that is striving to
meet the triple constraint by balancing these three goals in order to meet the project goals.
In this literature survey is more focusing on the topic of project cost management. Oxford
Business English Dictionary defines costs as an amount of money that we need in order to
buy, make or do something. Other than that, in the accounting field, cost is the large amount
money that a company need to pay, which affects its financial results. As we know, money is
a resource that we need and used to achieve a specific objective. Because of that, it is important
for project managers to understand clearly about project cost management in orderto achieve
the budget goals.
 2. A factor that is common in Project Cost Management
The common factors that have been discussed on project cost management is project
resources. This is because all the project resources involve the cost in project management.
That’s why project resources need to be pointed in order to complete each project.
Resources is most important things to be considered in project management as a part of the
planning process where the project manager must determine what resources are needed. To
complete the project all the resources are required is such as labor, materials, supplies,
equipment, and contingency and escalation.
The project manager needs to consider with internal and external resource in organizations, the
capacity, and demand while planning the resources. Besides that, the project manager alsomust
know what resource utilization, realization, and profitability for the project. At the sametime,
the project manager needs to identify on how each resource is utilized on the project, program,
or business area. Because of that, resource planning is the first aspects that the project manager
needs to handle in order to complete the project.

3. A factor that is similar in Project Cost Management

he financial and human resources that are required in cost management in order to complete a
project within an approved budget. “Cost management can be defined as the application of
management accounting concepts, methods of data collection, analysis and presentation in
order to cater the information needed to plan, monitor and control costs” (Frank, 2011).
According to Frank, Schwalbe, Richard, and Mohammad, there are three processes in project
cost management that are used by them and which described in the PMBOK Guide:
1. Estimate costs
The first steps in cost management is to estimate the costs of human resources and physical
resources for each activity in the project. Cost estimating can be defined as a process of
calculating all the resources costs that involved in the project work. The main outputs of the
cost estimating process are activity cost estimates, basis of estimates, and project document
updates” (Schwalbe, 2011). This step often occurs in the planning phase and it is important
for project managers to understand the estimated cost of each activity.
2. Determine budget
The next step in project cost management is to create a realistic project budget. In the project
budgeting process, the main outputs is cost performance baseline, project funding requirement
and project document updates. The process of determining the budget should involve the
overall cost estimates to individual work items for establishing a baseline for measuring
performance. A good project budget will help the project manager to make decisions based on
the schedule and resource allocation.
 3. Control costs
The last process in project cost management is controlling the costs. Controlling costs is a
process to control the changes of the project budget. The project manager needs to regularly
monitor and measure the performance of the budget and revise forecasts as required for
effective cost controls. The main output at the end of the cost control process are work
performance measurements, budget forecasts, organizational process asset updates, change
requests, project management plan updates, and project document updates.

4. A factor that is difference in Project Cost Management

The use of resource planning is to identify all of the required resources in the project. It is
very important in project management because it will help the project manager to examining
the project work and determining what are the resources, people, and equipment are needed
to complete the project. Besides that, resource planning also are used to identify the expected
quantity of the needed resources so the predicted cost can be calculated. Based on the survey
that has been done some of the survey stated different item in resource planning.
According to Richard, he stated that the resource planning inputs is consist of six that are
enterprise environmental factors, organizational process assets, activity attributes, resource
availability, and project management plan. The tools and technique that are used are expert
judgment, alternative analysis, published estimate data, project management software, and
bottom-up estimate. Finally, the output to resource planning resource requirements, activity
attributes update, resource breakdown structure (WBS), resource calendar update, and
requested changes.
Based on Project Management Professional (PMP), the input to resource planning consist of
six, which is work breakdown structure (WBS), historical information, scope statement,
resource pool description, organizational policies, and activity duration estimates. The tool and
techniques that are used is based on expert judgment, alternative identification, and project
management software. And resource requirement is the output of this resource planning.
 Control of Project Cash Flows

Section 12.3 described the development of information for the control of project costs with
respect to the various functional activities appearing in the project budget. Project managers
also are involved with assessment of the overall status of the project, including the status of
activities, financing, payments and receipts. These various items comprise the project and
financing cash flows described in earlier chapters. These components include costs incurred
(as described above), billings and receipts for billings to owners (for contractors), payable
amounts to suppliers and contractors, financing plan cash flows (for bonds or other financial
instruments), etc.

As an example of cash flow control, consider the report shown in Table 12-8. In this case,
costs are not divided into functional categories as in Table 12-4, such as labor, material, or
equipment. Table 12-8 represents a summary of the project status as viewed from different
components of the accounting system. Thus, the aggregation of different kinds of cost
exposure or cost commitment shown in Table 12-0 has not been performed. The elements in
Table 12-8 include:

 Costs
This is a summary of charges as reflected by the job cost accounts, including
expenditures and estimated costs. This row provides an aggregate summary of the
detailed activity cost information described in the previous section. For this example,
the total costs as of July 2 (7/02) were $ 8,754,516, and the original cost estimate was
$65,863,092, so the approximate percentage complete was 8,754,516/65,863,092 or
13.292%. However, the project manager now projects a cost of $66,545,263 for the
project, representing an increase of $682,171 over the original estimate. This new
estimate would reflect the actual percentage of work completed as well as other
effects such as changes in unit prices for labor or materials. Needless to say, this
increase in expected costs is not a welcome change to the project manager.
 Billings
This row summarizes the state of cash flows with respect to the owner of the facility;
this row would not be included for reports to owners. The contract amount was
$67,511,602, and a total of $9,276,621 or 13.741% of the contract has been billed. The
amount of allowable billing is specified under the terms of the contract between an
owner and an engineering, architect, or constructor. In this case, total billings have
exceeded the estimated project completion proportion. The final column includes the
currently projected net earnings of $966,339. This figure is calculated as the contract
amount less projected costs: 67,511,602 - 66,545,263 = $966,339. Note that this profit
figure does not reflect the time value of money or discounting.
 Payables
The Payables row summarizes the amount owed by the contractor to material suppliers,
labor or sub-contractors. At the time of this report, $6,719,103 had been paid to
subcontractors, material suppliers, and others. Invoices of $1,300,089 have
accumulated but have not yet been paid. A retention of $391,671 has been imposed on
subcontractors, and $343,653 in direct labor expenses have been occurred. The total of
payables is equal to the total project expenses shown in the first row of costs.
 Receivables
This row summarizes the cash flow of receipts from the owner. Note that the actual
 receipts from the owner may differ from the amounts billed due to delayed paymentsor
retainage on the part of the owner. The net-billed equals the gross billed less retention
by the owner. In this case, gross billed is $9,276,621 (as shown in the billings row),
the net billed is $8,761,673 and the retention is $514,948.
Unfortunately, only $7,209,344 has been received from the owner, so the open
receivable amount is a (substantial!) $2,067,277 due from the owner.
 Cash Position
This row summarizes the cash position of the project as if all expenses and receipts for
the project were combined in a single account. The actual expenditures have been
$7,062,756 (calculated as the total costs of $8,754,516 less subcontractor retentions of
$391,671 and unpaid bills of $1,300,089) and $ 7,209,344 has been received from the
owner. As a result, a net cash balance of $146,588 exists which can be used in an
interest earning bank account or to finance deficits on other projects.

Each of the rows shown in Table 12-8 would be derived from different sets of
financial accounts. Additional reports could be prepared on the financing cash flows
for bonds or interest charges in an overdraft account.

The overall status of the project requires synthesizing the different pieces of information
summarized in Table 12-8. Each of the different accounting systems contributing to this table
provides a different view of the status of the project. In this example, the budget information
indicates that costs are higher than expected, which could be troubling. However, a profit is
still expected for the project. A substantial amount of money is due from the owner, and this
could turn out to be a problem if the owner continues to lag in payment. Finally, the positive
cash position for the project is highly desirable since financing charges can be avoided.

The job status reports illustrated in this and the previous sections provide a primary tool for
project cost control. Different reports with varying amounts of detail and item reports would
be prepared for different individuals involved in a project. Reports to upper management
would be summaries, reports to particular staff individuals would emphasize their
responsibilities (eg. purchasing, payroll, etc.), and detailed reports would be provided to the
individual project managers. Coupled with scheduling reports described in Chapter 10, these
reports provide a snapshot view of how a project is doing. Of course, these schedule and cost

Schedule Control

In addition to cost control, project managers must also give considerable attention to
monitoring schedules. Construction typically involves a deadline for work completion, so
contractual agreements will force attention to schedules. More generally, delays in
construction represent additional costs due to late facility occupancy or other factors. Just as
costs incurred are compared to budgeted costs, actual activity durations may be compared to
expected durations. In this process, forecasting the time to complete particular activities may
be required.

The methods used for forecasting completion times of activities are directly analogous to
those used for cost forecasting. For example, a typical estimating formula might be:

where Df is the forecast duration, W is the amount of work, and ht is the observed productivity
to time t. As with cost control, it is important to devise efficient and cost effective methods for
gathering information on actual project accomplishments. Generally, observations of work
completed are made by inspectors and project managers and then work completed is estimated
as described in Section 12.3. Once estimates of work complete and time expended on particular
activities is available, deviations from the original duration estimate can be estimated. The
calculations for making duration estimates are quite similar tothose used in making cost
estimates in Section 12.3.

For example, Figure 12-2 shows the originally scheduled project progress versus the actual
progress on a project. This figure is constructed by summing up the percentage of each activity
which is complete at different points in time; this summation can be weighted by the magnitude
of effort associated with each activity. In Figure 12-2, the project was ahead of theoriginal
schedule for a period including point A, but is now late at point B by an amount equal to the
horizontal distance between the planned progress and the actual progress observed to date.

Schedule adherence and the current status of a project can also be represented on geometric
models of a facility. For example, an animation of the construction sequence can be shown on
a computer screen, with different colors or other coding scheme indicating the type of activity
underway on each component of the facility. Deviations from the planned schedule can also be
portrayed by color coding. The result is a mechanism to both indicate work in progress and
schedule adherence specific to individual components in the facility.

In evaluating schedule progress, it is important to bear in mind that some activities possess
float or scheduling leeway, whereas delays in activities on the critical path will cause project
delays. In particular, the delay in planned progress at time t may be soaked up in activities'
float (thereby causing no overall delay in the project completion) or may cause a project delay.
As a result of this ambiguity, it is preferable to update the project schedule to devise an
accurate protrayal of the schedule adherence. After applying a scheduling algorithm, a new
project schedule can be obtained. For cash flow planning purposes, a graph or report similar
to that shown in Figure 12-3 can be constructed to compare actual expenditures to planned
expenditures at any time. This process of re-scheduling to indicate the schedule adherence is
only one of many instances in which schedule and budget updating may be appropriate, as
discussed in the next section.

Relating Cost and Schedule Information

The previous sections focused upon the identification of the budgetary and schedule status of
projects. Actual projects involve a complex inter-relationship between time and cost. As
projects proceed, delays influence costs and budgetary problems may in turn require
adjustments to activity schedules. Trade-offs between time and costs were discussed in Section
10.9 in the context of project planning in which additional resources applied to a project activity
might result in a shorter duration but higher costs. Unanticipated events might result in
increases in both time and cost to complete an activity. For example, excavation problems may
easily lead to much lower than anticipated productivity on activities requiring digging.

While project managers implicitly recognize the inter-play between time and cost on projects,
it is rare to find effective project control systems which include both elements. Usually, project
costs and schedules are recorded and reported by separate application programs.
Project managers must then perform the tedious task of relating the two sets of information.

The difficulty of integrating schedule and cost information stems primarily from the level of
detail required for effective integration. Usually, a single project activity will involve
numerous cost account categories. For example, an activity for the preparation of a foundation
would involve laborers, cement workers, concrete forms, concrete, reinforcement,
transportation of materials and other resources. Even a more disaggregated activity definition
such as erection of foundation forms would involve numerous resources such as forms, nails,

carpenters, laborers, and material transportation. Again, different cost accounts would
normally be used to record these various resources. Similarly, numerous activities might
involve expenses associated with particular cost accounts. For example, a particular material
such as standard piping might be used in numerous different schedule activities. To integrate
cost and schedule information, the disaggregated charges for specific activities and specific
cost accounts must be the basis of analysis.

A straightforward means of relating time and cost information is to define individual work
elements representing the resources in a particular cost category associated with a particular
project activity. Work elements would represent an element in a two-dimensional matrix of
activities and cost accounts as illustrated in Figure 12-6. A numbering or identifying system
for work elements would include both the relevant cost account and the associated activity. In
some cases, it might also be desirable to identify work elements by the responsible organization
or individual. In this case, a three dimensional representation of work elements is required,
with the third dimension corresponding to responsible individuals. [10] More generally,
modern computerized databases can accomadate a flexible structure of data representation to
support aggregation with respect to numerous different perspectives; this type of system will
be discussed in Chapter 14.

With this organization of information, a number of management reports or views could be

generated. In particular, the costs associated with specific activities could be obtained as the
sum of the work elements appearing in any row in Figure 12-6. These costs could be used to
evaluate alternate technologies to accomplish particular activities or to derive the expected
project cash flow over time as the schedule changes. From a management perspective,
problems developing from particular activities could be rapidly identified since costs would
be accumulated at such a disaggregated level. As a result, project control becomes at once
more precise and detailed.
Unfortunately, the development and maintenance of a work element database can represent a
large data collection and organization effort. As noted earlier, four hundred separate cost
accounts and four hundred activities would not be unusual for a construction project. The result
would be up to 400x400 = 160,000 separate work elements. Of course, not all activitiesinvolve
each cost account. However, even a density of two percent (so that each activity would have
eight cost accounts and each account would have eight associated activities on the average)
would involve nearly thirteen thousand work elements. Initially preparing this database
represents a considerable burden, but it is also the case that project bookkeepers must record
project events within each of these various work elements. Implementations of the "work
element" project control systems have typically fondered on the burden of data collection,
storage and book-keeping.

Until data collection is better automated, the use of work elements to control activities in
large projects is likely to be difficult to implement. However, certain segments of project
activities can profit tremendously from this type of organization. In particular, material
requirements can be tracked in this fashion. Materials involve only a subset of all cost
accounts and project activities, so the burden of data collection and control is much smaller
than for an entire system. Moreover, the benefits from integration of schedule and cost
information are particularly noticeable in materials control since delivery schedules are
directly affected and bulk order discounts might be identified. Consequently, materials
control systems can reasonably encompass a "work element" accounting system.

In the absence of a work element accounting system, costs associated with particular
activities are usually estimated by summing expenses in all cost accounts directly related to
an activity plus a proportion of expenses in cost accounts used jointly by two or more
activities. The basis of cost allocation would typically be the level of effort or resource
required by the different activities. For example, costs associated with supervision might be
allocated to different concreting activities on the basis of the amount of work (measured in
cubic yards of concrete) in the different activities. With these allocations, cost estimates for
particular work activities can be obtained.
 Cost Accounting: Definition and Types With Examples

What Is Cost Accounting?

Cost accounting is a form of managerial accounting that aims to capture a company's

total cost of production by assessing the variable costs of each step of production as well as
fixed costs, such as a lease expense.

Cost accounting is not GAAP-compliant, and can only be used for internal purposes.

KEY TAKEAWAYS

Cost accounting is used internally by management in order to make fully informedbusiness

decisions.
Unlike financial accounting, which provides information to external financial statement
users, cost accounting is not required to adhere to set standards and can beflexible to meet
the particular needs of management.
As such, cost accounting cannot be used on official financial statements and is notGAAP-
compliant.
Cost accounting considers all input costs associated with production, including bothvariable
and fixed costs.
Types of cost accounting include standard costing, activity-based costing, lean
accounting, and marginal costing.
 Understanding Cost Accounting

Cost accounting is used by a company's internal management team to identify all variable and
fixed costs associated with the production process. It will first measure and record thesecosts
individually, then compare input costs to output results to aid in measuring financial
performance and making future business decisions. There are many types of costs involved
in cost accounting, which are defined below.

Types of Costs

 Fixed costs are costs that don't vary depending on the level of production. These are
usually things like the mortgage or lease payment on a building or a piece of
equipment that is depreciated at a fixed monthly rate. An increase or decrease in
production levels would cause no change in these costs.
 Variable costs are costs tied to a company's level of production. For example, a floral
shop ramping up its floral arrangement inventory for Valentine's Day will incur higher
costs when it purchases an increased number of flowers from the local nurseryor
garden center.
 Operating costs are costs associated with the day-to-day operations of a business.
These costs can be either fixed or variable depending on the unique situation.
 Direct costs are costs specifically related to producing a product. If a coffee roaster
spends five hours roasting coffee, the direct costs of the finished product include the
labor hours of the roaster and the cost of the coffee beans.
 Indirect costs are costs that cannot be directly linked to a product. In the coffee
roaster example, the energy cost to heat the roaster would be indirect because it is
inexact and difficult to trace to individual products

Cost Accounting vs. Financial Accounting

 While cost accounting is often used by management within a company to aid in

decision-making, financial accounting is what outside investors or creditors typically
see. Financial accounting presents a company's financial position and performance to
external sources through financial statements, which include information about
its revenues, expenses, assets, and liabilities. Cost accounting can be most beneficial
as a tool for management in budgeting and in setting up cost-control programs, which
can improve net margins for the company in the future.
 One key difference between cost accounting and financial accounting is that, while in
financial accounting the cost is classified depending on the type of transaction, cost
accounting classifies costs according to the information needs of the
management. Cost accounting, because it is used as an internal tool by management,
does not have to meet any specific standard such as generally accepted accounting
principles (GAAP) and, as a result, varies in use from company to company or
department to department.
 Types of Cost Accounting

Standard Costing

Standard costing assigns "standard" costs, rather than actual costs, to its cost of goods sold
(COGS) and inventory. The standard costs are based on the efficient use of labor and materials
to produce the good or service under standard operating conditions, and they are essentially
the budgeted amount. Even though standard costs are assigned to the goods, thecompany still
has to pay actual costs. Assessing the difference between the standard (efficient) cost and the
actual cost incurred is called variance analysis.

If the variance analysis determines that actual costs are higher than expected, the variance is
unfavorable. If it determines the actual costs are lower than expected, the variance is
favorable. Two factors can contribute to a favorable or unfavorable variance. There is the cost
of the input, such as the cost of labor and materials. This is considered to be a rate variance.

Additionally, there is the efficiency or quantity of the input used. This is considered to be a
volume variance. If, for example, XYZ company expected to produce 400 widgets in a period
but ended up producing 500 widgets, the cost of materials would be higher due to thetotal
quantity produced.

Activity-Based Costing

Activity-based costing (ABC) identifies overhead costs from each department and assigns
them to specific cost objects, such as goods or services. The ABC system of cost accounting
is based on activities, which refer to any event, unit of work, or task with a specific goal, such
as setting up machines for production, designing products, distributing finished goods, or
operating machines. These activities are also considered to be cost drivers, and they are the
measures used as the basis for allocating overhead costs.

Traditionally, overhead costs are assigned based on one generic measure, such as machine
hours. Under ABC, an activity analysis is performed where appropriate measures are identified
as the cost drivers. As a result, ABC tends to be much more accurate and helpfulwhen it comes
to managers reviewing the cost and profitability of their company's specific services or
products.

For example, cost accountants using ABC might pass out a survey to production-line
employees who will then account for the amount of time they spend on different tasks. The
costs of these specific activities are only assigned to the goods or services that used the activity.
This gives management a better idea of where exactly the time and money are beingspent.

To illustrate this, assume a company produces both trinkets and widgets. The trinkets are very
labor-intensive and require quite a bit of hands-on effort from the production staff. The
production of widgets is automated, and it mostly consists of putting the raw material in a
machine and waiting many hours for the finished good. It would not make sense to use
machine hours to allocate overhead to both items because the trinkets hardly used any
machine hours. Under ABC, the trinkets are assigned more overhead related to labor and the
widgets are assigned more overhead related to machine use.

Lean Accounting

The main goal of lean accounting is to improve financial management practices within an
organization. Lean accounting is an extension of the philosophy of lean manufacturing and
production, which has the stated intention of minimizing waste while optimizing productivity.
For example, if an accounting department is able to cut down on wasted time,employees can
focus that saved time more productively on value-added tasks.

When using lean accounting, traditional costing methods are replaced by value-based pricing
and lean-focused performance measurements. Financial decision-making is based onthe
impact on the company's total value stream profitability. Value streams are the profit centers
of a company, which is any branch or division that directly adds to its bottom-
line profitability.

Marginal Costing

Marginal costing (sometimes called cost-volume-profit analysis) is the impact on the cost of
a product by adding one additional unit into production. It is useful for short-term economic
decisions. Marginal costing can help management identify the impact of varying levels of
costs and volume on operating profit. This type of analysis can be used by management to
gain insight into potentially profitable new products, sales prices to establish for existing
products, and the impact of marketing campaigns.

The break-even point—which is the production level where total revenue for a product equals
total expense—is calculated as the total fixed costs of a company divided by its contribution
margin. The contribution margin, calculated as the sales revenue minus variablecosts, can also
be calculated on a per-unit basis in order to determine the extent to which a specific product
contributes to the overall profit of the company.
 The Importance of Cost Accounting
Managers rely on cost accounting to provide an idea of the actual cost of processes,
departments, operations or product which is the foundation of their budget, allowing them to
analyze fluctuation and the way ftmds are used socially for profit. Cost accounting is used in
management accounting, where managers justify the ability to cut costs for a company in order
to increase that company's profit. As a tool for internal use, versus a tool for external users like
financial accounting, cost accounting does not need to follow the GAAP standards (Generally
Accepted Accounting Principles) because its use is more pragmatic. Cost accounting creates a
financial value out of the production of a product, measuring currency that is nominal into units
that are measured by convention. By taking recorded historic costs abit further, cost accounting
allocates a company's fixed costs over a specific time period to what items are actually
produced during that period of time, creating a total cost of product production. Products that
were not sold during that period of time produced a "full cost" of those products, recording
them in a complex inventory system that uses accounting methods of its own that are in
compliance with the GAAP standards. Managers are then able to focus on each period's results
as it relates to the "standard cosf * of any product. Any distortions in cost that were caused by
calculating what the overhead of a product is versus what a unit cost is for companies that
specialize in only one specific product are ver\' minor in industries that mass produce that
product with a low fixed cost. Understanding why costs vary compared to what was actually
planned helps a manager to save company money by taking actions that areappropriate to
correct that variation in the future. Variance analysis is a very important part ofcost accounting
because it breaks down each variance into many different components of standard cost and
actual cost. Some of these components are material cost variation, volume variation and labor
cost variation. Cost accounting is a very important part of the management accounting process.
In order for managers to determine the best methods to increase a company's profitability, as
well as saving company money in the future, cost accounting is a necessar>' system in the
management of a company's budget, providing important data to analyze fluctuation in
company production costs. Managers rely on cost accounting to provide an idea of the actual
cost of processes, departments, operations or product which is the foundation of their budget,
allowing them to analyze fluctuation and the way funds are used socially for profit. Cost
accounting is used in management accounting, where managers justify the ability to cut costs
for a company in order to increase that company's profit. As a tool for internal use, versus a
tool for external users like financial accounting, cost accounting does not need to follow the
GAAP standards (Generally Accepted Accounting Principles) because its use is more
pragmatic. Cost accounting creates a financial value out of the production of a product,
measuring currency that is nominal into units that are measured by convention. By taking
recorded historic costs a bit further, cost accounting allocates a company's fixed costs over a
specific time period to what items are actually produced during that period of time, creating a
total cost of product production.
Products that were not sold during that period of time produced a "full cosf' of those products,
recording them in a complex inventory system that uses accounting methods of its own that are
in compliance with the GAAP standards. Managers are then able to focus on each period's
results as it relates to the "standard cost" of any product. Any distortions in cost that were
caused by calculating what the overhead of a product is versus what a unit cost is for companies
that specialize in only one specific product are very minor in industries that mass produce that
product with a low fixed cost. Understanding why costs var>' compared to what
was actually planned helps a manager to save company money by taking actions that are
appropriate to correct that variation in the future. Variance analysis is a very important part of
cost accounting because it breaks down each variance into many different components of
standard cost and actual cost. Some of these components are material cost variation, volume
variation and labor cost variation. Cost accounting is a very important part of the management
accounting process. In order for managers to determine the best methods to increase a
company's profitability, as well as saving company money in the future, cost accounting is a
necessary system in the management of a company's budget, providing important data to
analyze fluctuation in company production costs. In today's dynamic corporate world cost
accounting is something on which managers rely so much in order to calculate budget values
with the help of calculating the actual expenses of their projects' operations, management, and
human resource costs And Finally comparing these results with current market fluctuations and
standings and getting the desirable revenue and profit. This tool is used in management
accounting so to calculate the cost cutting in current organization structure and thus bringing
more profit to the company. Also this cost accounting is more likea pragmatic calculation tool
and thus does not follow the General Accounting Principles. Costaccounting is used to create
the worth of a product out of its mass production, measuring financial value which is nominal
into produced numbers measured by convention., It also allocates a company's fixed costs over
a specific period of time what items are actually produced during that period of time by taking
in account the previous recorded historic costs, thus idenfifying the total costs of product
production. During that period of time, products which were not sold produced a "full cost" of
those products, so getting them record in an inventory system. It makes Management able to
be focused on each of these products during a specific time interval. It is evident that a mass
produced product by a specialized company does not get affected that much by the mismatch
in calculations of unit costs with its overhead. Understanding the variation in comparison with
actual planned work is helpfiil to save company's money by taking appropriate actions to rectify
that variation in the future.
One of the core components of cost accounting is Variance e.g. material expenses variation,
volume variadon and labor expenses variation. In short cost accounting is become the
necessary part of any company's accounting processes. It helps management to find the best
effort solutions to cost cutting and saving and reducing the company's budget with more profit
income. Business enterprises derive many advantages from the cost accounting system.Cost
accounfing helps management in efficient utilization of resources and achieving the goalof
business i.e. maximization of profit. The deficiencies of financial accounting may be restated
as advantages of cost accounting because the later has emerged to overcome the limitations of
the former. However, a good cost accounting system will provide the following main
advantages:
1. Reveals type of activities- the cost accounting system provides data about profitable and
unprofitable products and the causes of low profitability, the steps may be taken to eliminate
or reduce inefficiencies and wastages arising in any form such as spoilage of materials,
underutilization of plant capacity, excessive ideal time, low quality of production etc.
2. Reducing cost- All items of cost can be analyzed to minimize the loss and wastage arising
from the manufacturing process and finding out new and improved wage to reduce costs
associated with different activities.
3. Cost control- Methods of production may be improved or changed so that costs are
controlled and profit is increased.
4. Inventory control- Important techniques of inventory control which are integral part of cost
accounting are used for helping in the preparation of interim profit and loss account suchas
perpetual inventory system, inventory levels, ABC analysis, etc
5. Decision making- It provides suitable cost information for managerial decision making
such as make or buy, replacement of old machinery, introduction of a new product line etc
. 6. Computation of selling prices- Cost accounting provides cost information to determine
the price of the product which is influenced by many factors such as competitive conditions,
seasonal demand, change in technology etc. It is very easy advantageous particularly during
depression period when the prices are to be fixed below the cost.
7. Negotiations- Cost accounting system helps management, in negotiations with labour
unions and the government on the detailed information provided by it. Thus, an adequate cost
accounting system ensures maximum utilization of physical human resources, checks fraud
and manipulation and helps employees missing as well the employer in their basic goals getting
higher earnings and maximizing the profit of the concern. In addition to all the above
advantages it aids in formulating policies, reveals provide cost data to outside agencies, reveals
ideal capacity and checks the accuracy of financial accounts etc. There has in recent years been
a great need for an understanding of construction economics and cost control, particularly
during the design stage of projects. The importance of this is due largely to the following: o
The increased pace in society in general has resulted in clients being less likely to tolerate
delays caused by redesigning buildings when tenders are too high. o The client's requirements
today are more complex than those of their Victorian counterparts. A more effective system of
control is therefore desirable from inception up to the completion of the final account, and
thereafter during costs-in-use. o The clients of the industry often represent large organizations
and financial institutions. This is a result of takeovers, mergers and some public ownership.
Denationalization has often meant that these large organizations remain intact as a single
entity. There has thus been an increased emphasis on accountability in both the public and the
private sectors of industry. The efficiency of these organizations at construction work is only
as good as their advisers. o There has been a trend towards modemdesigns and new techniques,
materials and methods of construction. The designer is able to choose from a far wider range
of products and this has produced variety in construction. The traditional methods of estimating
are unable to cope in these circumstances to achieve value for money and more balanced
designs. o Several major schemes in the UK and abroad in construction and other industries
have received adverse publicity on estimated costs. Even after allowing for inflationary factors,
the existing estimating procedures have been very inadequate. It is not a valid diversion to
suggest that projects in other industries such as the Nimrod Early Warning System, Concorde
or space exploration have produced considerably more inaccurate estimates than those in the
construction industry. o Contractors' profit margins have in real terms been reduced
considerably during the past decade. This has resulted in their greater cost-consciousness in an
attempt to redress possible losses. o There has, in general, been a move towards the elimination
of waste, and a greater emphasis on the use of the world's scarce resources. This has
necessitated a desire for improved methods of forecasting and control of costs. Tyres are a very
important (maybe the most important)
component of your car or truck because they represent your only contact between you and the
road surface. Drive with bald or faulty tyres and you run the risks of accidents and injuries. In
the United Kingdom, the law requires a minimum thread depth of 1.6 mm in the main grooves
which are situated in the central three quarters of a tyre. On average, you should replace the
tyres every 40.000 km. Irrespective of distance travelled, you should change the tyres if the
thread depth is below a safety level, but really you shouldn't need a law to force you to change
tyres when it is time, for your life, the life of your passengers who will most likely be your
family members, and the life of other road users depend on you doing the rightthing. If you
happen to reside in Eastern Australia including Queensland, New South Wales, Canberra,
Victoria and Tasmania, JAX Quick fit Tyres currently have 72 locations spread across the
states mentioned above where you can get a quick change of tyres. They claim thatthey can
likely offer you cheap deals. They also do tune ups.

Review of work already done

Job order cost accounting information system by H.J.Williams (1985) Review management
response to the proposed system therefore increased cost accountability and job cost control
are accomplished. Mental health cost studies by B.Dicky (1986) they assess the strength and
weakness of the work already done and suggest area for finance standardization in the present
work being done, and cost benefit analysis review of trend in the mental health cost literature.
The cost accounting environment in British Industrial by R.K.Fleischman (1992) Record for
each distinct work and branch of trade determines which were advantageous. Computer cost
accounting-determining labour content is service by T.E.Bell (2003)Cost control variables
budgets baseline are determine by Kenneth King Humphreys. Who is accountable for work,
what the project cost accounting? Classic Drucker essential wisdom of Peter Drucker (2006)
Activity based costing therefore gives not only much better cost control as manufacturing
companies have done with traditional cost accounting. Management and cost accounting by
Colin Drury (2007) The review problem are more complex and require you to relate and apply
the content to management and cost accounting. (44) Cost accounting formula for
multiprogramming computer consisting by C.R.Symons-1971 A cost accounting formula is
derived for multiprogramming computer consisting of the formula is illustrated by reference to
control data of 6000 computer. In this section further aspects compared with the actual
distribution for the work run. Environmental Cost Accounting for chemical and oil companies
by D.Shields (1975) environmental element, and senior management performancereview also
cost control. Comparing baseline costs to current may help. Cost accounting finalreport by
LSCOO TX(1980) a review of cost accounting systems at LSCO and IHGI provided. Material
cost budgeting and control at Livingston incurred by shipyard, excluding work done by other
divisions, trolling indirect costs has already been touched on in the description of the
Departmental budget target. Cost and management accounting by Colin Drury-2006 this
account is called a cost control or general ledger adjustment account. Using an interlocking
accounting system to record the transaction listed. Cost accounting and production control in
Multiproduct by L.H.Rodrigues. However, the validity of the traditional
methods of cost accounting when applied requires work at a large proportion of the operation
points already defined and was done by distributing the FIFO. Fricing and cost accounting: a
handbook for government contractors by Darrell Oyer (2005) internal review by management
to ascertain employee compliance with policies and procedures periodic reconciliation of cost
control records. Cost accounting methodologies in prices setting of acute by F. Gaal (2006)
focusing on the cost accounting methodologies applied in the calculation and continuous
algorithms and by hand detailed review of the any compensation is an already overstretched
work. What can and should be done by the HDGs system.
Cost Benefit Analysis in information system development by J.K.King (1978). Review basis
element of cost benefit analysis and other substantial expert or the entire work requires
specifically done by those with the greatest interest. Government policy and the cost of doing
research by D.Kennedy (1985) The President of the Association of American did the work.
The capital cost of equipment and special facilities, in short, it has already had harsh political
ramifications. Sagan in his paper (1955), perhaps the first theoretical paper on the theory of
cost accounting management, emphasized the need for management of cost accounting and
warned that it could vitally affect the health of the company. He realized the need to build up
a theory of cost accounting management. He discussed mainly the role and functions of money
manager cost accounting management. Realizing the dearth of pertinent literature on cost
accounting management. Walker in his study (1964) made a pioneering effort to developa
theory of cost accounting management by empirically testing, though partially, three
propositions based on risk-return trade-off of cost accounting management. Walker studied the
effect of the change in the level of cost accounting on the rate of return in nine industries for
the year 1961 and found the relationship between the level of cost accounting and the rateof
return to be negative. Welter, in his study (1970), stated that cost accounting originated because
of the global delay between the moment expenditure for purchase of raw material was made
and the moment when payment was received for the sale of finished product.
Delay centers are located throughout the production and marketing functions. The study
requires specifying the delay centers and cost accounting tied up in each delay centre with the
help of information regarding average delay and added value. Lambrix and Singhvi (1979)
adopting the cost accounting cycle approach to the cost accounting management, also
suggested that investment in cost accounting could be optimized and cash flows could be
improved by reducing the time frame of the physical flow from receipt of raw material to
shipment of finished goods, i.e. inventory management, and by improving the terms on which
firm sells goods as well as receipt of cash.
However, the further suggested that cost accounting investment could be optimized also
(1) by improving the terms on which firms bought goods i.e. creditors and payment of cash,
and
(2) by eliminating the administrative delays i.e. the deficiencies of paper-work flow which
tended to extend the time-frame of the movement of goods and cash. Warren and Shelton
(1971) applied financial simulation to simulate future financial statements of a firm, based
on a set of simultaneous equadons. Financial simulation approach makes it
possible to incorporate both the uncertainty of the future and the many interrelationships
between current assets, current liabilities and other balance sheet accounts. The strength
of simulation as a tool of analysis is that it permits the financial manager to incorporate in
his planning both the most likely value of an activity and the margin of error associated
with this estimate. Warren and Shelton presented a model in which twenty simultaneous
equations were used to forecast future balance sheet of the firm including forecasted
current assets and forecasted current liabilities. Current assets and current liabilities were
forecasted in aggregate by directly relating to firm sales. However, individual cost
accounting accounts can also be forecasted in a larger simulation system. Moreover, future
financial statements can be simulated over a range of different assumptions to portray
inherent uncertainty of the future. Cohn and Pringle in their study(1973) illustrated the
extension of Capital Asset Pricing Model (CAPM) for cost accounting management
decisions. They tried to inter relate long-term investment and financing decisions and cost
accounting management decisions through CAPM. They emphasized that an active cost
accounting management policy based on CAPM could beemployed to keep the firm's
shares in a given risk class. By risk, he meant unsystematic risk, the only risk deemed
relevant by CAPM. Owing to the lumpy nature for long-term financial decisions, the firm
is continually subject to shifts in the risk of its equity. The fluid nature of working capital,
on the other hand, can be exploited so as to offset or moderate such swings. For example
they suggested that a policy using CAPM could be adopted for the management of
marketable securities portfolio such that the appropriate risk level at any point in time was
that which maintains the risk of the company's common stock at a constant level.
Similarly, Copeland and Khoury (1980) applied CAPM to develop a theory of credit
expansion. They argued that credit should be extended only if the expected rate of return
on credit is greater than or equal to market determined required rate of return. They used
CAPM to determine the required rate of return for the firm with its new risk, arising from
uncertainty regarding collection due to the extension of credit. Thus, these studies show
how CAPM can be used for decisions involved in cost accounting management. One more
approach, used mainly in empirical studies, towards cost accounting management has been
to apply regression analysis to determine the factors influencing investment in working
capital. Different studies in the past have considered different explanatory variables to
explain the investment in inventory. A brief review of these studies is important as
regression equation of investment in working capital, in tiie present study, would be
formulated on the basis of works on investment in inventory. In inventory investment
literature, there is basically one school of thought according to which firms aim at an
optimum or desired stock of inventories in relation to a given level of output/sales. This is
known as acceleration principle. Pioneering work in this field has been done by Metzler
(1941). However, his work was mainly on simple acceleration principle which postulated
that firms liked to maintain inventories in proportions to output/sales and they succeeded
in achieving the desired level of inventories in a unit time period. That is to say, any
discrepancy betweenthe actual level and desired level of inventories is adjusted within the
same time-period. Needless to say, that such an instantaneous adjustment is not a realistic
assumption to
make. Modifications, therefore, have been introduced in the literature to provide for partial
adjustment. Goodwin (1948) assumed that firms attempted only a partial adjustment of the
discrepancy between the desired stocks as determined by the level of output and the
existing stock. Similarly, Darling and Lovell (1965) modified Metzler's formulation based
on simple acceleration principle and obtained, the relationship based on flexible
accelerator principle. There are several reasons physical, financial and technical those
motivate partial adjustment. Among the physical factors, mention may be made of
procurement lags between orders and deliveries. The length of such lags is connected with
the source of supply, foreign or domestic availability. Import licensing procedures on
account of foreign exchange scarcity could cause further delays in adjustment. Among the
financial factors, cost advantages associated with bulk buying and higher procurement
costs for speedy delivery are also mentioned. Uncertainties in the market for raw materials
and in the demand for final product also play a role in influencing the speed of adjustment.
Technically, firms like to make sure that changes in demand are of a permanent character
before making fiill adjustment. The acceleration principle has great relevance in inventory
analysis than in the analysis of fixed investment, as there are limits to liquidate fixed
capital in the face of declining demand. Other variables influencing inventories have been
introduced in the literature in the context of accelerator model. Rate of interest is used as
a proxy for the opportunity cost of carrying stocks or as a measure of the cost of fiinds
needed to hold inventories. It has been found significant in the studies of Hilton (1976)
and Irwin (1981). Time-trend is expected to be important because inventories generally
accumulate with the expansion ofeconomic activities of the company. Anticipated price
changes, measured by changes in wholesale price index of inventories, are taken as an
explanatory variable to capture speculative element in inventory. This suggests a positive
relationship between price changes and inventory. An increase in sales is expected to
increase the demand for stocksto meet orders regularly. An increase in capacity utilization
is also expected to increase the demand for stock by increasing the demand for raw
materials and increasing the inventories of finished goods. Thus, the variable, capacity
utilization, is postulated to have a positive coefficient in the equation. Abramovitz (1950)
and Modigliani (1957) highlighted the impact of capacity utilization on inventory
investment. Existing stock of inventories is expected to take account of adjustment process
to the desired levels. Thus the variable, existing stock of inventories, is postulated to be
negatively related with the desired stock. The rafio of inventory to sales may affect
inventory investment positively because a high ratio of stocks (50) to sales in the past
suggests the maintenance of high levels of inventories in the past and thus also calling for
high investment in inventories inthe current period. The studies of Metzler (1941) and
Hilton (1976)have found this variable, inventory-sales ratio, to be statistically significant.
Fixed investment is generally expected to affect inventory investment inversely because
of competing demand for the limited funds. However, in case of an expanding firm, the
two components may be complementary. Besides, availability of funds from retained
earnings and external sources, may affect investment decision by providing funds for
financing inventory investment. Therefore, retained earnings and flow of debt are
postulated to have positive coefficients. The studies described so far, are the important
studies conducted abroad. A number of studies on cost accounting management have been
conducted in India also. The following discussion describes Indian studies. The
first, small but fine piece of work is the study conducted by National Council of Applied
Economic Research (NCAER) in 1966 with reference to cost accounting management in
three industries namely cement, fertilizer and sugar. This was the first study on nature and
norms of cost accounting management in countries with 'scarcity of investible resources'.
This study was mainly devoted to the ratio analysis of composition, utilization and
financing of cost accounting for the period 1959 to 1963. This study classified these three
industries into private and public sector for comparing their performance asregards the
cost accounting management. Appavadhanulu (1971) recognizing the lack of attention
being given to investment in working capital, analyzed cost accounting management by
examining the impact of method of production on investment in workingcapital. He
emphasized that different production techniques require different amount of cost
accounting by affecting goods-in process because different techniques have differences in
the length of production period, the rate of output flow per unit of time andtime pattern of
value addition. Different techniques would also affect the stock of raw materials and
finished goods, by affecting lead-time, optimum lot size and marketing lag of output
disposals. He, therefore, hypothesized that choice of production technique could reduce
the cost accounting needs. He estimated the ratio of work-in-progress and cost accounting
to gross output and net output in textile weaving done during 1960, on the basis of detailed
discussions with the producers and not on the basis of balance sheetswhich might include
speculative figures. His study could not show significant relationship between choice of
technique and working capital. However, he pointed out that the idea could be tested in
some other industries like machine tools, ship building etc. by taking more appropriate
ratios representing production technique correctly.
 Data analysis and interpretation

Cost control is always a go-to strategy when business conditions are tough, but it shouldn’t be
de-emphasized when economic conditions improve. After all, tight controls on the cost side of
the ledger strengthen businesses and provide them with added flexibility to invest in growth
opportunities.

Still, identifying cost control methods can sometimes be challenging and time-consuming
even for financial professionals. Consider these five suggestions for a fresh approach.

1. Get everyone involved.

Challenge employees throughout the company to identify ways the business can save time or
money. Most everyone can probably point to inefficiencies or activities with a poor return on
investment.

Your outside partners — suppliers and vendors — might also be able to offer ideas on how
your company can reduce expenses or how they may be able to work with you at a lower cost
by changing payment terms or ordering patterns. Consider rewarding employees and business
partners whose suggestions are implemented.

2. Be greener.

Take a fresh look at how you can save on energy costs. Are your office lights and equipment
all energy-efficient? What about your heating and air conditioning system? Also examine
options such as window film and solar panels that could help you lower expenses.

3. Reduce your office footprint.

Evaluate whether your company is fully utilizing its office space. Maybe there are vacant
offices within your building that could be leased out? If you have staff who frequently
telecommute, you could reduce your physical office space and lower overhead costs by setting
up shared work stations.
 4. Work with interim professionals.

Bringing in consultants allows companies to adjust their staffing management to match

business opportunities. By working with professionals on a project basis, companies canquickly
access consultants' specialized subject-matter expertise and skills as needed.

5. Challenge accounting and finance staff.

All financial personnel, not just cost accountants, should be up to speed on cost control. If
needed, provide additional training.

Work with your team to apply a cost accounting perspective to business problems and focuson
how your business processes and activities influence costs. Another way to build this
knowledge is to have accounting and finance staff work with different business units for a
period of time to expand operational knowledge and gain firsthand insights into cost drivers.

Even in good economic times, cost control is important because it improves your company’s
ability to operate from a position of strength. Don’t wait until you’re forced to cut costs. By
being proactive and continually focusing on cost control methods, you’ll be less likely to need
to react suddenly to changing circumstances.

Related posts

 4 Cost Control Measures You Can't Live Without

 A Crash Course in Cost Control Management
 4 Cost Control Measures That Will Help Your Company

Even if you have a dedicated finance team that understands the cost accounting process,
actually identifying the most effective ways to reduce spending can be challenging. Cost
control is one of the best ways to keep your business in shape so it continues to perform well
in a variety of economic environments.

The four strategies outlined below are good first steps toward reducing overhead expenses
and achieving cost control.

1. Hire the right people

Taking a careful approach to all steps in the hiring process — from recruitment to onboarding
— is one of the most important cost control measures. Bad hires are expensive, and an
employee who can't keep up with work demands takes a heavier toll on a business than some
may think. According to research from Robert Half, managers spend more than 10 hours out
of every 40-hour workweek coaching underperforming employees.

Finance executives also acknowledged that hiring mistakes negatively affect team morale. Of
the CFOs surveyed, 91 percent said poor hiring decisions affect morale at their companies.

Looking to hire? Let us do the heavylifting and save you time and money.

2. Negotiate annual contracts

If your business is anything like most other enterprises these days, you work with a variety of
third-party vendors. The contracts with then are a great place to look for long-term cost control
measures. Multi-year contracts will usually favor the supplier, so if you can reopen the
contracts to annual bidding, you might be able to lower your cost of goods.

3. Build strong relationships with suppliers

Another important step in controlling costs is to be diligent about staying on top of your
expenses. Putting off payments until the last minute or past the scheduled due date will only
exacerbate costs in the long run. These practices are also likely to damage the relationships
you have with your suppliers.

Instead, the best approach is to pay your invoices as early as possible. Another potential
benefit: Organizations that enjoy good relationships with their suppliers may also have more
leverage when it comes time to negotiate.

4. Use cloud computing as a cost control

Technology has advanced in such a way that your employees can be just as productive as ever
— and perhaps, even more so — by relying on cloud-based servers to access data and use
software. As more people telecommute and collaborate with colleagues in different regions,
cloud financial solutions are fast becoming ways for organizations to enhance efficiency and
reduce overhead costs. The cloud provides round-the-clock access to business data, and
financial Software-as-a-Service programs can give firms greater flexibility.

Want to help your company’s bottom line? Cost control, whether it's through hiring, supplier
contracts and relationships, or cloud technology, can impact your profits over the long term
and position your company for success.

What Is Project Cost Control

For a customer to be satisfied with a project and for the business to make a profit completing
it for them, it's important that the project's costs remain controlled. The project manager has a
significant role in this, from creating the budget to tracking spending. If you're researching
project management roles as a career possibility or taking on supervisory responsibilities in
your own job, it may benefit you to learn about project cost control. In this article, we discuss
what project cost control is, how it's different from project cost management, the steps involved
and tips for successfully controlling costs in a project.
Project cost control is one component of project cost management, and it involves tracking
how a project's spending varies from baseline expectations throughout the life of the project
and creating corrective plans if necessary. The project manager is usually responsible for the
project's cost controls, including operating monitoring software and investigating any cost
differences. Good project cost control requires a detailed knowledge of the project's planning
and execution, since the project manager must be able to identify when the project exceeds the
projections and understand why.
 Project cost control vs. project cost management

Cost control and cost management in the field of project management have some similarities:
They're both completed by the project manager, both require extensive financial data and they
both help a project stay within its budget. There are also several important differences between
project cost control and project cost management, including:
Scope: Project cost management describes a long-term process for handling a project's budget
and finances throughout the whole project and includes cost control, while cost control is the
specific process of evaluating and adjusting expenses while the project is progressing.
Time period: Project cost management begins with the planning phase and continues
throughout the project, while project cost control happens only after the project has begun.
Requirements: To complete project cost management, a project manager researches many
elements of the project including labor and equipment costs, scope, requirements and the details
of each step of the process. To complete project cost control, a project manager needsthe
project's budget and projected costs as well as current data from ongoing project expensesand
enough understanding of the project to understand why costs differ from projections.

What are the steps of project cost control

Here are the four main processes of project cost control:

1. Measure differences from baseline budget
First, the project manager understands the baseline budget expectations by reviewing the
original budget and any departmental or stage breakdowns. Then, they implement tracking
procedures to see how the project's spending compares to the projected costs, and if it is
different, they measure how great the difference is. Tools like specialized software and
spreadsheets can help project managers with this tracking process. It's important that the
project manager make sure their information is as accurate as possible in this stage so that
cost forecasts are accurate in the next step.
2. Forecast final costs
Once the project manager understands the differences from the original budget, they use this
information to project what the project's final cost will be if spending continues along current
lines. If the project was over budget in a stage that is now complete, the project manager
calculates any costs added during that time or later delays that event may cause. If the project
is over budget for a process that is still going on, the project manager calculates how much
more over budget that ongoing process will add to final costs.

3. Determine possible corrective actions

Once the project manager has all this information, they can look at their plan for the project
and see what potential corrective actions could bring the project back within budget
specifications. Depending on the project, this may involve adjusting the schedule, the staffing
or the project timeline to reduce costs.
4. Implement and evaluate corrective actions
Next, the project manager implements these corrective actions by negotiating with teammates,
vendors or contractors. They may also communicate with the client to explain thechanges and
the reasoning behind them. The project manager then uses the new data and the budget tracking
practices to evaluate whether the corrective actions were effective. If not, theproject manager
creates and implements new corrective actions until they get the desired results.

Tips for project cost control

Here are some tips for implementing cost controls in your projects:
Review the budget frequently. To understand whether project spending is acceptable or
whether it's time to implement corrective measures, it's important to review your budget
frequently, at least every week. This way, you can catch any overspending as soon as it
happens and reduce extra costs immediately.
Communicate with all team members. You can find out how your team members are
spending their hours or what funds they need if you communicate with them frequently. If
you are working on a large-scale project, you may also think of new corrective measures by
speaking with other department managers or vendors.
Control project scope. You may find your project exceeding labor budgets if your teammates
aren't aware of how much the project or contract involves. Keeping your project within the
original contract or agreement can prevent your team from doing free labor for the customer
and going over budget with labor costs and delaying the schedule.
Track individual components. To make it easier to understand where overspending happens,
track both budget and spending for individual components of larger projects. This may mean
tracking contractor spending, tracking labor in different departments or tracking labor and
material costs separately.
Revise budget if necessary. If your corrective measures don't fully get the project's costs within
the estimated costs, review the original estimation and budget process. If there were
discrepancies or forgotten costs during that process, work with the client to revise the budget
and use that information to make better estimates for future projects.
 Cost breakdown structure

Cost budgets usually start with a procurement strategy and the cost breakdown structure
(CBS). The CBS defines the level at which costs will be collected. Its purpose is to allow
budgets to be set and costs to be collected, recorded and controlled.
Cost control is an essential part of any financial strategy. When monitoring your company’s
finances, how can you stay within budget?

Just like personal budgeting, you can do a variety of things, like categorize spending,
determine areas where your team spends the most money, and find ways to limit spending in
each area. Successfully doing all these things is what controls the budget and increases profits.

The basic principles of cost control are similar for corporate and personal budgets. In this
article, we’ll explain what cost control is and how cost control fits into the cost management
system.
 Cost controlling in Thermal Plants

Infrastructure 1 is the basic need for physical and social structure development and for the
operation of mechanism of a society and enterprise. It can be generally defined as the set of
interconnected structural elements that provide framework supporting an entire structure of
development. It is an important term for judging a country or region's development. The term
typically refers to the technical structures that support a society, such as roads, water supply,
electrical grids, telecommunications, and so forth, and can be defined as "the physical
components of interrelated systems providing commodities and services essential to enable,
sustain, or enhance societal living conditions”. The importance of power sector for the
development of a country cannot be overemphasized. As a matter of fact infrastructure is the
lifeline of the economy of a country. It is seen that all the developed countries have adequate
power supply so that all the activities are executed efficiently, smoothly in time. On the other
hand, all the underdeveloped and developing countries have not sufficient supply of power.
The power plans of these countries targeting for building of adequate infrastructure to put their
economies on a high growth path. The power generation in India can be explained with the
help of following table and figure. The power generation graph showing upward trends tomeet
the growing power demand of industry and household. This is shows a positive sign about the
growth of India.
The power demand in India is always more than power availability. So there is always power
shortage in the concern. The table given below and figures shows that energy shortage has
downward trend. This indicates that reform in power sector is in right dire 0 1997-98 1998-99
1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09
2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 3 The power demand in India is always
more than power availability. So there is always power shortage in the concern. The table given
below and figures shows that energy shortage has downward trend. This indicates that reform
in power sector is in right dire 200 400 600 800 Power Generation in india Generation(Billion
Unit) The power demand in India is always more than power availability. So there is always
power shortage in the concern. The table given below and figures shows that energy shortage
has downward trend. This indicates that reform in power sector is in right direction.
The study of peak demand data shows that in earlier year’s peak shortage was in two digits
but now due to proper planning and management it goes even below 5% in present scenario.
It is also clear from the data and figures available in table and figures given below.
Most generating capacity in India is with government owned organizations. The Electricity
Supply Act, 1948 created State Electricity Boards (SEBs) and gave them responsibility for the
generation, transmission, and distribution of power, as well as the authority to set tariffs. SEBs
set up by state governments operate on minimum budgetary limit and revenue shortfalls.
Electricity tariff fixed by SEBs failed to cover costs and generating capacity which was
expanded slowly in the 1960s and 1970s. Consequently and blackouts were common. To
increase generating capacity, the government of India established the National Hydroelectric
Power Corporation and the National Thermal Power Corporation2 (NTPC) in year 1975, which
built generating capacity and transmission lines that

fed into the SEB systems. In 1990, 63 percent of installed capacity was owned by SEBs, 33
percent by the federal government, and 4 percent by private companies. Beginning in 1996,
attempts were made to reform SEBs by establishing State Electricity Regulatory Commissions
(SERCs) and by unbundling generation from transmission and distribution— traditionally the
first step to reform electricity sector. By 2009, 85 percent of coal-fired generating capacity
owned by SEBs had been unbundled, but the purchase of generating capacity by independent
power producers was not available then. SERCs were also to reformthe method by which
generators were compensated. Under the Electricity Act, 2003 SERCs were to follow the
Central Electricity Regulatory Commission’s (CERC’s) guidelines in compensating
generators. The CERC 3 compensates the power plants under its jurisdiction based on
performance. Compensation for energy used in generation is paid based on scheduled
generation and depends on operating heat rate. Compensation for fixed costs (depreciation,
interest on loans and finance charges, return on equity, operation and maintenance expenses,
interest on working capital, and taxes) is based on plant.

availability. There is, however, evident that SERCs have set compensation for fuel use based
on very high estimates of operating heat rate, suggesting that this may not provide much of an
incentive for plants to improve thermal efficiency.
 Techniques of Cost Control Implemented by Small and Medium Scale
Enterprises

With the liberalization of the Indian Economy and Globalization, there is now an efficient cut
throat competition from various concerns of the world. As a result there is now competition to
secure a position for survival. This has increased the importance of effective Cost Control.
Business Administration is the process of managing a business or non-profit organization so
that it remains stable and continues to grow. Business includes industry (production) and
commerce (distribution). It is a systematic and organized course of activity with the purpose
of earning and living. It is necessary to study the factors such as Administration, Management,
and Effective Control over Costs, which contribute to its success or the conditions that are
essentials for success in business. Though it is not essential to be a financeexpert to understand
the definition of cost control, planning and actually implementing the cost control techniques
can be quite a big challenge. It is essential for the managers, accountants, supervisors etc. To
have a good understanding of the cost control judgment which is a part of effective cost control
techniques? A firm exercising a better control last year does not mean that it has now been
relaxed from the cost control function. Cost control relies heavily on accounting techniques.
Some of the key cost control techniques are responsibility accounting control system, standard
costing, budgetary control and cost management ratios
Therefore, effective cost control includes the routine management of the organizational
activities, such as controlling of wastage, misappropriation, loss of work time, set up time etc.

OVERVIEW OF SMALL AND MEDIUM SCALE ENTERPRISES

With the advent of planned economy from 1951 and the subsequent industrial policy followed
by Government of India, both planners and Government earmarked a special role for small-
scale industries and medium scale industries in the Indian economy. Due protectionwas
accorded to both sectors, and particularly for small scale industries from 1951 to 1991, till the
nation adopted a policy of liberalization and globalization. Certain products were reserved for
small-scale units for a long time, though this list of products is decreasing due tochange in
industrial policies and climate. SMEs always represented the model of socio- economic
policies of Government of India which emphasized judicious use of foreign exchange for
import of capital goods and inputs; labor intensive mode of production; employment
generation; non concentration of diffusion of economic power in the hands of few (as in the
case of big houses); discouraging monopolistic practices of production and marketing; and
finally effective contribution to foreign exchange earning of the nation with low import-
intensive operations. It was also coupled with the policy of deconcentration of industrial
activities in few geographical centers. It can be observed that by and large, SME’s
in India met the expectations of the Government in this respect. SME’s developed in a
manner, which made it possible for them to achieve the following objectives:
1. High contribution to domestic production
2. Significant export earnings
3. Low investment requirements
4. Operational flexibility
5. Location wise mobility
6. Low intensive imports
7. Capacities to develop appropriate indigenous technology
8. Import substitution
9. Contribution towards defense production
10. Technology – oriented industries
11. Competitiveness in domestic and export markets
At the same time one has to understand the limitations of SMEs, which are:
1. Low Capital base
2. Concentration of functions in one / two persons
3. Inadequate exposure to international environment
4. Inabilityto face impact of WTO regime
5. Inadequate contribution towards R and D
6. Lack of professionalism In spite of these limitations,
the SMEs have made significant contribution towards technological development and
exports. SMEs have been established in almost all-major sectors in the Indian industry such
as:
Food Processing
Agricultural Inputs
Chemicals and Pharmaceuticals
Engineering; Electricals; Electronics
Electro-medical equipment
Textiles and Garments
Leather and leather goodsMeat
products
Bio-engineering
Sportsgoods
Plastics products
Computer Software, etc.
As a result of globalization and liberalization, coupled with WTO regime, Indian SMEs have
been passing through a transitional period. With slowing down of economy in India and
abroad, particularly USA and European Union and enhanced competition from China and a
few low cost centers of production from abroad many units have been facing a tough time.
Those SMEs who have strong technological base, international business outlook, competitive
spirit and willingness to restructure themselves shall withstand the present challenges and
come out with shining colors to make their own contribution to the Indian economy.
Meaning of Small Scale Industries:
Use of “small” as a designation in industry differentiates one set of industries from others
according to comparatively small in operation, employment, production, capital, technology,
processes layout etc. Thus this small sector share unique problems compared to others. In the
case of industrial units small industries are to be expected to have a unique set of problems in
relation to their ‘smallness’ that differentiates them from large industrial units. At the same
time, the small sector has unique advantages. As a matter of fact small scale sector has now
emerged as a dynamic and vibrant sector for the Indian economy in recent years. Not only
industrial planners and economists but also sociologists, administrators and politicians are
attentively attracted towards the sector for different parameters. Indian economy witnessed
with cottage industries, handicrafts, village industries, home industries etc. from its origin or
ancient period. The concept of small scale industry is only relative to the circumstances,
perhaps this may be the reason for lot of confusions and misunderstanding regarding the
definition of 'small scale industry'. The definition of small scale industries have been shaped
in the planning period.
Definition of Small Scale Industry:
Defining small-scale industry is a difficult task because the definition of small-scale industry
varies from country to country and from one time to another in the same country. In most of
the countries in the world, the criterion for defining a small enterprise is related to the size of
employment. Every country has set its own parameters in defining small-scale sector. The
definition of small industry is an important aspect of Government policy as it identifies the
target groups. The conventional definition includes cottage and handicraft industries which
employ traditional labor-intensive methods to produce traditional products, largely in village
households. On the recommendation of the Federation of Association of Small Industries of
India (FASII), an apex level organization of small-scale sector, set up under the aegis of the
Ford Foundation team, only the investment in fixed assets in plant and machinery, whether held
in ownership terms or by lease or by hirepurchase, instead of fixing the limit on overall
investment, was considered for granting the status of a SSI unit.
From time to time, there have been changes in the ceiling limit of investment in plant and
machinery. The Fiscal commission denotes that – “A cottage industry is one which is carried
on with the help of the family either as a full time or as a part time occupation.” 11 The Small
Scale Industries Board (SSIB) in 1955 defined, "Small-scale industry as a unit employing less
than 50 employees if using power and less than 100 employees if not using power and with a
capital asset not exceeding Rs. 5 Lakhs". Again the definition and concept was modified to
promote small scale sector. Ministry of Commerce and Industries provided a new definition:
“Small-Scale industries will include all industrial units with a capital investment of not more
than Rs. 5 lakhs, irrespective of the number of the number of persons employed” Fixed capital
investment in a unit has also been adopted as the other criteria to make a distinction between
small-scale and large-scale industries. This limit is being continuously raised upwards by
Government. In 1966, the small scale enterprises were defined as undertakings with a fixed
capital investment of less than Rs. 7.5 lakhs and ancillaries with a fixed capital investment of
Rs. 10 lakhs, investment will imply investment in fixed assets in plant and machinery, whether
held in ownership term or lease or by hire purchase. 'The initial capital investment of Rs. 7.5
lakhs has been changed to Rs. 10 lakhs for small scale enterprises and Rs. 20 lakhs for
ancillaries in 1975. Again this fixed capital investment limit was raised to Rs. 20 lakhs for
small units and Rs. 25 lakhs for ancillary units in 1980. At the same time, in the case of tiny
units, the limit of investment has been raised from Rs. 1 lakh to Rs. 2 lakhs.
The Government of India in 1985, has further increased the investment limit to Rs. 35 lakhs
for smallscale units and 45 lakhs for ancillary units. Again the new Industrial Policy in 1991,
raised the investment ceilings in plant and machinery from Rs. 35 lakhs to Rs. 60 lakhs for
small-scale units and from Rs. 45 lakhs to Rs. 75 lakhs for ancillary units. An ancillary unit is
one which is engaged or proposed to be engaged in the manufacture or production of parts,
components, sub-assemblies, tooling or intermediaries or rendering services and the
undertaking supplies or renders or proposes to supply or render not less than 50% of its
production or services, as the case may be, to one or more other Industries undertakings and
whose investment in fixed assets in plant andmachinery whether held on ownership terms or
on lease or on hire-purchase does not exceed Rs. 10 million. During 1997, as per the Abid
Hussain Committee's recommendations on smallscale industry, the Government of India has,
further raised investment ceilings to Rs. 3 corers for small-scale and ancillary industries and
25 lakhs for tiny enterprises. The new Policy Initiatives in 1999-2000 defined small-scale
industry as a unit engaged in manufacturing, repairing, processing and preservation of goods
having investment in plant and machinery at an original cost not exceeding Rs. 100 lakhs.
Since then it was maintained till the year 2006. These units have been merged with “Micro,
small and Medium Enterprises” (MSME). The act clearly dived into two categories of
industries; one is enterprises engaged in the manufacturing of production of goods pertaining
to any industry and another is enterprises engaged in providing or rendering of services. The
MSMEs of manufacturing enterprises have been classified into micro, small and medium
enterprises based on the amount of investment in plant and machinery
Definition of Micro, Small and Medium Enterprises in India Micro, Small and medium
enterprises as per MSMED Act, 2006 are defined based on their investment in plant and
machinery (for manufacturing enterprise) and on equipment for enterprises providing or
rendering services. The defined limit on investment for enterprises to be classified as micro,
small and medium enterprises is as follows:
 Cost control and cost accounting in tyre industry

Cost accounting can be broadly defined as "the body of concepts, methods and procedures,
used to measure, analyze or estimate the costs, profitability and performance of individual
products, departments and other segments of a company's operations, either for internal or
external use of both, and to report on these questions to the interested parties". In case essence
of management planning and control, cost accounting is considered helpfiil due to its ability in
classifying, collecting and analyzing the cost. The installation of appropriate system for
controlling the purchase and use of materials, the effective utilization of labour and obtaining
and using services are also a part of the field of cost accounting. For a better cost control the
cost accounting department has to calculate the direct cost of a product/ process and to add
there to a due proportion of indirect costs incurred. Direct costs included the cost of direct
material, direct labour and some other direct expenses which are incurred in the course of
manufacturing of a particular product/ process. Indirect costs include proportionate cost of
factory expenses, administration, selling and distribution expenses, which are incurredfor the
common benefit of all product/process of a firm. The cost accounting department can,
therefore, ascertain the cost of each product/process of a firm. The cost accounting department
can, therefore, ascertain the cost of each product/process in a systematic manner. The
managerial process cycle involves investigation and diagnosis, planning and controlling. Thus,
control is an important function, which ensures accomplishment of work as per the plan
specified. Therefore, all accounting efforts are made toward executing control over the
activities of an enterprise. This is will presented by preparing monthly summaries of sales,
operating costs and profits. Such accounting statements are important for management as they
give an overall view of the financial aspect of an enterprises performance. However, the degree
for of dependency upon guides and standards for measurement differs from accounting process
to other. Thus, investigation and diagnosis rely heavily on historical data; planning leans
powerfully on anticipation and projection; and controlling depends totally upon standards and
measures of deviation. Cost accounting records play a vital role in the control function of
management as illustrated below
Control over material
l Material is considered the largest cost element and constitutes a major proportion of the total
cost production. Hence, control over this cost element is most necessary for the ample scope it
provides for cost reduction. This can be affected handling of all classes of inventorieswhich
constitute a sizable task in any manufacturing concern. This is ensured by the cost accounting
system which involves the use of different account books and documents like bin card, stores
ledger, material abstract, etc., that provides an affective check on the incoming and outgoing
of materials and store into a from the business. This will largely help in reducing the
possibilities of theft, pilferage, deterioration, etc. such a control is one among many other in a
system of inventory supervision, which will be explained in detail Chapter 3 and particularly
in relation to the practices adopted by the tyre industry in India through a study of the cost
accounting system in some selected unit.
 Control and Labour

Labour is the second major constituent of cost. Therefore, detailed analysis and study of every
direct labour operation is necessary in a system of cost control. In this regard the cost
accounting system plays a major role by employing techniques of scientific management of
job analysis, operation analysis, time and motion study and wage incentive. This can be done
more smoothly is daily summary reports are prepared to show the number of hours worked
and wage rate of each worker per job or operation. This will also disclose the number of hours
worked and the idle time for the purposes of managerial control. This will be discussedin detail
in the fourth chapter.

Control over overhead

Overhead expenses are the third element of cost. Here the responsibility of the cost accounting
system lies in classifying costs into direct and indirect so as to facilitate the costing of
production units. Moreover, further classification of overheads or indirect cost intocontrollable
and noncontrollable enables management to concentrate more on those costs which can be
reduced or eliminated e.g. this will explained in detail in the fifth chapter.

Control through product specifications

Product specification involves detailed written specification for every product manufactured
and special job undertaken. This system will help reducing the cost of production as
guesswork is removed from the quantity or raw materials required. This will also contribute
towards control over costs as the production order is made according to predesigned set of
such specifications. All these are a part of the wealth of data made available to management
by installing cost accounting system.
 Control from Plan layout

This can be attained by analyzing the production operations involved in the manufacture of a
product in relation to the space available for these operations from the basis of plant layout.
Such analysis is taken care of by the cost accounting system and results in the preparation of
the flow chart of the manufacturing process. This will aid in arranging the plant in a manner
as to ensure the best possible production output with the least input of efforts, which will
reflect in reducing the cost of production. Control from production scheduling Production
scheduling means predetermined timings for a given quantity and type of production. This
requires grouping and arranging the present available orders from customers, which have to
be transcribed into plant production orders in a way to make the most economical use of
production facilities by management resulting in large savings of money costs. A cost
accounting system shed enough light on such procedures. From all above it can be observed
that the cost accounting as a tolls of management planning and control is directly linked with
cost analysis.
Duly analyzed cost data is essential for management decision making which is based on a well-
defined distinction between relevant costs and irrelevant costs. This is important to determine
the various alternatives from which the best course of action has to be chosen. Costcontrol is
important not only with regard to production activities but is equally important of marketing
operations although control of marketing costs has received relatively less attention than
control of manufacturing costs. For this purpose, an analysis of marketing costs, and cost
information based on such analysis, are invariable required by marketing managers. Surely the
nature of marketing operation makes it difficult to apply cost control of marketing costs has
been well established.
 SUGGESTION

As with any project, cost controls are essential in ensuring that the appropriate time and resources are applied
to the project and any potential for waste is reduced. However, often cost controls are applied without regard
to the overall impact these can have on the project and thereby serving as an impediment to the project as a
whole or causing an increase in costs as the project progresses. Not all cost controls have to be resource-driven
as some cost control measures can be included in the original outlay of the project. There are five key means
of engaging cost controls while avoiding an improper application that can cause concerns both before and
during the project implementation.

Team Communication
While adequate prior planning is an obvious means of controlling costs, proper team communication is
essential during all phases of a project. This includes engaging in a dual traffic of communication where
managers and project leaders communicate expectations and objectives, but concerns are facilitated upwards
as well. This prevents problems from reaching a crisis as issues can be managed effectively before said point.
Clear and concise team communications create an avenue of flexibility that can be leveraged to help in
reducing costs.

Maintaining Change Controls

Changes occur with any project, regardless of scale. However, controlling how changes are managed and
implemented can reduce the impact on the overall project. It is not about always limiting the change requests,
but altering how the change is formatted, its relation to the scope of the project and its subsequent
communication to the necessary change providers.

Explore For Hidden Costs

Hidden costs can be a significant factor in controlling costs. This can be a lack of anticipation in regards to
fluid assets or commodities necessary for the project or any number of variables. An exacting search for
hidden costs should be conducted as part of any planning stage, however, there should also be a period review
for hidden costs during various phases of a project. This can reduce the impact of the costs upon their
discovery and allow them to be effectively managed within the context of the project.

Maintain Consistent Headcount

Managing human resources can be an important part of a project’s cost control methodology. It is important to
maintain a consistent level of staffing in all aspects of the project in order to reduce the potential for cost
increases due to adjusting staffing levels ad hoc. In addition, it can have ancillary effects on other aspects such
as costs due to safety concerns and more.

Implement Vendor Controls

Vendors will attempt to pass on cost increases as they occur. However, proper vendor controls can limit these
increases. Additionally, vendors who are underperforming should be replaced as part of a project’s vendor
control scheme to reduce potential liability and other hidden cost areas.
While not a comprehensive list of cost control aspects, these five measures can help limit cost increases while
at the same time reducing the impact on other aspects of the project. A maintenance of scope and change
controls, implementing vendor controls and discovery of hidden cost areas while also providing clear
communication of objectives, expectations and maintaining a consistent headcount can limit and control costs
while ensuring the success of the overall project.
 Conclusion

Cost control and cost reduction are critical processes for many organization’s that reduce
production costs. Therefore, a decrease in total production cost and reduction in cost per unit
is necessary, which we can perform using cost control and cost reduction.

Cost control requires the predetermination of an estimated cost, which is not applicable in all
industries. In contrast, cost reduction is applicable in all industries as it center’s on lowering
production costs while increasing profit.

Finally, we can conclude that cost control provides a road map for organization’s, while cost
reduction challenges brands by lowering product costs:

 The best way for determining the selling price is to use the production expenditures.
 Always set your selling price high than your costs; the difference between the two is what
you call profit.
 The major the profit and your gain, the high the selling price.
 Cost, in common use, the fiscal value of goods and services that producers and consumers
purchase.
 In a introductory profitable sense, cost is the measure of the indispensable chances foregone
in the choice of one good or activity over others.
 This elementary cost is ordinarily referred to as opportunity cost.
 In order to create company methodologies, management uses cost accounting to forecast the
cost price and selling price of a good or service.
 The management can develop methods to control expenditures with the goal of achieving
maximum profitability by using cost value as a reference.
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