Cost Control and Cost Reduction

PRINCIPLES OF COST CONTROL 1. 1 Introduction represent is important to all told industry. toll shadower be divided into deuce general classes absolute greets and relative greets. Absolute woo measures the release in value of assets. Relative bell involves a comparison between the chosen course of action and the course of action that was rejected. This address of the choice action the action not taken is often called the opport social wholey be. The accountant is primarily concerned with the absolute comprise.However, the forest engineer, the planner, the manager call for to be concerned with the alternative terms the address of the lost opportunity. way has to be able to make comparisons between the policy that should be chosen and the policy that should be rejected. Such comparisons require the ability to predict cost, or else than merely record be. Cost information atomic number 18, of course, essential to the technique of cost prediction. However, the form in which much cost data ar enter limits spotless cost prediction to the field of comparable situations only.This limitation of accurate cost prediction may not be serious in industries where the occupation environ custodyt changes little from month to month or twelvemonth to year. In reap, however, identical take situations are the exception rather than the rule. Unless the cost data are broken down and recorded as unit cost, and correlated with the factors that control their set, they are of little use in deciding between alternative procedures. Here, the approach to the problem of useful cost data is that of identification, isolation, and control of the factors affecting cost. . 2 Basic Classification of Costs Costs are divided into two types uncertain costs, and mend costs. Variable costs vary per unit of take. For example, they may be the cost per cubic m of wood yarded, per cubic meter of dirt excavated, etc. Fixed costs, on the new(prenominal) turn over, are incu rred only once and as additional units of production are produced, the unit costs fall. Examples of fixed costs would be equipment move-in costs and alley access costs. 1. 3 Total Cost and Unit-Cost Formulas As harvesting operations become more complicated and involve both fixed and ariable costs, there usually is more than unitary way to accomplish a given task. It may be achievable to change the beat of one or both types of cost, and thus to arrive at a stripped-down total cost. Mathematically, the relationship existing between volume of production and costs can be expressed by the following equations Total cost = fixed cost + variable cost ? issue In symbols apply the first letters of the cost elements and N for the output or human activity of units of production, these simple formulas are C = F + NV UC = F/N + V 1. Breakeven Analysis A breakeven abstract determines the blockage at which one mode becomes superior to another manner of accomplishing rough task or objec tive. Breakeven analysis is a common and important part of cost control. One representative of a breakeven analysis would be to compare two methods of road manifestation for a road that involves a limited amount of cut-and-fill earthwork. It would be possible to do the earthwork by hand or by bulldozer. If the manual method were adopted, the fixed costs would be low or non-existent.Payment would be through with(p) on a day-to-day basis and would call for direct superintendence by a foreman. The cost would be calculated by estimating the cartridge holder required and multiplying this time by the total wages of the men employed. The men could also be stipendiary on a piece-work basis. Alternatively, this work could be done by a bulldozer which would have to be travel in from another site. Let us as junctione that the cost of the hand labor would be $0. 60 per cubic meter and the bulldozer would cost $0. 40 per cubic meter and would require $100 to move in from another site.The move-in cost for the bulldozer is a fixed cost, and is independent of the measuring rod of the earthwork handled. If the bulldozer is used, no economy ordain end unless the amount of earthwork is suitable to carry the fixed cost plus the direct cost of the bulldozer operation. Figure 1. 1 Breakeven Example for Excavation. If, on a set of coordinates, cost in dollars is plotted on the vertical axis and units of production on the horizontal axis, we can indicate fixed cost for any treat by a horizontal line parallel to the x-axis. If variable ost per unit output is constant, and so the total cost for any number of units of production will be the sum of the fixed cost and the variable cost multiplied by the number of units of production, or F + NV. If the cost data for two processes or methods, one of which has a higher variable cost, exclusively lower fixed cost than the other are plotted on the same graph, the total cost lines will intersect at some block. At this point the levels of production and total cost are the same. This point is known as the breakeven point, since at this level one method is as economical as the other.Referring to Figure 1. 1 the breakeven point at which quantity the bulldozer alternative and the manual labor alternative become commensurate is at 500 cubic meters. We could have found this same result algebraically by writing F + NV = F + NV where F and V are the fixed and variable costs for the manual method, and F and V are the corresponding values for the bulldozer method. Since all values are known except N, we can solve for N development the formula N = (F F) / (V V) 1. 5 negligible Cost Analyses A similar, but different problem is the determination of the point of nominal total cost.Instead of balancing two methods with different fixed and variable costs, the aim is to bring the sum of two costs to a minimum. We will assume a alter crew of 20 men is clearing road right-of-way and the following facts are available 1 . Men are paid at the rate of $0. 40 per hour. 2. Time is measured from the time of divergence clique to the time of return. 3. Total walk of life time per man is increase at the rate of 15 minutes per day. 4. The cost to move the face pack is $50. If the inhabit is moved each day, no time is lost walking, but the camp cost is $50 per day.If the camp is not moved, on the present moment day 15 crew-minutes are lost or $2. 00. On the tierce day, the total walking time has increased 30 minutes, the fourth day, 45 minutes, and so on. How often should the camp be moved assuming all other things are equal? We could derive an algebraic expression using the sum of an arithmetic series if we wanted to solve this problem a number of times, but for demonstration purposes we can simply calculate the bonny total camp cost. The average total camp cost is the sum of the average daily cost of walking time plus the average daily cost of sorrowful camp.If we moved camp each day, then average daily cost of walking time would be vigour and the cost of moving camp would be $50. 00. If we moved the camp any other day, the cost of walking time is $2. 00 lost the second day, or an average of $1. 00 per day. The average daily cost of moving camp is $50 divided by 2 or $25. 00. The average total camp cost is then $26. 00. If we continued this process for various numbers of days the camp remains in location, we would obtain the results in Table 1. 1. dishearten 1. 1 just daily total camp cost as the sum of the cost of walking time plus the cost of moving camp.Days camp remained in location Average daily cost of walking time Average daily cost of moving camp Average total camp cost 1 0. 00 50. 00 50. 00 2 1. 00 25. 00 26. 00 3 2. 00 16. 67 18. 67 4 3. 00 12. 50 15. 50 5 4. 00 10. 00 14. 00 6 5. 00 8. 33 13. 33 7 6. 00 7. 14 13. 14 8 7. 00 6. 25 13. 25 9 8. 00 5. 56 13. 56 10 9. 00 5. 00 14. 00 We see the average daily cost of walking time increasing linearly and the average cost of moving camp decreasing as the number of days the camp remains in one location increases.The minimum cost is obtained for departure the camp in location 7 days (Figure 1. 2). This minimum cost point should only be used as a road map as all other things are rarely equal. An important output of the analysis is the sensitivity of the total cost to deviations from the minimum cost point. In this example, the total cost changes slowly between 5 and 10 days. Often, other considerations which may be difficult to quantify will affect the decision. In Section 2, we discuss balancing road costs against skidding costs.Sometimes roads are spaced more closely together than that indicated by the point of minimum total cost if excess road construction capacity is available. In this case the goal may be to reduce the risk of disrupting skidding production because of poor weather or equipment availability. Alternatively, we may choose to space roads farther apart to reduce environmental im pacts. Due to the usually forthwith nature of the total cost curve, the increase in total cost is often small over a wide range of road spacings. Figure 1. 2 Costs for Camp Location Example.