Cost Control – A Means to Achieving Business Objective
Cost Control – One common definition of business states that a business is an organization dedicated to the god of profit maximization or producing the largest possible profit for its owners (Solomon 1978). This definition appears to be too narrow or restrictive in the sense that profit maximization id taken as the only god of the business. By implication, any venture that is operated without the intent to maximize with not quality to be a business.
But that view is unrealistic. We there fore define a business in a broader sense to mean an agency that engages in the production of goods and services regardless of the motive force behind the decision to produce. In the commodity market, it is this business that covers the supply side of the market and provides the demand side in the factor market.
In other words, this definition is of the opinion that profit maximization is not the only motive behind business activities, some none profit making organization can still be called red business entity.
Also on another hand may authors gives the definitions of business as the act of buying and selling. This definition is the common belief of a common man. From his point of view business is not ling but the act of buying and selling. But as we can see by this definition, it neglects some important aspect in the business sector like services, Advertising etc. the major dement of this definition is that it neglects some important aspect of business.
The word business can also mean a different thing or can be used in another from to represent a task or duty that are is supposed to do. But this is not our major concern since we are discussing the commerce aspect of business not jut the word business.
THE OBJECTIVE OF BUSINESS
It is obvious that operating a business undertaking is a difficult task. Even them, people persist in pursing that economic activity now considers the motive of the entrepreneurs setting up business organization. What they have to achieve when they are able to flock their business units?
- PROFIT MOTIVE: One important aspiration of business organizations is to make as much profit possible. That means such business would want to obtain higher revenues from disposing their products at prices higher than what ir will cost them to produce such items profit is desirable force firm both as income and compensation to the risk. Bearing entrepreneurs. Business will also rely on such profit as one at the ways of internally financing and expanding themselves.
2. POLITICAL MOTIVE: Some businesses are establishment as avenues for their owners to achieve their political ambitions. This business the linkage of the names of the owners with the products provided to the people in the constituencies serves as a marketing device. The names of these political contestants become house hold words as the house hold acknowledge the concern shown by the these business owners.
The attraction is that the product may have been sold to those likely supporters at prices much below that a normal market is sufficiently subdiced since the emphasis is to pass these products to onerous users who are expected to massively support the benevolent entrepreneurs at election time. Business ownership become a political campaign strategy.
3. PHILANTHROPIC INTENTION: Business can be set up mainly for the purpose of taking care of the less privileged members of the society. That is to a demonstration of philanthropy. The products of most needy without any prices charged alternatively such products may be sold to the most servile disadvantaged members at the community at prices below the cost of production. At the worst the prices attached to the items for this class of persons may dust allow the business to break even: that is where the price is equal to the cost of production per item.
4. SOCIAL SECURITY AND RECOGNITION: Even when some countries are aware that certain businesses are economically unprofitable, they still insist on embarking on them. They may be guided by the desire to provide greater security for their territories. The setting up of various plants for production of different arms and ammunition by many countries is carried out mainly for this purpose. The cost of their production is not intended to be recovered from their side’s revenue.Further more, some businessmen choose to establish their business in their word societies in spite of the certainty of financial losses from such ventures. The overriding intention may be to project the social image and of such communities that seen to have been obscure previously the social ranking of these business owners along their folks and colleagues is similarly enhanced.
5. MARKET SHARE: The immediate preoccupation of some business can be to capture a reasonable size of the market available to them.
This can usually be achieved be de-emphasizing the volume of profit accruing to such enterprises and concentrating more on what extent of market is controlled at a given point in time. In the pursuit of this objective the business concerned can dispose of the products at prices below the open market prices in order to under cut the sales volume with covering only the cost of production. Such business are said to engage in satisfying.
6. DEVELOPMENTAL OBJECTIVE: May business exist in development of target societies. They are established with the cardinal aims of creating jobs for the army of the unemployed, razing people’s income levels and bridging the income gap between such poor previously unemployed people and their rich contemporaries.Some business have also been inaugurated to open up neglected regions of a territory like the word areas. When Nigerian governments advocate word industrialization or baking, the immediate target is to encourage development. It is guide obvious that the cost of sustaining such word ventures may be too high to rover from the sides returns in the foreseeable facture.
The basic relevant infrastructure is virtually non existent in such rural areas and the cost of installing. It is usually too high to encourage profit making even in the near future.
OVERVIEW OF COST CONTROL
Before we can define cost control let us look at the two words separately before joining the two. Cost can be defined as whatever is to be sacrificed to obtain the desired out put in generally regarded as its cost of production.Cost arises because factors of production must be assembled to realize this out put as indicated in the production function.
According to Polimeni R.(1985) cost can be defined as the benefits given up to acquire goods and services. The benefits given up are measured in money terms by the reduction of assets or incidence of liabilities at the time the benefit are acquired. At the time of acquisition of the cost incurred is for present or future benefits when these benefits are received, the cost becomes an expense. An expense is defined by Akano .D.D (Apric 1981) as a cost that can give future benefits as classified as assets.An economist’s concept of cost is usually more elaborate than that of the non-economist. The non-professional economist e.g, an accountant, recognizes and includes only the payments made outright in the hire of external factors of production. Such payments constitute the explicit costs.
The professional economist however goes beyond the explicit cost in determining the cost of production for a given level of out put. He recognizes and includes the implicit or imputed costs. These are the payments due to the owners of the business because of their own internal contribution to the production process. They arise from all the businessman’s own resources applied in the production activity.
Therefore, the economist fall cost of the production of a certain level of output is composed of the explicit plus the implicit or imputed costs. An example of explicit cost is the wage paid to hired labour or rent paid to another landlord for the use of his land. In the case of implicit cost we can think of a former who, instead of hiring another person to cultivate his land, does it himself. The amount he would have paid the external labour which he now absorbs himself most be recognized as part of the total cost. It stands for an imputed cost. The explicit and implicit costs are jointly know as the fall opportunity cost of production or the economist’s cost.
A very important reason for engaging in the above distinction is that it influences the determination of profits by the two analysts. In a situation where the accountant is declaring positive profit, the economist may just observe a normal profit where total cost equals total revenue or an outright loss, where total cost exceeds total revenue.Control on the other hand can be said to be the manages activity which ensures that what is happening and organization is actually what is planned. Control can also mean the act of working in accordance with the stipulated plan at the organization to achieve the desired objective.
Control can not work with out plan. For effective control to take place, there most be stipulated plan which most be followed to achieve the maximum objective.The achievement of profit mating objective will not be possible if lake concrete industries could go to incur cost without control. The effective and efficient cost control is a major determinate for the achievement of the objective and their accomplishment is profit mating.
Akano J. J. (1981) in his study described cost control as “ the prevent of west within the existing environment in an organization. It is a procedure whereby actual results are compared, against predetermined standard, so that west can be measured, where appropriate, corrective action can be taken”. It means that before lake concrete industries can control cost, it most pre determine what was to achieve and what that achievement reasonably is likely to cost. Subsequently, actual performance most be evaluated and actual cost also ascertained. The actual performance and the actual cost are than compared increase in cost beyond what they should have would be investigated.
Two main methods are employed in controlling cost. These are budgeting control and cost reduction technique.” The main aim of these technique is to ensure that all resources available to use are effectively utilized.
BUDGETARY CONTROL
This according to him is a technique where cost and performance to be attired for a year or mouth or any longer period” are predetermined before the beginning of the period” Each department or sectional head is made to prepare a budget of cost interred to be incurred in his department for the period. He most however justify why the cost would be incurred. All departmental budgets of cost and performance are then consolidated for the lake concrete company as a whole cost budget, salaries and wages budget (which gross pay), depreciation of plant and machinery budget, administrative and other expenses budget, profit budget.
Emmanuel O.R and Otlay D.T (1984) defined budgetary control as “ the establishment of budget relating the responsibilities of managers and requirement of a policy and continuous comparison of actual with budgeted results either to score by individual action the objectives and their accomplishment of the policy or provide a basis for its revision.
When a budget has been prepared and accepted by the management, they became executive orders, on that those responsible for specific areas of the budget to ensure that they achieve the targets they have set for themselves.
In annual budget for the lake concrete industries is phased monthly/weekly over the years so that the actual for each monthly /weekly is compared with the budgets and abnormal various are investigated and action taken to prevent repetition. However no manager or supervisor id called upon to explain abnormal costs over which he has no control. For instance certain external factors such as government restraints, political upheaval, natural hazards etc are not within the control of managers and their effects on their performance are not blamed on managers.
SALES: At the end of made are compared with the budget. The sales manger answers queries why his target id not achieved. He defined himself by given the value of orders received but which redetection faculties could not meet if has sides order is within, he blames the production manager for not producing all the orders he received.
MATERIAL COST: Perhaps the most important aspect of cost control is material cost for every level at sides achieved, a predetermined material cost (based on past experience) would have been established i.e if it has been determined that material cost would be 6% of sides then material cost sides value of pay N20, 000 solve be N12,000 if the sides then because N19000 then material cost should be N5400 but if actual material cost becomes N12,000 then there has been excess usage of 1,200 and this will decimally reduce the profit budget by this amount. The factory or production manager with then have to explain why excess material usage of 1200 came about the reason could be one the followings.
– Excessive wastage
– Increase in unit price which was either not anticipated or through faulty purchasing procedure
– Negligence in usage.
Material management: The study if material cost leads us to material management. According to Nweke B.O (Ollins) Material management is concerned with the management of material inflow into of raw materials, component parts work in progress etc According to Omolehinwa (1985) “material management is concerned basically with planning and controlling of material.
Control is a process by which event are made to uniform to a plan.
Therefore, to control materials, the must be plan of action Omolehinwa E.O (1985), further stated that planning focuses on such issues “what to store, where to buy, when and how much to buy”
The main objectives and their accomplisher to minimize total cost. The total costs are given by the following equation:
Total material cost = purchase cost of stock + carrying cost + store cut cost.
There are different inventory models in which the behaviour of total material costs can be examined. One of the important. The models is the economic order quality (EOQ). It is very important in the material management. The model according to Omolchinwa(1985) assumes that”
– No price discount is allowed
– Demand rate is constant
– Carrying cost is directly proportional to the value of stock held.
– No stock out is allowed.
He further emphasized that two problems usually met in determining EOQ are
– What figures to use as cost at capital
– Determination of cost of placing orders.
Average cost will be different from a marginal cost.
The total relevant material cost that can be minimized under the base EOQ model is give by total stock cost = ordering cost X carrying cost. In our basic EOQ model, costs are ordinarily effected by the number of orders placed in a given period and the average stock carried is given by q/2, where Q id the order quality. The two most important things that most be considered in EOQ model is the carrying cost and the ordering costs. Carrying cost are those associated with keeping stock. The largest component of carrying cost consist of all the cost incurred in writing purchase orders.
N20. then the value of average stock held per annum = N120 x 500 = N10.000 but suppose carrying cost per naira is 5% then carrying cost per annum N10.000 x 0.055000
Carrying cost can be obtained as follows:
Let us assume that the order quality Q = 1000 units do that average stock = 500 units and cost of purchase per unit =
Ordering cost can be obtained also as follow: ordering cost = number of orders x ordering cost per order. If we have weekly purchase for example, require 50 times as may order consequently approximately 50 times as may ordering forms.
Economic order quantity can be derived with a formula.
EOQ = 240
C
Where
EOQ = Economic order Quantity
A = Total requirement
O= order cost
C = Carrying cost
LABOUR COST: Another most important aspect of cost control after material is direct labour cost. Omolehinwa dealt on it and according to him. ”it is the cost traceable to a product or job in economically feasible manner”. For effective cost control, the cost accountant should forward to receiving assistance from the following department.
PERSONNEL DEPARTMENT: This department provides the right type of labour for the organization. It is responsible for the management, tracing welfare transfer and retirement of labour to keep all relevant document and information on each worker.
ENGINEERING AND WORKERS STUDY DEPARTMENT
The department are responsible for :
– Maintaining softy and efficient working condition.
– Preparation of plan and specification for each job scheduled for production.
– Study work method
– Setting piece rates.
TIME KEEPING DEPARTMENT
Information regarding the workers use of their tine is obtained. This time keeping department provides information through the clock cards and the labour time ticks, production departments. As fore as the accountant id concerned, his primary interest in the production department as it effects labour cost is reporting to the production manager relevant labour cost information including labour cost variance and its significant effects wages department. Maintains a record of job classification, the department and wages rate of employee. It also determine the gross and net amount of those earrings. Other functions include summarizing the different deduction from the gross wages to be posted in total to be credit of the over time and bonus payments (if any).
OTHER COSTS
Similarly other actual cost such as repairs, consumables, stores, premises expense etc. are compared with budgets for each department variance or excess queried. To achieve the lake concrete industries objective, every supervisor operator etc has a responsibility for cost control.
COST REDUCTION
All the above points relate to budgetary control. To complement this technique, cost reduction is another tool employed to improve the profitability of lake concrete industries. Cost reduction is “the important of the environment by examine the purpose for which cost are incurred and by a variety of means according to Akano .J (may 1981) eliminate or reduce the incidence of spending”. To educe the consumption of resources require a constant appraisal of lake concrete industries and not just production processes, to reduce or control cost, we must constantly bear the following question in mind in whatever we do.
– What costs is incurred?
– What is the incurred
– Who incurs the cost
– Why are the cost incurred?
– Are the incurred costs reasonable for the benefit received?
MATERIAL COST CONTROLS
“In most industries, Akano fourthly emphasized account for about 50% to 60% of the total cost of product” since, it is a principle cost element, material cost should be effectively controlled. A saving in material cost is a lot in monetary terms. Major areas where material cost can be properly controlled are as follows: purchasing: purchasing function is to procure materials and it is therefore necessary to examine the following areas in purchasing.
-Whether deliveries are made to the factories as scheduled.
– Capital most not necessarily be heavily invested in stock of the some time ensuring that the factories do not run out stock.
– Economic order quantities (EOQ) most be maintained taking cognizance of price and storage costs.
– With the exception of purchase of material of low value tender or equations most be of material use. This will ensure that material are being purchase at competitive prices.
STOCK CONTROL
Most if not all manufacturing concerns keep sizeable quantities of stock and the cost associates with keeping stocks most be carefully watched from being on the high side than necessary. The following cost most be kept reasonable control.
– Storage cost of rent and rate space, insurance and container. improved loyal and store location would reduce these costs.
– Handing cost example fork lift trucks, pullet trucks, driver set good production planning would also reduce the costs. Stock taking costs can be reduced by reducing the stock taking time and personnel through continues stock taking and perpetual inventory system.
– Physical deterioration and evaporation can be educed by employing suitable storage facilities.
MATERIAL STORAGE AND ISSUING
The store administration cost should also be watched. (eg, paying reasonable wage to store keeping and clerks. The employment of capable store keepers with reasonable remuneration would reduce loss due to lackage, obsolescence pilferage since they would be more dedicated and run the stores efficiently by ensuring that::
– I necessary capital is not tied up in stocks.
– There are no stock run outs who can be very expensive the lake concrete industries in terms of production hours, lost and not meeting costumers delivery dates.
– Periodically producing a list of show moving or obsolete stock to manager so that alternative use or disposed decision can be guiltily taken.
MATERIAL HANDLING COSTS
Material handing cost increase with the rate which materials are moved or handled. Consideration should be given to the following points to achieve a reduction in cost.
– Good factory layout will ensure that material flow freely and directly through all the various point of use.
– The use of equipment such as conveyors crones, hoist, belts and tocks will reduce handling labour cost .
LABOUR COST CONTROL: According to Akano J.J (April,1981) “ the primary cause of high labour cost are poor factory layout, fault production design and bad production planning.
FACTORY LAYOUT: A poor cost because there should be no flow of worth, as a result more time would be taken to complete the job..
Also factory layout should simplify production process an as much as possible combine, and re-arrange task and possible reduction of operations.
PRODUCT DESIGN:
Good product design leads to lowest practical cost and the following principles should be borne in mind.
– purpose of the product most be achieved with out sacrificing quality.
– The Quality should not be above what is normally required
– Simplicity in operation and maintenance.
PRODUCTION PLANNING: A good production planning system can reduce labour cost by ensuring that.
– Enough job to occupy employees during the working period and notified to factory.
– best known ways of performing jobs must be fond by production planning and ensure they are commutated to the factory.
Labour efficiency : effective utilization of labour increases efficiency and labour cost per unit of out put is reduced. To achieve high labour efficiency consideration has to be give to incentive. To reduce labour cost, one has to increase productivity. To achieve objectives and accomplishment, the employee has to be convinced that they would benefit if they increase their productivity. This can be done by sharing of the increase between the employers and the employees (payment for instance)
The aim of incentive is to increase and maintain the employee’s interest and sense of responsibility. In Akano’s study (1981) “ the payment of bows, the provision of canteen and recreational facilities though motivate employees but lose their value early. To boast the employee’s moral and long term stabilization stabilizing effect on labour force which will in turn reduce labour cost. However, the additional cost of introducing labour cost reduction is through increase productivity. High labour turnover leads to high laobur costs. The following are dome factors that cause labour turnover.
– continual employment of in experienced labour/ either for social or political reason.
– Injustices or partiality in promotion and increment awards.
– Poor working conditions.
THE ROLE OF COST CONTROL IN BUSINESS
The role and importance of cost control in any business organization can never be over emphasized. No organization can achieve its desired objective with out engaging in the act of cost control. Let us look the various area that cost control plays important role.
– Helps the organization to reduce it total cost. Total cost as he all knows is all the cost incurred in the production of a particular product. When an organization engages in the act of cost control or controls, cost in every aspect of production, the overall total cost is reduced and that will give the organization an edge over other organization in competition.
– Profit maximization. This is another area in which an organization cuts cost in every aspect of its production, it helps and increase the profit maximization of the organization
– Improve production. Cost control helps the organization to improve in its production activities.
– Increase productivity. In order to achieve this consideration has to be given to incentive. To achieve objective and accomplishment, the employee has to be convinced that they would benefit if they increase, their productivity. This can be done by sharing of the increase between the employers and the employees.
– Continuation of business. Cost control makes the organization to continually be in business despite all adds.
-Edge over competitors. This is another role that cost control plans in the business organization. When an organization is engaged in cost control it gives the organization a very good edge over its competitors. It make the organization to win almost every aspect of the completion.
– Enables the organization to achieve that aim and objective. Cost control let, any organization to attain its objective and accomplishment effectively, which is to make profit.
—-This article is not complete———–This article is not complete————
This article was extracted from a Project Research Work Topic
“ANALYSIS OF BUSINESS OBJECTIVE AND THEIR ACCOMPLISHMENT THROUGH EFFECTIVE COST CONTROL
(A CASE STUDY OF LAKE CONCRETE INDUSTRIES LIMITED, ENUGU STATE)”
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Cost Control – A Means to Achieving Business Objective
