Production Cost Control in Manufacturing Organization

Production Cost Control in Manufacturing Organization

PRODUCTION COST CONTROL DEFINITION – Production is the combination of man and material in an efficient manner with the aim of generating product.  In its broad since it is the concentration of man, material and machinery to produce goods.Production process can take the form of the following:

1.       Analytical

2.       Synthetic

3.         Extraction

4.       Fabrication

Analytical process:  An analytical process beings with a raw material which is subsequently reduced to its component parts to form one or more product.

Synthetic Process:  A synthetic production process combines different raw materials or combines different raw materials or component parts of form a product.  It may also be a process that changes a single raw material into a product of a different form.  Examples, chemical, drugs and brewing industries.

Extraction:  The raw materials come from the land, sea or air.  The process of obtaining these materials is called extraction.

Fabrication:  This is the process of making products of greater values from already manufactured materials.  Production basically can be carried out in two ways.  Continuously and intermittently.

Continuously Production:  Continuous production is characterize by a constant flow of materials in the production process.

Continuous production processes are characterized by production of a standardized product to stock before specific customer orders are received.  A factory assembling refrigerators is an example of continuous production.

Intermittent Production:   Intermittent production is a process that has varieties in the flow called job order or job for production.   It is characterized by production of specific customer order after the orders are received.  The product is built to customer specification machine shops that product a wide variety of product to customer.  Specifications are examples of intermittent production.

Standardization is necessary to achieve the maximum benefit from the continuous process.  The number of models, sizes designs and specification must be kept, if the number of models and sizes must increase, the volume must also increase so that the continuous production process can be efficient.

Production control is the function of management which plans, directs and controls the materials supply and processing activities are produced by methods to meet the approved production objective.  Production control is also a process for integrating labour machinery and materials to achieve the objective of the enterprise. Cost concern is a continuous characteristic of any organization effective cost control which depends greatly on co-operative motivation, effective communication in an organization. This concern for cost has been manifested variously in two ways:  Cost reduction and cost control.


Importance for cost control:  It is a fact that production cost constitutes the major proportion of operation cost I manufacturing organization.  Therefore for such manufacturing company to survive, grow and pay back its share holders by making reasonable profit,  the effective control of such a cost by management becomes very vital.

When cost is not properly controlled and maintained by ensuring that actual result are in alignment with pre-determined standards, it could result in higher operating cost, lower profit margins and finally dissatisfaction among owners and prospective owners.  It is quite natural that no manufacturing company can afford to invest resources in areas in which it has no latitude to control.  It is them critically clear that the importance of studying the method of production cost control cannot be over-stressed.

Need for cost control:    The need for cost control are:

1.                 To examine the control systems in operations at the project development institute Enugu

2.                 To evaluate them as to their effectiveness or otherwise.

3.                 To find out all the inherent deficiency

4.                 to make recommendations for solving identified problems and

5.                 possibly improve and undated any obsolete technique in line with recent trends.


Cost control is the process of ensuring that performance is close to exist standard as much as possible this involves the adoption of standards of comparison usually the procedure is to pre-determine cost and to compare the actual cost incurred with pre – determined cost.

Control is then achieved by the comparism of actual with the standard to reveal out of line performance in order that step may be taken to remove the responsible factor.

The affections cost control is a determinant in achieving profit maximization.  Cost control also aid in making – decisions with respect to capital investment, areas of operation and other basic process.  At the bottom the clerk exercise control in the way he uses his time and how he treats company properties in the middle,  the broaden of cost control falls on the supervisory personnel at all levels.

1.       conditions to be controlled:  This could be events like output cost and profit.

2.     Sensor:  This detects a change a physical stimuli and can be measured.  Examples include:  Excessive material which like remain unused.  All these things show that something is wrong somewhere.

3.     Comparator:  This is used for comparing actual with standard plan so as to detect deviation, what could be a comparator in ordinary business life is a manager, foreman etc.

4.       Activator:   This is a response to information from the company which helps to initiate corrective action.  Example of activator is when the top management changers the source of raw material or when a better personnel is recruited.

5.       Cost of Reduction Technique:  This is the process of finding ways to achieving a given result through improved designs, new layouts, incentive plans etc.

These ways are in most cases originated by the internal audit section under its structure services note to management.  According to Akano J. J. cost reduction is the improvement of the environment in a way to eliminating or reducing the incidence of spending.  To reduce or control cost must bear the following question;

1.                 What cost are incurred.

2.                 What are the cost incurred

3.                 By whom are the cost incurred;

4.                 Are the incurred costs reason for the benefits received.


Production overhead control:  Production overhead (manufacturing ) over head cost unlike the cost of direct materials and direct labour are indirectly related to products.  For example, they are the cost of indirect materials and supplies, indirect labour, repairs, maintaining, insurance heat, light an many others.  The manufacturing overhead rate that is calculated by dividing a budgeted measurable factor that is related both to the products and the overhead into a budget of manufacturing overhead at normal capacity.  These factors selected may be direct labour cost, direct labour hours, much line hours or some other bases of measurement that are appropriate for the particular manufacturing operation.

Control of overhead cost per-supposes a pre-determined budgeted overhead cost control pre-determining overhead cost requires thoughtful and tactful analysis of past experiences, ideal and other concrete information to arrive at the closest possible estimate for determing actual production costs.

Indirect manufacturing overheads have the fixed and variable components.  The variable component relates to the level of production activity.  Hence, before the overhead cost should have estimated, a consideration should be given to the estimated level of production range or activity and its attendant factors as to whether production should be capital intensive or labour insensive should be considered in the amount of manufacturing, overhead that will be incurred depends on the production method.  Moreso, factors as to whether the level of production should be based on an estimate of plant and workers maximum output under idea conditions or whether it should be such as to allow for practical situations.  Such as possible machinery breakdown or employees absenteeism and other factor important for estimating the level of production should be considered also.

Based on the estimated production level, the overhead absorption rate is determined and applied to the actual production.  Actual manufacturing overhead cost are recorded periodically, as they are incurred daily in the general and subsidiary ledgers.  The use of these ledgers allow for a greater control since related items of overheads are grouped together.  The same goes for others.

An important aspect of control of manufacturing overhead cost is their description according to the cost centes that incurred them.  A initial allocation or apportionment of some of these overhead costs to respective cost centries helps in achieving the cost control objectives, in that every cost center takes up it self the objective of controlling its overhead cost to pre-determined level or target.

Moreso, the creation of service department which services as responsibility centers where overhead cost are initially accumulated before their apportionment to the production also serve the same purpose of cost control.

In their own view, Allan Diebin and Harold Biarman maintained that an essential part of the overhead control system is the flexible budgeted cost are adjusted to reflect the level of activity.  The flexible budget procedure enable us to compare the actual overhead cost with a budgeted amount that is pre-determined for the same level of operation.


The cost control technique that is being used by the institute is the budgetary control system.  budgetary control is the planning on advance of the business as a whole ca be controlled.

The budgetary control system helps the institute:

(a)     To plan its policy

(b)     to coordinate the activities of a business so that each is part of an integral total and

(c)    To control each function so that the best possible result may be obtained.

The productions budget:  it shows the quality of products to be manufactured.  It is prepared by the production manager.  Like every other firm, the institute does not prepare production budget monthly or annually but it is prepare on requisition.  When the government or individuals requisites the institute to produce one thing or the other based on requisition the institute will prepare the production budget for that particular requisition.

However, production budget is based upon;

1.   The sales budget

2.   the factory capacity

3.   the budgeted stock requirement

The institute practices flexible budgets and not fixed or static budget system.

Material Cost Budget:  It is prepared for all the item of raw materials needed by the institute for its products on requisition.  Waste in the materials cost of production is considered when preparing the material cost budget.  The various materials cost is determined by the initial needed thus, giving the total materials cost.

Labour Cost Budget:  The cost of labour is considered negligible to the total production cost, and it is regarded a fixed cost.  Labour Cost budget is prepared base on the number of employees currently involved in production.

Factory Overhead Budget:  The institute also prepares factor budget.  The factory overhead is made up of both fixed and variable factory overhead.  It consists of the indirect cost involve in manufacturing.


Internal control system is the whole system of control, financial and otherwise, established by the management in order to carry on the business of the enterprise in on orderly and efficient manner, ensure adherence to management policies, safeguard the assets and secure a far as possible the completeness and accuracy of the records. However, the directors authorizes orders, no other person is allowed to do so except where the directors is not around and there is no hope of his coming back in the near future however, the person who issues requisition is different form the person who authorize it.  Again, whoever authorize the order, it should not exceed the limit which the institute approves.  For instance, the Directors has no right to authorize any requisition that is above 500 in number, which is the institute’s limit, when this is to happen, he has to consult other top management.  On agreement of such authorization, by the majority or two third, the director can go ahead with his authorization.


—-This article is not complete———–This article is not complete————

This article was extracted from a Project Research Work Topic


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Production Cost Control in Manufacturing Organization

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