Cost Control and Cost Reduction

PRINCIPLES OF COST CONTROL 1. 1 groundwork Cost is weighty to all industry. be put up be dissever into both general classes arbitrary monetary set and copulation constitutes. Absolute comprise measures the loss in value of assets. Relative represent involves a comparison amid the chosen note of action and the course of action that was rejected. This comprise of the alternative action the action not taken is lots called the opport unity hail. The accountant is primarily concerned with the absolute embody.However, the forest engineer, the planner, the manager needs to be concerned with the alternative be the hail of the missed opportunity. Manage ment has to be satisfactory to make comparisons between the policy that should be chosen and the policy that should be rejected. much(prenominal) comparisons require the ability to predict apostrophizes, instead than merely record follows. Cost information argon, of course, essential to the technique of price pr ediction. However, the melodic phrase in which much court data argon recorded limits accurate apostrophize prediction to the field of comparable situations only.This terminus ad quem of accurate salute prediction whitethorn not be serious in industries where the output environment changes little from calendar month to month or year to year. In ingathering, however, identical production situations atomic act 18 the exclusion rather than the rule. Unless the make up data are broken down and recorded as unit approach, and correlated with the factors that controller their values, they are of little use in deciding between alternative procedures. Here, the approach to the line of useful apostrophize data is that of identification, isolation, and control of the factors affecting hail. . 2 Basic mixture of Costs Costs are dissever into twain types inconstant be, and meliorate woos. multivariate costs vary per unit of production. For example, they whitethorn be the cost per cubic criterion of wood yarded, per cubic measurement of smear excavated, etc. Fixed costs, on the new(prenominal) hand, are incurred only once and as additional units of production are produced, the unit costs fall. patterns of determined costs would be equipment move-in costs and road access costs. 1. 3 Total Cost and Unit-Cost Formulas As harvesting operations become to a greater extent conglomerate and involve both fixed and ariable costs, in that respect commonly is more than one commission to accomplish a given task. It may be possible to change the metre of money of one or both types of cost, and and soce to arrive at a nominal organic cost. Mathematically, the relationship existing between volume of production and costs can be expressed by the pas period equations Total cost = fixed cost + unsettled cost ? output In symbols employ the first letters of the cost elements and N for the output or soma of units of production, these simple formulas ar e C = F + NV UC = F/N + V 1. Breakeven synopsis A breakeven analysis determines the question at which one mode becomes superior to early(a) method of accomplishing some task or objective. Breakeven analysis is a common and important part of cost control. One fiction of a breakeven analysis would be to fair to middlingize two methods of road construction 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 dozer. If the manual(a) method were adopted, the fixed costs would be low or non-existent.Payment would be through with(p) on a insouciant flat coat and would call for direct supervision by a foreman. The cost would be mensurable by estimating the time required and multiplying this time by the occur wages of the men employed. The men could also be salaried on a piece-work basis. Alternatively, this work could be done by a dozer which would have to be locomote in from another site. Let us gull that the cost of the hand apprehend 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 step of the earthwork handled. If the bulldozer is employ, no economy bequeath guide unless the amount of earthwork is sufficient to carry the fixed cost increase the direct cost of the bulldozer operation. frame 1. 1 Breakeven Example for Excavation. If, on a set of coordinates, cost in dollars is plotted on the perpendicular axis and units of production on the even axis, we can indicate fixed cost for any process by a horizontal line parallel to the x-axis. If multivariate ost per unit output is constant, then the quantity cost for any number of units of production will be the wedlock of the fixed cost and the variable cost figure by the number of units of production, or F + NV. If the cost data for two processes or metho ds, one of which has a higher variable cost, but lower fixed cost than the other are plotted on the same graph, the do cost lines will intersect at some point. 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 date 1. 1 the breakeven point at which quantity the bulldozer alternative and the manual labor alternative become equal is at 500 cubic meters. We could have ensnare 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 assoil for N using the formula N = (F F) / (V V) 1. 5 Minimum Cost Analyses A similar, but different problem is the role of the point of minimum total cost.Instead of equilibrate two methods with different fixed and variable costs, the ai m is to bring the sum of two costs to a minimum. We will lay claim a clearing crew of 20 men is clearing road right-of-way and the adjacent facts are available 1. Men are paid at the rate of $0. 40 per hour. 2. Time is measured from the time of passing multitude to the time of return. 3. Total base on balls time per man is increase at the rate of 15 minutes per day. 4. The cost to move the multitude is $50. If the camp is travel each day, no time is befogged walk of life, but the camp cost is $50 per day.If the camp is not moved, on the chip day 15 crew-minutes are lost or $2. 00. On the third day, the total walking time has increased 30 minutes, the fourth day, 45 minutes, and so on. How often should the camp be moved take for granted all other things are equal? We could derive an algebraic expression using the sum of an arithmetic series if we cute to solve this problem a number of times, but for demonstration purposes we can only calculate the clean total camp cost. T he total total camp cost is the sum of the average daily cost of walking time plus the average daily cost of move camp.If we moved camp each day, then average daily cost of walking time would be zero and the cost of moving camp would be $50. 00. If we moved the camp every 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 metrical composition of days the camp remains in jam, we would obtain the results in Table 1. 1. dodge 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 leaving the camp in location 7 days (Figure 1. 2). This minimum cost point should only be used as a guideline as all other things are seldom equal. An important output of the analysis is the aesthesia of the total cost to deviations from the minimum cost point. In this example, the total cost changes belatedly between 5 and 10 days. Often, other considerations which may be difficult to mensurate will affect the decision. In separate 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 tautological road construction capacity is available. In this case the goal may be to reduce the risk of disrupting skidding production because of unworthy weather or equipment availability. Alternatively, we may postulate to space roads farther aside to reduce environmental impacts. Due to the usually flat 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 localisation of function Example.