Unit-1 Cost Control

UNIT 1

Cost Control

Control may be defined as a process by means of which managers attempt to direct, regulate and restrain the actions of people in order to achieve the desired goals of the establishment: financial success, preservation of sound environment, etc.

Steps in cost control –

Establishment of standards

Measuring performance

Taking corrective action ( if required )

ü  Establishment of standards include establishment of procedures, standard purchase specification, standard recipe, standard yield, etc. which are set a benchmark for performance.

ü  Measuring performance is done against the set standards; variance is checked to find how closely standards are being followed.

ü  Ideal = Actual +/- Variance, Variance should be within set parameters/ tolerable limits. Corrective actions are taken when the variance is beyond tolerable limits, which may include re-establishment of standards, if required.

Objectives and Advantages

·         To ascertain the profitability of each revenue-producing department.

·         To reveal the possible sources of economy.

·         To facilitate the optimum and better utilization of resources.

·         To obtain information for the adaptation of a sound pricing policy.

·         To give an opportunity for comparison.

·         To increase the efficiency of the employees.

·         To reduce the wastage and pilferage.

·         To allow flexibility in the selling price in case of the banquet functions this in turn results in higher revenue.

·         To prevent fraud by staff.

·         To set example for the subordinates by the managers or leaders (i.e. the supervisors).

 Methods of controlling food cost

                                I.            Ordering perishable food in quantities for immediate use in preparations and service.

                              II.            Ordering non-perishables food in quantities which can be turned over fast to prevent spoilage.

                            III.            Offering incentives to the staff for achieving sales target.

                            IV.            Using standard recipes from which portions can be easily identified.

                              V.            Close supervision and regular checks at strategic points to pinpoint area of variance and correct them in food control cycle.

                            VI.            Using modular equipments for storage, preparation and service.

                          VII.            Portioning of dishes in the kitchen, by handing it over to the service staff.

TYPES OF COST

TYPES OF COST

Costs are expenses the company has to pay during the production of its product. There are 3 main types of costs, these are fixed costs, variable costs, and semi-variable costs:

·         Fixed costs:

Costs that don't change over a period of time and don't vary with output. E.g. salaries, rent, tax, insurance, heating, and lighting. Fixed costs can also be called indirect costs as they are not directly associated with the final product. Fixed costs have to be paid even if the company is not producing any goods.

·         Variable costs:

Costs that vary directly with output so when output increases, variable costs also increase. E.g. raw materials, electricity. Variable costs can also be called direct costs as they are directly associated with production.

·         Semi-variable costs:

These costs have fixed and variable elements. E.g. a person working for the company may have a fixed salary but may also earn commission on sales.

Total costs are calculated by adding together fixed, variable and semi-variable costs.

2. ELEMENTS OF COST

We can divide total cost in following main elements of costs:

1. Direct Cost
It is that element of cost in which we can include the cost of direct material and direct labor. If we take its total, it will be prime cost.

a) Direct Material Cost
Direct material is that material which we find in the finished product and easily measures its cost. For example, for making furniture, woods are direct material and its cost will be the part of the direct cost.

b) Direct Labour Cost
Direct labor is used for producing the product. We pay wages for making a product to laborers and this cost will be the direct labor cost.

c) Direct Expenses Cost
Except for direct material and direct labor, all direct expenses will be direct expenses cost.

2. Indirect Cost 

Overheads

When we can not charge an expense directly on the product, we can say it is indirect expense or overhead. In overhead, we can include indirect material cost, indirect labor cost, and other following indirect expenses.

i) Manufacturing overheads
ii) Administrative overheads
iii) Selling overheads
iv) Research and development cost

Factory rent and rates, insurance of plants or telephone bill are the main examples of overheads.