PROJECT COST CONTROL*

COST CONTROL: DEFINITIONSCost control may be defined as steps taken by the management to assure that the cost objectives set down in the planning stage are attained.

For effective cost control, most organizations use Standard Cost System, in which the actual costs are compared against standard costs for performance evaluation and deviations are investigated for remedial actions.

Cost control is also concerned with feedback that might change any or all of the future plans, the production method, or both.*

ESSENTIALS INVOLVED IN COST CONTROL PROCESS:Set up targets of costs for a given production (reference base lines)

Measure the actuals periodically

Compare the actuals with the targets

Find out variances

Analyze the causes of variances

Take corrective actions.

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SETTING UP COST TARGETS OF A GIVEN PRODUCTION From the Sales Budget, a production plan is drawn.

The input costs are estimated. The basic elements of costs are RAW MATERIALS, LABOUR & OVERHEADS. Cost estimation is done on the basis of this information.

During the actual production process, the cost of raw materials, labour & overheads are determined:Raw Materials: Costs are ascertained from the material register or stores requisitions or Job cards, etc.Labour Costs: Are ascertained by Time Cards or Job cards, etc.Overheads: Costs are not allocated to a particular product. These are to be distributed among the products produced.*

TYPES OF COSTS:1. STANDARD COSTING: STANDARD COST is defined as a pre-determined cost based upon engineering specifications and representing highly efficient production for quality standards and forecasts of future market trends. IMPLIES THAT:a) For the estimated total output for the future period, the cost per unit is determined in advance for materials, labour and overheads. b) The cost is based upon past experience, experiments and specifications drawn up by the technical staff. c) The cost is expressed in rupees, considering firm estimates in respect of prices and rates that are likely to prevail.Standards differ from estimates, as estimates are loosely drawn up and are not meant as guide lines for action.Standard costs are carefully determined and are actually used for measuring actual costs & for locating un-necessary wastages.Standard costs helps a concern to improve its performance & to investigate causes of variance.

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ADVANTAGES OF STANDARD COSTING:Standard costs help management in fixation of prices and in laying down production policies.They provide constant and uniform basis for management regarding operational efficiency of workers and other staff members.Through study of variance, management needs to concentrate only on areas and problems which require its attention.Standard costs help in readily showing up and then , the elimination of avoidable wastage and losses.Performance of employees at all levels can be judged objectively.

Limitations:Standards may be either too strict or too liberalStandards once fixed rarely hold good for a long period. They require revision.*

2.HISTORICAL COSTS:Past accounting records of costs are used as standards for measuring performance.The past or historical cost becomes the basis for the comparison and evaluation of future performance.

Advantages:For using as a standard, the historical costs can be ascertained easily and economically from past accounting records.The comparative efficiency of business over a number of years is clearly indicated by it.The standard is easy and simple for understanding on the part of all sub-ordinates.Small companies use historical costs widely as their standard.Large companies have to depend on historical costs for those areas where no other cost standard are available. *

HISTORICAL COSTS (cont.):Limitations:Past working conditions and facilities that produced a certain result might not be present in subsequent years, thus it may fail to serve as a measure of performance in the years to come.

Past cost might not represent a satisfactory cost that should be strived for.

The historical cost can never prescribe what cost should be under planned conditions of work.*

3.ESTIMATED COSTS:The estimated cost of future operations is used by many companies as standards against which actual costs are compared and evaluated.Estimated costs are established from the result of past experience, the impact of present conditions and interpretations of future trends and situations.Estimated costs are the outcome of studies, analysis and judgment on the part of managers.Advantages:In a business with changing situation as well as in enterprises having non-repetitive character of activities, estimated cost supply the sensible and practical standard for control purposes.Intangible operations like research, public relations, etc., are not subject to control by any standards except estimated costs. Estimated costs are superior to historical costs as control standards. As the estimated costs looks into the future and incorporates results of forecasts, it provides a sound basis for evaluating actual costs. *

PROJECT COST CONTROL*

PROJECT COST CONTROLWe shall now see how the system of PROJECT COST CONTROL is set-up and applied to control a PROJECT and ITS RUNNING COST:

First you establish a set of reference baselines (costs, standards, milestones, etc.)

Then, as work progresses, you monitor the work, analyze the findings, forecast the end results and compare those with reference baselines.

If the end results are not satisfactory then you make adjustments as necessary to the work in progress, and repeat this cycle at different intervals.

It the end results get really out of line with the baseline plan, you may have to change the plan.

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SCHEMATIC DIAGRAM OF PROJECT COST CONTROLOUTPUTSet up Base Line PlanRequirements: Products Standards MilestonesCost ForecastsUncertaintiesProcurement StrategiesWork ForceSuccess Indicators etc.Monitor & ReportMeasure: ProgressQualityScheduleExpenditureCash FlowAnalyzeEvaluate:Progress vs PlanVarianceTrendsProductivityForecastsModify PlanControlFor Critical Items:Modify Activities:PeopleResourcesEquipmentMethodsReforecast & Revise:Cost EstimateScheduleQualityScope

COST CONTROL: INPUTSFollowing activities/ documents in the life of a project contribute to the organizations ability to effectively control project costs:

Cost Baseline: It is a time-phased budget that is used as a basis against which to measure, monitor and control overall cost performance of the project.It is made up by summing estimated costs by period. ( Has an S shape and is known as an S-curve.

Project Funding Requirements:Funding requirements, total and periodic (i.e. annual or quarterly), are derived from the cost base line.

Performance Reports:Performance reports provide information on cost and resource performance as a result of actual work progress. (cont..)*

COST CONTROL INPUTS:4.Work Performance Information: Information pertaining to the status and cost of project activities being performed is collected. This information includes:Deliverables that have been completed and those not yet completedCosts authorized and incurred Estimates to complete the schedule activitiesPercent physically complete of the schedule activities

Approved Change Requests:Approved change requests can include modifications to the cost terms of the contract, project scope, cost baseline, or cost management plan.

Project Management Plan:The project management plan and its cost management plan component and other subsidiary plans are considered when performing the Cost Control process.

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COST CONTROL TOOL :

EARNED VALUE TECHNIQUE (EVT) :

An important part of cost control is to determine the cause of a variance, the magnitude of the variance, and to decide if the variance requires corrective action.

2. The earned value technique uses the cost baseline contained in the project management plan to assess project progress and the magnitude of any variations that occur.*

*COST CONTROL TOOL

EARNED VALUE TECHNIQUE (EVT) :

EARNED VALUE TECHNIQUE (EVT) :

The PV, EV and AC values are used in combination to provide performance measures whether or not work is being accomplished as planned at any given point in time.

The most commonly used measures are cost variance (CV) and schedule variance (SV)

Determination of Variances:Cost Variance (CV): CV equals earned value (EV) minus actual cost (AC). The CV at the end of the project will be the difference between the budget at completion (BAC) and the actual amount spent, i.e.: CV = EV ACSchedule Variance (SV): SV equals earned value (EV) minus planned value (PV). Schedule variance will ultimately will be zero when the project is completed because all the planned values will have been earned. SV = EV - PV*

EARNED VALUE TECHNIQUE (EVT) :

The Earned Value Technique (EVT) compares :Budgeted cost of planned work, PVBudgeted cost of work accomplished (earned value) EVActual Cost of work performed AC.

The best way to read these three-line charts is: (a) Compare EV curve to PV for SV

(b) Compare EV to AC for CV

(cont..)*

*COST CONTROL TOOL (TECHNIQUE)The figure uses S curves to display EV data for a project that is over budgeted and behind the work plan.

PROJECT PERFORMANCE REVIEWS Planned reviews are meetings held to compare:Cost performance over timeSchedule activities or work packages overrunning and under-running budgetMiles stone due, and Milestones met.

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PROJECT MANAGEMENT SOFTWARE Project Management software, such as computerized spread sheets, is often used to monitor PV versus AC, and to forecast the effects of changes and variances*

COST CONTROL: OUTPUTS1.Cost Estimate (Updates): Scheduled activity cost estimates may be revised.Revised cost estimates may require adjustments to other aspects of the project plan.Cost Baseline (Updates): These values are generally revised only in response to approved changes in project scope.Sometimes, cost variance may be so severe that a revised cost baseline is needed.Requested Changes: Analysis of project performance can generate a request for a change to some aspect of the project.Recommended Corrective Actions: A corrective action is anything done to bring expected future performance of the project in line with the project management plan.Project Management Plan (Update): Includes schedule activity, work package or package cost estimates, cost base line, etc.*

End of Lecture*

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