The Impact Of Cost Control On Manufacturing Industries

The Impact Of Cost Control On Manufacturing Industries

CONCEPT OF COST CONTROL

The importance of cost control measure to business organizations cannot be over emphasized. The ultimate goal of an establishment is survival, which borders an selling and cost price. But selling price is affected by external forces, which are beyond the control of management. Therefore the only area which management can effectively control is its own cost, It is necessary in the study of this nature, to review the opinion of authors and scholars on the concept of cost control. Cost control is the regulation of executive action of the cost of operating an undertaking particularly where such action is guided by cost control (Edmand 2000).

Cost control to Lucey (2002), is the adherence to cost target that is compelling, even to conform to plan. This involves several activities. Thus control is the activity, which measure deviation from planned performance and provides information upon which corrective action can be taken if required to alter performance so as to conform to the original plan. He went on to say that a standard specify the expected performance. This can be in the form of a budget, procedure, stock level, an output rate, a standard cost or some other target, for example, a. budget has to be set and actual performance is also determined. This is measured and compared with the set standard and the result is reported in form of variance analysis.

Corrective action is taken in line with the report made where

deviation is glaring. Hence it is argued that “control” is an action that provides feedback of result (Hongren, 1997). It is essential to note here that in no case should control mean that managers must cling to preexisting plan, where unfolding event indicate a desirability later agreed that were not encompassed in the original plan. It is generally good that original plans can be modified in line with prevailing circumstances. Control of cost should be done given room for flexibility, plan and cost targets should not be considered as absolute inviolate. Well conceived plans should allow enough flexibility or discretion so that the manager may feel free to seize an unforeseen opportunity. To carry out cost control activities there must exist a well-organized and functioning cost accounting system.

Managers in making decision should consider cost information if they want to know the cost of an object, which my be a product, service rendered, process, activities etc for control purposes. Management needs timely and reliable feedback for information on cost incurred to evaluate performance and product. The basic purpose of a cost system is therefore to generate information. Thus the accounting system should provide information for internal reporting to managers for use in planning and controlling routine operations and external use (Weetman, 1996).

Different types of cost information are required for different objectives and different cost methods and techniques may be suitable for different purposes. The type of cost data depends on the nature of business and the decision to be made. It is therefore essential to define the objective and scope of the system. Definition could relate to the entire organization, department, product, functions, cost element e.t.c. So it is only when the scope and objective for which a cost system is being designed as defined, that it is possible to Select the appropriate cost method and technique to adopt.

Any cost system should provide not as much cost information but as much as it is needed and useful (Lucky, 2002). A cost system being an important requirement for a cost control device has to be properly managed for its to achieve its objective.

2.2 COST CLASSIFICATION

Wheldom (1974) stated that preliminary to determining, accumulating, summarizing, reporting and interpreting cost, that it is also necessary to classify them. In the case of manufacturing concern, costs are of the following two broad types: factory or production cost and distribution or selling and administrative cost. Early interest on cost control was centered on factory cost, while the greatest emphasis is still in this area. Many producers have become aware that effective control offers the promise of significant savings in the area of distribution cost. Furthermore, considerable attention is being paid to cost by wholesalers, retailers, financial institutions, government agencies and other enterprises outside the realm of manufacturing. Factory cost embraces direct materials, direct labour, direct expenses and factory overhead charges incurred in fabricating product. All other cost or expenses of a manufacturing enterprise can be regarded as distribution cost or general overhead costs.

Direct materials are those materials that can be physically identified with a specific product and which can feasibly be charged directly to a unit. For instance, in a printing plant, the paper used on a printing job is a direct materials, it becomes part of the finished product. It is thus possible with relative ease to change cost of paper directly to the job which it is used. On the other hand, the ink used for the job also turned into the finished product, but it is seldom practical to measure the amount of ink which is not charged as a direct material but as part of the factory overhead of the printing plant.

There are myriad instances in manufacturing where material goes into the product in such a relatively small quantity as to make it impractical to attempt to charge their cost directly to particular jobs. In direct cost includes a variety of items that could not be charged directly to jobs or unit of product because they are used for the benefit of all products rather than for any one specific product, for instance, it is impractical to attempt to estimate how much of a factory supervisor’s salary is chargeable to a pair or to a gross of shoes produced in this plant. Consequently, such cost must be apportioned over the total product.

Weetman (1996), is of the opinion that the distinction between direct and indirect cost is of most significance in job — order production, where it is desirable to charge to the fullest extent, all cost which are peculiar to each job, in order to arrive at an intelligent price for the job. In continuous production, where products are substantially alike or identical and the prices for them are uniform, costs are averaged over total production so that each unit is assigned a share of all costs, whether direct or indirect.

In Job order costing, indirect materials include factory supplies, such as office supplies, lubricants, repairs, and maintenance of materials, that enter into the product in quantities to significant for practical costing to particular jobs. The ultimate concern of a manufacturing company is not the making of product, but selling them at a profit. Hence, it is argued that all cost are distribution cost. To facilitate this analysis, however, industrial costs are usually divided into factory cost and general overhead cost, i.e selling and distribution cost. Selling expenses are those, which are mostly directly concerned with the marketing of goods and this is the responsibility of the chief executive. They embrace such expenditure such as, salaries, promotion, repair and maintenance, taxes, insurance, and miscellaneous expenses.

A general accounting system might yield only totals of such selling expenses as the above listed. Such figures could be compared between periods to discover trends for effective control, thereafter, more detailed data are required. It can be arranged for the accounting system to yield analysis of selling cost of sales territories or branches, individual salesman or types of outlet, geographical area, classes of buyers and method at delivery.

2.2.1 MATERIAL CONTROL

During (1992) stresses that effective control of material cost involves operational and accounting control. From the operational viewpoint, physical and procedural safeguards should be provided for materials and supplies.

In this case, physical facilities should be provided which will protect materials and supplies from damage, deterioration and make them inaccessible to others. Also specific employee should be made. responsible for the purchasing, receipt, inspection, care and disposition of the materials and supplies. Thus, responsibility of the materials control are divided among purchasing, receiving, inspection, store keeping, production and service department personnel.

Accounting control of materials cost will be affected by providing:

  1. Forms for recording the requisitioning, ordering, purchasing, reviewing, inspecting, issuing and other handling of direct and indirect materials.
  2. Written procedure for all such handling
  • Written authorization for persons in the company who are entrusted with any phase of the material acquisition and consumption.
  1. A system of reports to reflect materials cost performance in respect to such factors as usage, wastage, spoilage and variance from established price and standards.
  2. Logical, consistent policies for costing materials issued to product or service departments and for statement presentation of inventories.

During (1992) further explains that the control of materials cost should begin with the requisitioning of materials. Only a relative few responsible persons such as departmental supervisors should be authorized for requisition of materials and such authorization should be clearly defined in the accounting and procedure manuals.

In some cases, the authority for requisition of product materials and factory supplies will be confined to the production control department. In any case, there should be no opportunity for initiating unauthorized requisitions.

All requisition should be written even when’ there is an emergency situation and an order should be definite with a confirmed written requisition; while It is possible to make needed items by means of a’ written memorandum to the purchasing department, a requisition form should be designed, such that, will ensure uniformity of information supplied to the purchasing department and will minimize the amount of writing required in the requisitioning process.

The requisition form should conform to the needs of the business that will use it in general, it should provide for the following:

(i) Date requisition items needed

(ii) Requisitioned items needed

(iii) Requisition number

(iv) Precise description of needed items

(v) Signature or initials of originator or requisitor

(vi) Actual or estimated cost of items.

The Stores department will keep the original material requisitions in the

file as evidence of its transfer and accountability for the material issued. Receipts are similarly recorded in the stock cards from receiving reports. If inventory cards are kept in a separate stores ledger department, extra copies of receiving reports, material requisitions and other forms, which affects the balances of materials in stock, will have to be provided for the department. The accounting department will tabulate and summarize its copies of the material requisitions each month. It will then make a summary entry reducing the material inventory control accounts and charging the work-in-progress inventory control account for direct materials issued. Likewise, the accounting department will make a summary of receiving reports each month and charge the total receipts of materials to the material inventory control account.

Thus, the general accounting department will take care of monthly charges and credit the general ledger control account and material inventory. Meanwhile, the stores ledger clerks will record daily the receipts and issues of individual items of materials in the subsidiary store ledger. Hence, the whole idea of material control is to provide information that will assist with keeping cost under control.

2.2.2 CONTROL OF MANPOWER

Okoye (1997) explains that labour is the second element of cost aid it is argued that it is the most important element. In a sole entrepreneurship for example, a tailor working in his village, pays no electricity bill, rent, e.t.c. therefore, expenses are almost absent except for the cost of the repair of the machine. In extractive industries such as mining of crude oil, practically no direct material is used to produced the crude oil because it is the gift of nature. The necessary equipment are simply put in place to extract the crude oil. These examples show that materials and expenses can play minimum role in some industries but labour must be present in all cases. Apart from this, it is labour that controls the use of materials and expenses incurred. It is generally accepted that the success or failure of production of goods and services largely depends on the labour. Labour is therefore, a strategic element of – cost and needs to be monitored closely.

Okoye (1997) further states that labour is the human contribution to production process and it requires regular evaluation, control and analysis.

Horngren (1997) further explain that the operational control of labour cost involves job analysis, job classification and recruitment and training of qualified personnel. It also involves the appointment of various levels of supervisors with responsibility for clearly defined areas of labour cost and the necessary authority to maintain control over labour utilization.

2.3 COST CONTROL TECHNIQUES

The most common cost control techniques is 1’responsibility accounting” sometimes called control accounting, standard costing and budgetary control are often referred to as responsibility accounting (Lucey, 2002). Standard costing and budgetary control are two aspects of responsibility accounting which depict a situation where there is decentralization of authority, with the performance of the decentralized unit being evaluated in term of account result. Responsibility information about the input and/ or outputs of a responsibility centre to the percent body (Okoje, 1997).

Responsibility accounting is defined as the system of accounting that is within the organization reflecting the plans and actions by assigning particular revenues and cost to one person having a pertinent responsibility (Edmonds, 2000).

It may also be defined as a system of accounting n which cost and revenue are analyzed in accordance with areas that are personally monitored in financial terms (Lucey, 2002).

The basis of responsibility accounting is the partitioning of the whole organization into responsibility or control centres wherein, they delegate certain authority and responsibility to make some decisions. The head will be motivated to keep cost in check and increase revenue where applicable. This will lead to a high degree of consciousness in the various centres and cost will be controlled throughout the organization.

Performance of each head is measured and the result reported back to him. He then gives corrective action where necessary. This responsibility accounting is employed for performance measurement and control purposes.

The fundamental principle that must be in any responsibility accounting system includes:

(i) ORGANIZATION LINE

Responsibility and authority must be clearly drawn without overlapping. It is worth emphasizing that cost control s not achieved just by accumulating cost aid reporting cost information by organizational segment but by function and answer for them.

A proper organization structure is very important for effective cost control. By proper structure, it is meant that, there should be neatly drawn boxes on the authority and responsibility and the positioning of each function in the appropriate place in the structure. Proper decision of authority and responsibility will avoid gaps or overlapping of responsibility and authority. The exact arrangement depends upon the importance of various functions and their importance of various functions and their inter-relationship.

(ii) CONTROLLABLE AND UNCONTROLLABLE COST

Controllable and uncontrollable cost must be clearly separated in the report; Cost over which a manager has significant control within a given time span should be assigned to him and he is answerable for them. He should not be answerable or held responsible for cost which he has no control.

It should be noted that the term controllable and uncontrollable only has meaning in relation to a particular cost centre. What is controllable to management could be uncontrollable in another. However, they must be classified to meet the particular information needs at These two principles are necessary in order to identify with reasonable certainly the cost for Which any manager could be fairly held responsible. This is to avoid having one manager held answerable for decision made by another manager.

Having explained the general idea of cost centre or responsibility accounting, we shall now turn to explaining the two major techniques involved in standard costing and budgeting control.

2.4 AN OVERVIEW OF STANDARD COSTING

Standard cost is a focus or predetermination of what actual cost should be under projected conditions, serving as basis of cost control and as a measure of production efficiency or standard comparism when ultimately aligned against actual cost. It furnishes a medium by which current results can be compared and the responsibility for deviation can be placed. It is also considered as a predetermined calculation of how much cost should be under specific working condition (Lucey, 2002).

Standard cost with actual cost incurred and deviation are reported for corrective actions to be taken. The standard costs are set based on sound technical and engineering studies known in production methods and layout, work measurement, material specification, wages, material price projections e.t.c.

However, standard cost is not an average of previous cost; these are likely to contain the result of past inefficiencies and mistakes. Furthermore, changes in methods, technology and cost make comparison with the past of doubtful value for control purpose. Thus, realistic standard that can be used for control purpose rest on a foundation properly organized, standardized methods and procedures and comprehensive information system. This information enables the management to see whether processes are being worked economically and are producing a satisfactory output. It further serves as a guide to whether prices can be adjusted to meet competition. Nevertheless, cost control in respect of cost is best affected through actions at the point where they are incurred. Hence, standard should be set for labour, material, variables, overheads consumed in performing an operations. A standard should be maintained for each product and significant changes in production method or inputs price, they should be changed in order to ensure that standard reflect current targets (Druvy 1992).

Therefore, it can be said that standard costing serves as a cost control because it highlights those activities that do not conform to plan, and thus alerting decision makers to those situations that may be out of control and the need to take corrective actions and also simplify the task of tracing cost to products for control purpose.

2.4.1 THE PURPOSE OF STANDARD COST

The primary purpose of standard cost is to keep low the unit cost of production as possible, given the current state of production and given the current state of industry. The system. is made efficient by the achievement of the workers in using not more than the standard amount  of materials, labour and overhead to produce the product. Hence, we can say that the system is a motivational one. Its goal is to provide a bench mark for good performance which those workers would serve to achieve. Standard costing system however aids planning operation and gives insight into the probable impact of managerial decision on cost levels and profits. This is because according to Weelman (1996), standard cost are measured in advance of the period of time which they relate. This according to him would require estimates of price of inputs and outputs, which will aid planning and control.

In the views of Matz and Usry (1980) the purpose for which

standard cost would be used, which was also in line with the views of Weetman (1996) are as follows:

  1. Establishing Budgets
  2. Controlling cost and motivating and measuring efficiencies
  • Promoting possible cost reduction.
  1. Simplifying cost procedures and expediting cost reports.
  2. Assigning cost of materials, work in progress and finished good inventories.
  3. Forming the basis for establishing bids and contract and for setting sales prices.

It should be noted at this point that the effectiveness of controlling cost depends greatly upon knowledge of expected cost, standard therefore serve as a measurement which draws all attention for. cost variations. Thus executives and supervisors become cost conscious as they become aware of result. This cost consciousness tends to reduce cost and encourages economies in au phases of the business.

2.4.2. THE SETTING OF STANDARD

According to Garrison and Noreen (1994), the setting and standard of cost is more of an art than science. According to them, it required the combined thinking and expertise of all persons who have responsibility over price and quantities of output. It is thus expected that for the nature of this task to be carried out effectively, a committee should be set up. This committee is what Engler (1990) describes as “the standard committee”. The committee according to him normally include its controllers, industrial engineer, purchasing officer, factory superintendent, and line supervisor. Thus by this arrangement, each member is required to provide the needed information within his/her area of expertise, this committee however, is directly responsible for setting standards.

One should note clearly that the establishment of the standard committee with it member from different part of the organization is very necessary because according to Lucey (1989), meaningful standard, which can be used for control purposes rest on a foundation of properly organized and standardized methods and procedures and a comprehensive information system.

However, for standard cost to become an effective control mechanism, they must reflect what the future costs should be and not what past costs were. Past costs may contain inefficiencies and if they are automatically used as a starting point for the current year, the inefficiencies will be perpetuated.

2.4.3 ACCEPTANCE ANN REVISION OF STANDARDS

The advocates of standard cost see it as a way to achieve efficient operation through its planning and control influence on managers and workers. The operation of a good cost system with currently attainable standards yet right standards is not an easy task. It requires a considerable effort. The values of the system may be negated if the standards are constantly under attack by managers and workers.

Acceptance of the standards is necessary for at least two reasons.

(I) The workers must believe that they are reasonable. If the standards set are considered unfair, the workers may not attempt to achieve them and may try to subvert the standard cost system. The results are misdirected energy and, ultimately, misused resources which are the antithesis of the goal of standard cost.

(ii) The standard must be accepted if the variances are, to have meaning. If the standards are open to question, then so are the variances.

A typical policy is to review the standard whenever quantity or prices changes occur significantly, but at least one year. Failure to revise standards periodically can result in them becoming unfair for evaluation performance.

In the views of Anderson and Sollen Burger (1992), standard costs should be reviewed periodically to see if revision are necessary at the selected level of quantity. They asserted that although many factors may combine to determine the best time to review standard cost, they should be revised at least one year.

2.4.4 LEVELS OF STANDARDS

According to Pizzing (1987), standards can be divided into two main classes. Basic standard, and current standards. He however added that current standards could be further divided into ideal and expected standard.

Generally speaking, there are four (4) levels of standards and the ones used in a particular organization dependent on the requirement and objectives of management. The four main levels of standards as pointed by Abohi (2001) and supported by Aigbokhaevbolo (2002) are basic, ideal attainable, current and current standards.

Let us consider the various levels of standards one after the other.

(i) ATTAINABLE STANDARDS:

They are based on normal operating conditions and consequently some allowance is made for wastage, inefficiencies e.t.c. Well attainable standard provide a useful psychological incentives by giving employees a realistic, but target of efficiency. The CIMA official terminology

describes an attainable standard as a standard which can be attained if a – standard unit of work is carried out efficiently, a machine properly

operated or material properly used, allowance are made for normal shrinkage, waste and machine break downs. The standard represents future performance and objectives that are reasonably attainable.

Attainable standards are useful for annual operational plans and so ideal for various analyses. In summary, attainable standards exist where the critical control points of physical and cost standards are set at levels which are neither too tight or too loose, but are sufficiently tight to motivate staff performance.

A problem in setting attainable standards however might be to decide what a reasonable allowance is for waste and break downs etc, it can be argued that a standard should act as a challenge to employees but it is too challenging, it might fail to provide a motivating stimulus because it is unrealistic.

(ii) IDEAL STANDARDS

These as based on perfect working conditions. This is the standard that is expected to be attained with zero variance or defect, so no provision is made for waste and idle time (Aigbokhaevbolo, 2002).

Variance from ideal standards are useful for pinpointing areas where a close examination may result in large saving, but they are likely to have an unfavourable motivational impact because reported variances will always be adverse. Employees will often feel that the goals are unattainable.

(iii) BASIC STANDARDS

These are standards, which are kept unaltered over a long period of – time and may be out dated. These are used to show changes in efficiency or performance over a long period of time. Basic standards are perhaps the least useful and least common types of standard in use. However, the CIMA official terminology describes them as standards established for use over a long period of time from which a current standard can be developed.

(iv) CURRENT STANDARDS

These are standards based an current work conditions. According to Abohi (2001), current standards are normally for short-term duration to reflect current conditions. According to him, in stable conditions, current standards.

On his part, Agbokhaevbolo (2002) describes current standards as standards established to be attained in a specified short period of time to reflect the current situation. He further said that the standards are established with the hope that by the end of the limited time any temporary problems would be eliminated.

However, it is pertinent to note that current standards are very suitable in inflationary conditions when the physical standards are applied with current price levels. Current standards are however useful for operational plans such as for production, sales and stock, and useful for control purpose. The disadvantage of current standard is that they do not attempt to connect current levels of efficiency.

2.4.5 ADVANTAGES OF STANDARD COSTING

Owler, Brown (1983), suggested the following as advantages of standard costing:

(a) Actual performance is readily comparable with the predetermined standards, showing separately favourable or adverse variances.

(b) The variance can be analyzed in detail, enabling the management to investigate the cause. Any inefficiencies of labour, of the use of materials and of the operation of machines, for example, will be discovered.

(c) The principle of “management by exception” can be applied. Managements do not spend time and effort searching through unnecessary information, but can concentrate their attention on important matters.

(d) Gains or losses due to market fluctuations in prices of raw materials, as distinct from variations due to manufacturing

conversion, are revealed.

(e) The effects on costs of variation in the price as well of materials, the rate of labour wages, the volume of production, and alterations in expenses are demonstrated at short intervals.

This information enables the management to see whether shops or processes are being worked economically, and are producing a satisfactory output. It further serves as a guide as to whether prices can be adjusted to meet competition.

DISADVANTAGES

According to Garrison and Noveen (1994), although the advantages of using standard costs are significant, we must recognized that certain difficulties can be encountered by the manager in applying the standard cost data. Moreover, the improper use of standard costs as well as the – “management by exception” principle can lead to adverse behavioural problems in an organization. Managers cited the following as being problems or potential problems in using standard costs:

(a) Difficulty may be experienced in determining which variances are materials or significant in amount.

(b) By focusing only on variances above a certain level (that is on variances that are considered to be material in amount) other useful information such as trends may not be noticed at an early stage.

(c) If management performance evaluation is tied to the exception principle, subordinates may be tempted to cover up negative exceptions or not report them at all. In addition, subordinate may not receive reinforcement for the positive things they do, such as controlling or reducing costs charges in their area of responsibility, but may only receive reprimands for those items that exceeded the acceptable standards. Thus, subordinate moral may suffer because of the lack of positive enforcement for work well done.

(d) The management-by-exception technique may also affect supervisory employees in an unsatisfactorily manner. Supervisors, may feel that they are not getting a complete review of operations because they are always just keying in on problems.

These potential problems suggest that considerable care must be taken in starting a standard cost system. It is particularly important that the manager focuses on the positive, rather than on the negative, and that work well done; be appropriately recognized.

2.5 BUDGETARY CONTROL

Budgetary control is the establishment of budgets relating to the continuous comparison of actual with budgeted results, either to secure by individual action and objectives of the policy or provide a basis for its revision (CIMA). Budget here refers to a plan quantified in monetary terms, prepared and approved prior to a defined period of time, usually showing planned income to be generated and or expenditure to be incurred during that period and the capital to be employed to attain a given objectives (CIMA).

Budget is a target fixed up in terms of naira or a quantitative against which the actual achievement of an individual or a firm is measured.

Budgetary control operates through the various budgets. It is designed to assist management in the allocation of responsibility and authority and other such issues that would enhance the organization’s well being. Its laid down policies co-ordinates the different activities of the firm and exercise the necessary control so that the individual targets set up by the different budgets can be achieved.

In establishing a budgetary control system, it is necessary to:

  1. Establish budgets for each section of the firm and then incorporate such functional budgets into the master budget.
  2. Record all control performances and compare them regularly with the budgets so as to determine the variances.
  • Ascertain reasons for such variances and the necessary correction.

Budgetary control is the practice of establishing budgets which identify areas of responsibility for individual managers and of regularly comparing actual results against expected results. The difference between actual results and expected results are called variances and these are used to provide guideline for control action by individual manager.

To make valid comparisons between actual cost incurred and a realistic budget allowance, it is necessary for there to be flexible budgets.

because these are budgets with each item of cost analyzed into fixed and

variable element so that when the actual activity level is know, the budget can be “flexed” to produce target cost allowance against actual cost which can be legitimately compared. Thus flexible budgets become the only feasible budget for cost control purpose.

Budgeting control feedback should also be designed round the organization’s structure. The feedback should be designed to reflect the different levels of the organization and the duties and scope of responsibility of the managers concerned. Each level of reporting should be interrelated with other levels, which are above and below the one V concerned. In this way each manager is kept informed of his own performance and of the progress of those junior to him for whom he is responsible. He also knows that managers senior to him receive reports, suitably summarized and edited, on his own performance. The procedures outlined above are the very care of the control process from which it is hoped that appropriate corrective activities will result.

2.5.1 IMPORTANCE OF A BUDGETARY CONTROL SYSTEM

According to Owler, Brown (1983) and Aigbokhaevbolo (2002) the following are the importance of a budgetary control system:

  1. It lays down an objective for the business as a whole.
  2. It co-ordinates all the activities of the business in order to centralize control and decentralize responsibility to each manager involved.
  • It probes into the reasons for the deviation from standard and takes corrective control when necessary.
  1. It helps in reviewing current policies and in determining future policies.
  2. Improve allowance of scarce resources.
  3. Economizes management time by using the management by exception principle.
  • Motivates employee by participating in the setting of budgets.
  • Provides a basis for performance appraisal (variance analysis).

2.6 VARIANCE ANALYSIS

Variance explains the difference between actual and expected results (Lucey 2002). It highlights those situations where actual results are better than expected, and an adverse variance arises when they are not up to standard.

Variance help to pin-point responsibility in that, management can ascertain where the blame lies when results are poor and also improve operations, increase efficiency, utilize resources more effectively and reduce cost. Thus, the types of variances that are identified must be those that fulfill the needs of the organization. And variances should be detailed enough so that responsibility can be assigned to a particular individual for a specific variance for cost control purposes.

Variance analysis rest on the assumption of linearity concerning the behaviour of cost and revenue in relation to the level of activity. The linearity assumption implies that the majority of items, which make up the product cost and profit calculation respond in a direct linear manner to changes in activity.

2.6.1 TYPES OF VARIANCE

Different variances are used in different industries and it is not possible to discuss industries and all of them here. However, attention will be concentrated on those, which are frequently met with in practice.

According to Lucey (2002), variance may be calculated in respect of the following:

(1) Direct Material:

(a) Price variance

(b) Usage variance

Under Usage Variance we have;

(i) Mix variance

(ii) Yield variance

(2) Direct Labour:

(a) Rate variance

(b) Efficiency variance

(3) Variance overhead:

(a) Expenditure variance

(b) Efficiency variance

(4) Fixed variance

(a) Expenditure variance

(b) Volume variance

Under volume variance are:

(i) Capacity variance

(ii) Efficiency variance

(5) Sales Margin Variance

(a) Price Variance

(b) Quantity variance

Quantity Variance can be split into two:

(b) Volume Variance

2.6.2 MANAGERIAL USEFULNESS OF VARIANCE ANALYSIS

Cost of production re affected by internal factors over which management has a larger degree o control. An important job of an executive is to help the members of various management levels understand that all of them are part of the management team. Standard cost and their variances are an aid to keeping management informed of the effectiveness of production efforts as well as that of the supervisory personnel.

Variances are not ends in themselves, but springboards for further analysis, investigations and action. Variance also permits the supervisory personnel to defend themselves and their employees against futures that were not their fault. A variance provides a yardstick to measure the fairness of the standard, allowing management to redirect its effort and make responsible adjustment.

2.7 COST AVOIDANCE AND REDUCTION

It is necessary here to make a brief reference to cost avoidance and cost reduction if only it will correct the enormous impression sometimes created, that cost avoidance and control are one and the same thing.

These are different concept.

According to Edmonds (2000), cost avoidance is the refusal by management to institute certain actions to avoid cost. This may not necessarily have the effect of reduction in the long run cost of production (i.e it is not synonymous with cost reduction). It may lead to increase of another cost and hence does not increase profit margin.

While cost reduction, on the other hand, it is a planned and positive approach to the improvement of the cost target, therefore resulting in permanent savings of cost in the long run. The techniques adopted in reducing cost are:

  1. Reduction in expenditure without lowering output. This includes elimination of all form of waste.
  2. Increase productivity without incurring additional expenditure.
  • Improving production methods and technology.
  1. Reduction of unit cost permanently by other means e.g variety reduction (i.e) number of varieties of product reduction.

Therefore, it could be said that cost reduction is concerned with bringing down expenditure level and spending less than before without reducing the quality of the products or service.

THE IMPACT OF COST CONTROL ON MANUFACTURING INDUSTRIES

(A CASE STUDY OF GUINNESS NIGERIA PLC, BENIN CITY)

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