# Cost Control and Cost Reduction

Topics: Costs, Variable cost, Cost Pages: 5 (1630 words) Published: March 31, 2013
PRINCIPLES OF COST CONTROL
1.1 Introduction
Cost is important to all industry. Costs can be divided into two general classes; absolute costs and relative costs. Absolute cost measures the loss in value of assets. Relative cost involves a comparison between the chosen course of action and the course of action that was rejected. This cost of the alternative action - the action not taken - is often called the "opportunity cost". The accountant is primarily concerned with the absolute cost. However, the forest engineer, the planner, the manager needs to be concerned with the alternative cost - the cost of the lost opportunity. Management has to be able to make comparisons between the policy that should be chosen and the policy that should be rejected. Such comparisons require the ability to predict costs, rather than merely record costs. Cost data are, of course, essential to the technique of cost prediction. However, the form in which much cost data are recorded limits accurate cost prediction to the field of comparable situations only. This limitation of accurate cost prediction may not be serious in industries where the production environment changes little from month to month or year to year. In harvesting, however, identical production situations are the exception rather than the rule. Unless the cost data are broken down and recorded as unit costs, and correlated with the factors that control their values, they are of little use in deciding between alternative procedures. Here, the approach to the problem of useful cost data is that of identification, isolation, and control of the factors affecting cost. 1.2 Basic Classification of Costs

Costs are divided into two types: variable costs, and fixed costs. Variable costs vary per unit of production. For example, they may be the cost per cubic meter of wood yarded, per cubic meter of dirt excavated, etc. Fixed costs, on the other hand, are incurred only once and as additional units of production are produced, the unit costs fall. Examples of fixed costs would be equipment move-in costs and road access costs. 1.3 Total Cost and Unit-Cost Formulas

As harvesting operations become more complicated and involve both fixed and variable costs, there usually is more than one way to accomplish a given task. It may be possible to change the quantity of one or both types of cost, and thus to arrive at a minimum total cost. Mathematically, the relationship existing between volume of production and costs can be expressed by the following equations: Total cost = fixed cost + variable cost × output

In symbols using the first letters of the cost elements and N for the output or number of units of production, these simple formulas are C = F + NV
UC = F/N + V
1.4 Breakeven Analysis
A breakeven analysis determines the point at which one method becomes superior to another method of accomplishing some task or objective. Breakeven analysis is a common and important part of cost control. One illustration of a breakeven analysis would be to compare 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 bulldozer. If the manual method were adopted, the fixed costs would be low or non-existent. Payment would be done on a daily basis and would call for direct supervision by a foreman. The cost would be calculated by estimating the time required and multiplying this time by the average wages of the men employed. The men could also be paid on a piece-work basis. Alternatively, this work could be done by a bulldozer which would have to be moved in from another site. Let us assume that the cost of the hand labor 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 quantity of the earthwork handled. If the bulldozer is used, no...

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