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CONTROL TECHNIQUES

Budgetary Control
Standard Costing SQC Break-even Analysis Internal Audit/ Management Audit ABC Analysis EOQ PERT/ CPM MIS

Budgetary Control
Budget - a statement of planned allocation of resources expressed in financial or numerical terms. The Institute of Cost and Management Accountants, London, defines budgetary control as the establishment of budgets, relating the responsibilities of executive to the requirements of a policy and the continuous comparison of actual with the budgeted results either to secure by individual action, the objective of that policy or to provide a firm basis for its revision.

A budgetary control system secures control over costs & performance in various parts of an enterprise by:
Establishing budgets
Comparing actual results with budgeted ones;

and Taking corrective action or revising the budget, if required.

Primary objectives of budgetary control: To provide detailed plan of action for business over a period of time. To co-ordinate the different units and activities of

To motivate organizational members to perform

well. To exercise control over cost through comparison of actual results with budgeted ones and initiating rectification steps promptly. Steps in Budgetary Control: 1. Budgetary Objectives 2. Budgetary Organization 3. Budget Centres 4. Budget Manual 5. Budget Controller 6. Budget Committee 7. Budget Period

Standard Costing
Steps: 1. Fixation of standards - based on past records or through experiments also known as engineering methods. 2. Determining actual costs to make a comparative study. Achieved from cost accounting records. 3. Comparison between standard costs & actual costs is made to find out variation between the two. 4. If the variation is beyond the specified limit, it is taken for further analysis - to locate the reasons for such a variation.

Quality Control
Quality control can be applied at two distinct

phases of operations: control of an operation in process & inspection of raw materials, semifinished and finished products.
First phase - Statistical Quality Control

Second phase - Inspection Control.

Statistical Quality Control (SQC)/ Statistical

Process Control (SPC) - Is a method of measuring and continuously improving work process before the final inspection of the product. - It is preventive as well as remedial. - Is based on the theory of sampling which implies that the analysis of a few items out of the total population can be used to understand the features of the entire population. - It measures the product quality by taking sample for inspection during the production process. - Two considerations: Tolerance Limit

Tolerance Limit: is the variation in quality from the

standard specifications which can be acceptable. Eg:- a ball bearing of 3.00 cms size Limit for less precision operations 2.90 - 3.10 cms Limit for higher precision operations 2.95 - 3.05 Measurement of Quality: is undertaken during the operation itself so that if the machine starts producing items beyond the tolerance limit, it is stopped immediately to avoid further losses. SQC is useful in operations Which are automated Produce large volume of a particular product

Inspection Control
Is applied at the stage of raw materials as well as at

the stage of finished products or in between. QC manager or inspector seeks to determine the acceptability of parts, products, or services. Inspection is made by comparing the quality of the product to the standard, commonly known as specification- by means of a visual testing or testing examination. Tolerance limit of the quality variation is set out in inspection control as in SQC.

Quality control through Quality Circle

Developing a QC: 1. Start- up Phase 2. Constitution of QC 3. Initial Problem Solving 4. Presentation & Approval of Suggestions 5. Implementation

Break Even Analysis


Concerned with cost-volume-profit relationships. Magnifies a set of relationships of fixed costs,

variable costs, price, level of output and sales mix to the profitability of the organization. Indicates a break-even point which is the volume of activity when the revenue generated is exactly equal to the total costs (FC+VC) and there is neither a profit nor a loss. Any production above this point would yield profit.
Break-even point = Fixed costs Contribution per unit

Contribution = Sales price per unit Variable cost per unit Margin of Safety = Total sale proceeds Sales at BEP Profit = Sales Total costs (Fixed cost + variable cost) Or = Total contributions Fixed costs
Break-even chart is a graphic chart which presents the varying costs along with the changing sales revenue, indicates the sales volume at which costs are fully covered by revenue, and reveals the estimated profits or loss which will be realised

Internal Audit
Also called Operational Audit. Effective tool for managerial control.

It is carried out by managers themselves or

special staff appointed for this purpose. In addition to ensuring that accounts properly reflect the facts, also appraises policies, procedures, use of authority, quality management, effectiveness of methods, special problems & other phases of operations, the latter aspects being more emphasized in present-ay internal audit. Also, scrutinizes the applicability & relevance of policy, procedure, & method which have a

ABC Analysis
First step in inventory control - to classify the

different items of inventory to determine the degree & type of control required for each group. This technique uses the values of different types of inventory for their classification. A Group - high value & less in number B Group - Average value & average in number C Group Low value & large in number Maximum attention to A group items as these are critical in terms of value followed by B & C groups.

Economic Order Quantity (EOQ)


Indicates the size of order that will result in the

lowest total of order cost & inventory carrying cost for an item of inventory. Two types of costs are calculated: Order Cost & Inventory Carrying Cost 1. Order Cost:- cost of procuring raw materials. Include various types of administrative costs, consignment processing, invoice processing & payment procedure. 2. Inventory Carrying Cost:- involves interest on the money locked in inventory, cost of storage, cost of insurance for stock & cost of material loss due

EOQ =

2SO C

where S = Total quantity of materials required O = Ordering cost per unit C- Carrying cost per unit Eg:- S= 5000 units O= Rs.100 C = Re.1.00
EOQ =

25000100 1.00

= 1000 units

Safety Stock
It is maintained to continue its operations

uninterruptedly. Is required to meet unforeseen situations which may interfere with the regularity of material supply.

PERT/CPM
Programme Evaluation & Review Technique Critical Path Method

Are techniques of project management useful in

managerial functions of planning, scheduling & control. They minimize production delays, interruptions & conflicts. Process or Steps: Identification of activities Sequential arrangement of activities Time estimates of activities Network construction

MIS
Management Information System is a scientific way of collecting, processing,

storing & communicating information of various activities of an organization to the various levels of management. Is a system designed in an organization to provide right information at the right time to facilitate managerial decision making. Provide information in the form of reports. Provide information in structured form based on present & past data. Put emphasis on internal data.

Steps involved in the development of

MIS
Defining and analyzing various types of decisions

made in the organization Comparison of costs & benefits of the system Pre-testing of the systems and training of operators Proper planning for storage of information Mechanism for gathering & processing data Proper arrangement for dissemination of information Review of MIS at periodical intervals.

Project Definition

SDLC Stages
System Analysis

System Design

Implementation

Post- Implementation