Various cost control methods used by contractors
Get assignment help for this at
assignment4finance@gmail.com
Problem Statement
During the execution of a project, procedures for
project control and record keeping become indispensable tools to managers and
other participants in the construction process. These tools serve the dual
purpose of recording the financial transactions that occur as well as giving
managers an indication of the progress and problems associated with a project.
Aim
This study will introduce various cost control method
used by Contractors during the construction process and indentifies the problem
that arises in implementing and practicing those methods.
Objectives
To study the cost control method used Contractors in
the construction process.
To identify the cost control method frequently used by
contractors.
To identify problems faced by Contractors in implementing
and practicing the cost control method.
Scope of Study
This study will be limited to the cost control method
used by Contractors based within the geographical boundaries Kuala Lumpur and
Selangor during the construction period of the project.
Research Methodology
literature review
Introduction
Defining Cost Control
Cost Reporting Systems
Weekly Cost Report
One of the basic reports for the control of cost on
site is the weekly cost record (Pilcher, 1992). However, only major operations
involving large quantities and significant cost would be prepared, because it
involves a great deal of time and cost. In normal events, checking cost in
weekly intervals would be prove to be very difficult to be carried out and also
too expensive of an operation, unless the costs and quantities can be measured
accurately. Usually, the cost of materials used in a week would not be recorded
(Pilcher, 1992).
Nevertheless, should this operation is required to be
carried out, it should give a complete record of the quantities of work which
have been carried out in the week previous to the date of the report, together
with the lump sum total costs of the labour and plant that have been incurred
in respect of those operations (Pilcher, 1992). Sample of the report are shown
in Table 2.3 – 1.
Table 2.3— Weekly Cost Report
Each of the quantity, cost, and unit cost are prepared
on the basis of the work carried out during the week. There are two total area
that need to be recorded, that is, the amount of work carried out on the week
previously to the date of report and the amount of work carried out reported by
the previous report. The availability of these information should assist in
determining the cost difference in cost per unit between this and the previous
week.
In preparing the weekly record, it should be as
simple, brief and accurate as possible. The staff would only ignore the record
if there is too much impertinent information. The record should make a quick
and lasting impression that would take consideration to the significant
features of the condition (Pilcher, 1992).
Monthly Cost Report
At monthly intervals, it is desirable to prepare a
cost statement in somewhat more detail than the weekly control statements
(Pilcher, 1992). It shall consist of the actual cost incurred to date, In
addition to information regarding the cost to date and the value of the work
carried out, it is highly desirable that an estimate be prepared of the cost of
the work yet to be completed. Since it may well vary from the original
estimate, it should be prepared in the light of information that has been
gained on the work so far.
Standard Costs and Variances
In order to make a meaningful interpretation of the
information collected, it is necessary to have some form of norm or standard
against which the actual performance can be measured (Pilcher, 1985).
Estimating possible outcome from historic performance and experience usually
sets standards in construction or in special cases from the use of work
measurement technique (Pilcher, 1992).
Any departure from the set of standard practice is known
as variance. An unfavorable variance is one which the planned or budgeted cost
has been exceeded by the actual cost of work. Whereas, a favorable variance
indicates that less cost or resources has been incurred in order to complete
the work than what was budgeted (Pilcher, 1985). According to (Pilcher, 1992),
variance can occur because of two reasons:
The actual price paid for the resources is greater or
lesser than the amount estimated in the standard.
The actual quantity of resources used is greater or
lesser than the amount estimated in the standard.
The two factors deserve consideration if the work is
to be carried out as its budgeted cost. Inefficiencies are important in terms
of cost, and attention can be paid on limited areas where these inefficiencies
exists when using the variance analysis.
Actual Cost (AC)
=
Actual Quantity (AQ) × Actual Price (AP)
Standard Cost (SC)
=
Standard Quantity (SQ) × Standard Price (SP)
Total Cost Variance
=
Standard Cost (SC) – Actual Cost (AC)
Where,
Actual Quantity (AQ) is the actual amount of resource
used up to complete the work.
Actual Price (AP) is the actual price paid for the
acquisition of the resource used to complete the work.
Standard Quantity (SQ) is the estimated amount of
resources that will be used to complete the work.
Standard Price (SP) is the estimated price to acquire
the resource to complete the work.
A variance between Actual Quantity and Standard
Quantity indicates that the production is more/ less efficient than what was
estimated.
A variance between Actual Price and Standard Price
indicates that the price to acquire the resources to complete the work was
higher/ lower than the estimated price.
Material Variances
Usually, there is a variance between the price and
usage of the material used to complete the work. The material price variance
will amount to the difference between the standard and actual prices for the
quantity of material used whereas the material usage variance will be the
difference between the standard and actual quantities of materials used
(Pilcher, 1985).
Material Price Variance
=
AQ (SP – AP)
Material Usage Variance
=
SP (SQ – AQ)
Material Cost Variance
=
SC – AC
=
(SQ × SP) – (AQ × AP)
The cost variance for material can also be calculated
as the sum of variance between the material usage and variance between material
prices.
Material Cost Variance
=
Material Price Variance + Material Usage Variance
In both cases, the result obtained will be the same.
Labour Variance
There are two important variances to be considered at
the first stage of the analysis of labour performance and cost. These are
‘labour rate’ and ‘labour efficiency’ variances (Pilcher, 1985). The labour
rate variance occurs from the difference between the standard wage rate and the
actual wage rate paid.
Labour Rate Variance
=
Actual Time Worked (Standard Rate – Actual Rate)
=
AH (SR – AR)
The labour efficiency variance occurs from the
difference between the actual time and t he standard time to do a job, which is
measured at the standard rate.
Labour Efficiency Variance
=
Standard Rate (Standard Time – Actual Time)
=
SR (SH – AH)
Therefore,
Labour Cost Variance
=
SC – AC
=
(SQ × SP) – (AQ × AP)
Or,
Labour Cost Variance
=
Labour Rate Variance + Labour Efficiency Variance
It should be noted that the calculation of the labour
rate variance takes account of the variance as between the different rates of
pay, and therefore actual hours are priced at the standard rate when
calculating the efficiency variances (Pilcher, 1985).
Overhead Variances
The overhead cost variance is the variance that
acquired from calculating the difference between the actual overhead costs
acquire on an operation and standard overhead cost set for that operation
related to the production funds to be accomplish. The units can vary from based
to establish standards. They can be units of production or of time. Units of
time can b in hours, days, weeks, months or even years.
Units that are selected should be suitable to the
nature of works that is carried out. The units chosen are usually for
convenience and economy of calculation and data collection. The intention of
the analysis and the accuracy and the form in which the ultimate information
required are also important factors that influenced the choice chosen.
There are fixed and variable costs need to be
recognize when stating the overheads. Fixes costs do not alter with changing
levels of production but they might alter after a certain level of production
has been achieved. For example, in overheads for site supervision, one foreman can
be used for many levels of production and number of operatives. However, if the
levels of production have reached, or the numbers of operatives exceeds a
maximum level, then, the second foreman is needed.
The occurrence in the difference in the recovery of
the related overhead is called the ‘overhead volume variances’. This happens
because of the estimated production or time taken to produce the budgeted
quantity is greater or lesser than the actual production time. An unfavorable
volume variance happens when a fixed overhead is not fully utilized whereas a
favorable volume variance happened when the production time bearing a fixed
overhead is in excess of the budgeted.
An overhead budget variance is the difference between
the actual cost of overhead incurred and the overhead cost budgeted for that
level of production. An overhead efficiency variance is the difference between
the hours actually worked to achieve a specific production target and the
standard hours budgeted to be used to achieve that production target.
Control of Material
Controls of material are not highly considered in
creating cost control systems. This is because that labour and plant are the
areas variations exist more, and most probably, area where profit is acquired
or losses over the estimated costs. Controls for materials should be in terms
of unit measurement and not in terms of cost (Pilcher, 1992).is essay is an example of a student's work
Discn In cases of deficit,
one cannot be sure, if that the cost is on the bases of whether the materials
bought at prices lower than estimate have a higher wastage, or whether the
material are used economically, with little wastage but bought in price higher
than the estimates. The cost comparison alone made for materials would not
indicate the true quantity of the rate of usage for the materials.
One easy way in controlling materials is to draw a
graph of the quantities of various materials that should have been used, which
is calculated from present measurement of the quantities of work carried out.
Such graph would be drawn for major items only. Against this graph, each
individual can be drawn of a second graph, indicating the quantity of the
materials that have been delivered to the site.
Such information can be obtained from the invoices
received and a running total can then be easily be maintained. The intercept on
vertical ordinate between the two graphs should be equal in quantity. It is
necessary to check the stock on the site to make the comparison effective.
No comments:
Post a Comment