In simple words “Control” means keeping actual position within expected limits. When one talks of Cost Control, one does not mean “Cost Savings” but ensuring that Actual Costs remain within Estimated Costs. Savings, if any, are incidental and not Raison D’être of installing a cost or budgetary control system.
- COST CONTROL
Also called budgetary control. Actual Cost is matched with Budgeted Cost and difference, if any, is analyed into price variance and quantity (efficiency) variance.
Let us start with an example of a truck which was engaged to transport a heavy container to a place 1,000 km away in four days @10 hours per day. At the same time, the associated cost was estimated at Rs.70,000 or Rs.70 per km. (This represented out of pocket expenses and not Overheads such as depreciation, annual maintenance, driver salary and road taxes etc.) These figures are enough to lay down a cumulative daily budget as shown in Fig 1.
Now, we will watch the actual progress. Suppose, at the end of day one, the driver reported that he had covered a distance of 150 km and spent a sum of Rs.13,500. From this, we can work-out many useful indicators like (i) delays, (ii) cost overruns (exceeding budget), (iii) further cost & time to reach the destination, and (v) status at the time of reporting. This is shown below, while necessary explanation would follow:
- BCWP vs. ACWP
Difference between BCWP & ACWP shows cost variance while between BCWS & BCWP - Time Variance.
For Day-one, the budget was Rs.17,500 but actual expenses were lesser at Rs.13,500. But we cannot compare them as the budget was for 250 km whereas the expenses were incurred for only 150 km. We should calculate BCWP which in this case would be actual km x standard cost or 150 x 70 =10,500. Deducting this from the actual, we get Rs.3,000 as over spending ( 13,500 – 10,500 =3,000 ). If we deducted BCWP from BCWS, we get a figure in Rupees which can be converted into time. For example, there is a difference of 7,000 between BCWS (17,500) and BCWP (10,500). We know that the truck was supposed to run 25 km per hour which in term of Rupees would be Rs.1,750 (25 x 70). If we divide the difference of 7,000 with this amount, the result would be 4 which represented time of delay.
There is another way to calculate the delay. We can divide Daily Expectation of 250 km with time-frame of 10 hours and get 25 km per day. Since the truck has covered only 150 or equivalent to 6 hours (150 divided by 25), we can say that the truck was delayed by four hours ( 10 hrs – 6 hrs = 4 hrs).
So far only 150 km have been covered, leaving a balance of 850 km out of total 1,000 km. Since actual speed had been 15 km per hour, another 56.66 hrs (850 divided by 15) would be required. Similarly, one can work out actual cost per km which in this case was Rs.90 (13,500 divided by 150). On this basis, we can predict further cost by multiplying the figure with the remaining km.
If the performance was not viewed as satisfactory, the Boss had option to change the driver or the truck. Considering the truck had to pull out of heavy city traffic plus un-expected police checks, no action was taken except the driver was instructed to make up the shortfall as far as possible.
In the last column, Status Index is given which is a multiplication of time dimension (BCWP divided by Budget) and Cost Dimension ( BCWP divided by Actual Cost). A Status Index of 1 is OK, lower than one puts one on the alert and more than is good. But if it is very high, it should be concern to the Boss as perhaps the Standard was set too low.
For Day-Two, the driver reported covering an additional distance of 300 km at a cost of Rs.21,000. Adding them in Day-One figures, we can work out that the truck has so far covered a total distance of 450 km (150+300), improving the performance to 22.5 km per hour (450 divided by 20 hours). We can use this for estimating further time for the remaining 550 km (1,000-450 ). We find that it would take another 24.44 hours to reach the destination ( 550 divided by 22.5 = 24.44). Since, we had two days left, the situation had turned comfortable.
As far cost, the driver had so far incurred a cost of Rs.34,500 (13,500+21,000). The chart would accordingly appear as follows:
On the third day, the truck ran for 275 km at an additional expenses of Rs.22,000. The would change the position as follows:
On fourth and final day, additional 275 km were covered at a cost of Rs.12,650. This brought a material change in the situation as show below:
- Concurrent Control
It real-time control. In many countries, the vehicles are fitted with trackers and the management knows fully well how they are doing.
As would be observed from the foregoing, the Boss had been in full control of the situation at all the times. He knew well what was expected from the driver, what actual situation was, the difference between the two and whether it warranted any action or not. There were many stages when the performance was below standard yet there was enough time to take corrective action. This is what is called “Control”.
- PROGRESS INDICATORS
A large number of progress indicators are available in various text books. A manager may choose those which are relevant to the project progress such as Status Index, Overall Progress Index, BAC etc.
The situation can be presented graphically. If a Boss has many on-going projects, he or she can see at a glance which projects need his or her attention. It is known as "Management by Exception" where a manager intervenes only when there is a wide deviation in estimates and actuals.
The graph is given below. It can be extended to show position at the end of the project such as Total Expect Cost or Estimated Completion Time which forewarn the management to take necessary action if situation cannot brougt under control.