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UNDERSTANDING CONTROL

Updated on November 2, 2011

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.

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.

 

Fig 1
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:

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:

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”.

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.

 

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      Stellar Phoenix Review 4 years ago

      This post is steller! You definitely know how to keep a reader entertained. Between your wit and your pictures, I was almost moved to start my own blog (well, almost..ahaha) Excellent job. I really loved what you had to say, and more than that, how you presented it. Too cool! Stellar Phoenix

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      zohaibnoor 5 years ago

      thank you sir to share this link now i got it .

    • profile image

      zohaib noor 5 years ago

      informative hubpage ..

    • asadayub profile image

      asadayub 6 years ago

      A very informative article. Example is very good. Easily understandable. Thank You Sir.

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      Sarwat Aziz Abbasi 6 years ago

      I happened to go through this and found very informative especially the way of explanining. There were a few confusions with respect to the subject which have now been clarified.

    • Fahad_Khan profile image

      Fahad_Khan 8 years ago from Karachi

      I must say that Mr. Hafeez is doing an outstanding job for us by bringing more and more study material on hub pages. Thank you so much.

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       8 years ago

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      SAMREEN HABIB 8 years ago

      Thank you so much sir for sharing this, its really help me to understand it more clearly..

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      Kunwer Sufian Shahid 8 years ago

      Truly excellent post. Real hardwork is evident behind such posts. We are getting to learn unique concepts we never even heard of before.

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      kashan pirzada 8 years ago

      nice article

      thanks sir

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      husna fatima 8 years ago

      Thank you for such a nice explanation its help to clear my quries obout the topic

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      Qamar  8 years ago

      Thankyou sir for explaining my question with such good and understandable words . I got the answer that from where these further costs and time came from ... thankyou once again .....

    • hafeezrm profile image
      Author

      hafeezrm 8 years ago from Pakistan

      I would very shortly upload a case which tests the readers' ability to take a decision.

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      Imran Zafar 8 years ago

      Thank you Mr. Hafeez for sharing this important managerial tool. The explanation backed by the example made the concept so easy to grasp and understand. I would appreciate if another example depicting a different scenario can be shared to ingrain the concept.

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      Sana Rao 8 years ago

      Thank you for explainin me now i understand the topic

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      mushtaq2006 8 years ago

      Thank you sir for introducing such important managerial control tool. This can really help us in keeping real time control over our projects as the project progresses and we do not get any surprise variation at the end of project.

      Regards,

      Mushtaq Ahmed

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      Muhammad Essa 8 years ago

      Than you Sir for providing this. Now I can understand the

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      Muhammad Essa 8 years ago

      Than you Sir for providing this. Now I can understand

    • hafeezrm profile image
      Author

      hafeezrm 8 years ago from Pakistan

      For Sana Rao,

      BCWS is a plan, BCWP is the progress. If we plan to cover 250 km on the first day at a standard cost of Rs.70 per km (Both figures are given in the question), our BCWS would be 250 x 70 = 1,750. But as against plan of 250 km, the truck actually covered a distance of 150. So BCWP would be 150 x 70 =Rs.10,500. In other words, BCWS is a base or bench mark, against which we compare our BCWP or progress. BCWP is another name of "Earned Value".

    • hafeezrm profile image
      Author

      hafeezrm 8 years ago from Pakistan

      Dear Qamar Bezanjo.

      The column, you are referring to relates to "Further Cost".

      At the end of the first, further cost to complete the task was estimated to be Rs.76,500. You know that the truck had covered a distance of 150 km incurring an expense of Rs.13,500. If you just divide Rs.13,500 by 150, actual cost per km would come to Rs.90 per km. Since 850 km (1,000 - 150) were yet to be covered, further cost would be 90 multiplied by 850 =76,500.

      When we come to end of next day, the truck has move another 300 km bring the total distance to 450 km. So only 550 km (1,000 minus 450) remain to be covered. Meanwhile, the driver has given expenses for the second day at 21,000. Thus total expense so far are Rs.34,500 (13,500+21,000). If we divide 34,500 by 450, it comes to average cost per km is now Rs.76.67 per km. Since 550 km is yet to be covered, we estimate further cost of Rs.42,167 (76.67 multiplied by 550).

      Now I would explain about time of 56.67 hours. At the end of first, the truck has covered on 150 km in 10 hours. Its speed is only 15 km per hour. Had it continued on this speed, another 56.67 hours would be required to reach the destination. (We get this figure by dividing 850 by 15.

      For next day, further time would reduce to 24.44 when more distance has been covered and average speed has shown improvement.

      Hope this would make thing clear. Please do not hesitate to ask if any point is still not clear.

    • Emran Ali profile image

      Emran Ali 8 years ago from karachi

      Thank you so much for sharing such an informative article .

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      Qamar Bezanjo 8 years ago

      Thankyou sir for this informative post some of points which i was confused about are not cleared by this post ... Sir still i need to ask onething that in the second chart in further column where cost is 76500 in first day and second day is 42167 and the time 56.67 and 24.44 sir could you please tell me from where we got these data ... i will b very much thankful to you ...........

    • shahnawaz sheikh profile image

      shahnawaz sheikh 8 years ago from karachi

      Thank you sir for this post,

      It realy helped me clear some of the queries that i had about the topic

      thank you again

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      Tahir 8 years ago

      Its really an excellent effort, which clarify many confusing points.

      Hope to be benifitted again `form new article.

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      MUHAMMAD DANIAL 8 years ago

      ASSALAMUALKUM

      PERFECT EXPLANATION AS YOU GIVE IN THE CLASS.

      THANK YOU FOR ITS FURTHER EXPLANATION.

    • Fahad_Khan profile image

      Fahad_Khan 8 years ago from Karachi

      Excellent post. It cleared all the minor points that I was confused about. I'll ask other students also to visit this article and clear their concepts.

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      Sana Rao 8 years ago

      Thanx Sir for providin such a useful material but ill u please explain me the relation b/w BCWS and BCWP..well itz really informative and helpful to us.

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      KAZIMBDIN 8 years ago

      I have traveled in Mexico where bus system  is very efficient.  Once while traveling to Mexico City, I noticed two numbers on the top-inside of front wind-shield glass like 90 and 88.  I do not know Spanish neither other passengers traveling with me had any knowledge of English.  So I can only guess that 90 was the speed limit and 88 actual speed. 

      I say this because whenever the bus came near the city the two numbers dropped to 60 and 58.  Maybe  there was a GPS or tracker in the bus which was showing maximum allowed speed and maybe the bus can be stopped if the driver tries to be over smart.

      Of course, this would be real-time control as against feedback control explained by Mr. Hafeezrm in a very interesting way.