To earn good profits, it is essential to keep control over each and every element of cost, such as: 1. Control on Prime Cost 2. Control on Overheads 3. Control on Indirect Materials and Tools.
1. Control on Prime Cost:
Prime cost of a product has great role over the total cost. It consists of Direct Material cost and Direct Labour cost.
Direct material cost is the most important item of expenditure and it needs careful and correct recording.
To keep control on it, the following factors must be considered:
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(i) An efficient system of store-keeping.
(ii) To see that right quantities of materials are consumed with less wastage.
(iii) Over-stocking should be avoided.
(iv) As far as possible there should be minimum handling and steps must be taken to reduce handling charges.
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(v) It should be predetermined, if waste and scrap materials can be used for some other work. In this way, direct material cost can be kept under control
Direct labour cost is also a part of the prime cost.
In this respect following steps may be useful:
(i) It is necessary to express labour charges in terms of time.
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(ii) Labour rates should be fixed accurately with the help of Time and Motion Study.
(iii) A right system of time recording can be introduced to calculate the time taken by each worker.
(iv) Suitable inspection and supervision methods should be introduced.
(v) A suitable method of wage payment should be selected and introduced.
2. Control on Overheads:
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To run the business efficiently, it is very essential to have strict control on the overheads. Prime cost of product does not vary much from industry to industry for the same product. It is the overhead charges which are much responsible. If these are minimised cost can be controlled to a large extent.
For this purpose following steps must be taken:
(i) A set procedure for determining the total overhead charges of different departments should be followed and charges of each department should be compared to know whether they are in excess or not.
(ii) Keep control on the indirect labour force.
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(iii) Simplification of procedure for accounts and all administrative work is required to be done.
(iv) As far as possible less work should be got done during extra hours
3. Control on Indirect Material and Tools:
This can be kept under control by allowing a fixed amount for each shop and should be revised at regular intervals according to the needs.
As standard cost is a tool to keep control over the total cost, therefore, total cost should always be compared with it and shortcomings and defects are to be found out.