Modern Control Techniques

Besides the traditional techniques of budgetary control and standard costing, there are several other techniques of control which have been developed in modern times. These techniques may also be called non-budgetary techniques. One or more of these techniques may be adopted along with budgetary control and srandard costing. Let us discuss the more important techniques in detail.

 

Break-Even Analysis

Break-even analysis as a technique of control consists of the analysis of costs in relation to changes in the volume of sales and its impact on profit. It is basically concerned with determining the relationship between cost, volume of sales and profit. One of the major concerns of the management of an enterprise relates to the impact of changes in the volume of sales on profits. It is of interest to them to know the volume of sales at which costs will be fully covered and beyond which profits will be earned. For this purpose, two types of costs are distinguished. Variable costs (like direct material cost, direct wages, etc.) and Fixed costs (like factory and office rent, managers’ salary, etc.). If production and sales increase, variable cost per unit remains constant but fixed cost per unit decline. Suppose, the direct materials cost of a product is Rs. 10 per unit and direct wages per unit comes to be Rs. 5, whereas fixed cost upto the total production capacity is Rs. 400. Then, for 100 units produced and sold, the variable cost will amount to Rs. (10 + 5) × 100 i.e., Rs. 1500. For 200 units, the variable cost will be double the amount i.e., Rs. 3000 Fixed cost remains the same. Total cost for 100 units will thus be Rs. 1900, and for 200 units it would be Rs. 3400, not Rs. 3800. Hence, the total cost is found to rise less than proportionately to the increase in sales revenue. If the volume of production and sales decrease, there is a reverse effect. Thus, for 50 units the total cost will be Rs. (15 × 50) + 400 i.e. Rs. 1150. It will not be half of Rs. 1900 (total cost of 100 units). In other words, the total cost decreases less than proportionately to the decrease in sales revenue.

Further, suppose the selling price of the product per unit is fixed at Rs. 17. In that case, for each unit sold there will be a margin of Rs.2 after meeting the variable cost of Rs. 15. To recover the fixed cost of Rs. 400, the firm must sell at least 200 unit. The total sale price (200 × Rs. 17) will then be equal to the total cost i.e. Rs. 3400.

Thus, sale of 200 units (or Rs. 3400 sales revenue) may be regarded as the volume at which there is neither any profit nor any loss. This is known as the break-even volume. It indicates the-number of units that must be sold if the business is to be run without loss. Each unit of product sold above the break-even volume is expected to yield profit. If 250 units are sold, the profit earned will be Rs. 100 (50 x Rs. 2). This is because, the variable cost will increase by Rs. 15 per unit while sales revenue will rise by Rs. 17 per unit and there being no increase in fixed costs, there will be a margin of Rs. 2 per unit on 50 units as the profit.

The difference between the selling price and variable cost per-unit is known as the contribution margin. The amount of this difference contributes towards the recovery of fixed costs. Hence, the break-even volume of sales in units can be calculated by dividing the total fixed cost by the contribution margin. In the above example, the contribution margin is Rs. 2 (Rs.17 - Rs. 15), and the fixed costs are Rs. 400. So, the break-even volume is Rs. 400 ÷ 2 i.e. 200 units.

 


PERT (Programme Evaluation and Review Technique)

The key to success of most organisations is to clearly examine the projects or activities for the achievement of an objective within stipulated time and cost. Management is then required to determine detailed activities and their interrelationships, to estimate resources required and the time needed to complete these activities as per schedule, and to monitor and control the time and cost of the project.

Network analysis is a technique which is concerned with minimising the total completion time of the project, as well as minimising the over-all project costs. The network analysis is eminently suitable to projects which are not routine or repetitive and which may be conducted only once or a few times, such as construction of buildings, dams, research and development, marketing of new products, building a ship, construction of factories, missile production, etc. PERT and CPM are the two very popular types of network analysis used in modem management.

PERT is basically a technique of project which is useful in the following managerial functions related to planning, scheduling, controlling, etc.

The first and most important condition for using PERT is the breaking up of the project into jobs or activities and determining the order of precedence for these jobs, that is, deciding which jobs are to be completed before another can be started.

 

CPM (Critical Path Method)

CPM was developed by the engineers of the Du Pont Company in the 1950s for its application in all scheduling work, construction projects, research and development programmes and in many other situations that require estimates of time and performance. It calls for dividing a programme or project into its elementary parts in their chronological order of sequence. By breaking a project into interconnecting parts, the CPM technique is helpful in finding out the more strategic elements of a plan for the purpose of better designing, planning, coordinating and controlling the entire project.

Let us examine the concept of critical path to appreciate the significance of the critical path method as a technique of control.

In a network of activities one can enumerate a number of sequences of operations (paths) from starting event to end event of the project. Each sequence contains different combinations of activities with different durations. The study of the duration of various paths in a project can tell us the minimum time in which a particular project can be completed. The sequence of activities (path) for which the duration is the maximum indicates the minimum duration for the completion of the project.

This path is known as the ‘Critical Path’ being the path of maximum duration and reflects the minimum time necessary for the completion of the project. The critical path is so called because any delay in the completion of the activities lying on this path would cause a delay in the whole project. To finish the project in time, the activities lying on the critical path should be given top priority.

 

Statistical Quality Control

The purpose of quality control is to ascertain whether the quality of a product or service is being maintained or if there is any variation in size, weight, finish etc. In every production process there are always some standard specifications laid down either by the producer or the consumer. A good quality item is one which conforms to these specifications. However, variation in the quality of a product is inherent in every production process due to a number of factors. So, it is necessary to ascertain the variation which may be quantitative and qualitative. Quantitative characteristics are those which can be directly measured, e.g. weight, height, diameter etc. and such variations can be noted with the help of specific instruments. On the other hand in qualitative characteristics, direct quantitative measurement is not possible, e.g. cracks, breakage, colour etc. These can be determined by inspection only or by distinguishing between defective and non-defective items. But variation in the quality of products being an inherent characteristic of manufacturing process, irrespective of all possible precautions and measures, there are possibilities of random disturbances responsible for deviations in the quality of the product from the set standards. The sources of these disturbances are known as chance causes, e.g. changes in machine speed due to sudden changes in temperature or voltage of power supply etc. The presence of these causes in the system is due to multitude of reasons which are difficult to identify and uneconomic to eliminate. There may be other sources of variations which further cause the product to deviate from set standards. These causes are individual and can be identified and eliminated economically. The magnitude of variability due to these causes varies with the conditions of  the production process, nature of raw material, behaviour of operation etc. These causes are known as assignable causes.

Statistical quality control refers to the technique of ascertaining whether the variation in the quality of the product is due to chance causes or due to assignable causes. If the variation is due to assignable causes, it is detected and some corrective action is planned to improve the quality of the product. Statistical quality control is carried out with the help of control charts. To prepare a control chart the whole production line is divided into a number of sub-groups. The basis of selecting these sub-groups is such that variation in the quality of items within each sub-group is attributed due to chance causes, whereas the corresponding variation between various sub-groups can be due to assignable causes. The variation of quality characteristic within and between the sub-groups is analysed by some method to identify whether the process is in control or not.

Briefly speaking, statistical quality control is based on statistical estimation of errors or possible variation from the average (normal) proportion of errors. In its simple operation it involves specifying the quality levels and limits on control, and then plotting the variations.

 

Management Audit

Management audit is a systematic and impartial examination, analysis and appraisal of management’s overall performance. It is basically a procedure of appraisal of management’s total performance by means of an objective and comprehensive examination of the organisation structure, its objectives, plans and policies, its operation and its use of physical and human resources, and methods of operation. Thus ‘management audit’ signifies a critical assessment of management of the enterprise from the broadest point of view. It may be undertaken by the management itself or it may be carried on with the help of management consultants.

One very important feature of management audit it that instead of comprehensive audit, company may even apply it to a specific section of the organisation. As regards its scope, ‘production efficiency’ or ‘investment appraisal’ may be the subject matter of ‘management audit’. It may even be used to provide guidance on critical assessment of capital budgeting or profit performance.

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