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Cost Control and Cost Reduction

The document discusses cost control and cost reduction. Cost control aims to prevent costs from varying from planned amounts through executive action like comparing actual costs to standards. Cost reduction aims to permanently lower unit costs without harming quality through ideas that continuously reduce expenses. Some techniques for both include budgetary control, standard costing, material and labor control, and productivity improvements. Success requires defined responsibilities, effective reporting, and motivated employees who are rewarded for innovative cost-saving ideas.

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Anu Andrews
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545 views16 pages

Cost Control and Cost Reduction

The document discusses cost control and cost reduction. Cost control aims to prevent costs from varying from planned amounts through executive action like comparing actual costs to standards. Cost reduction aims to permanently lower unit costs without harming quality through ideas that continuously reduce expenses. Some techniques for both include budgetary control, standard costing, material and labor control, and productivity improvements. Success requires defined responsibilities, effective reporting, and motivated employees who are rewarded for innovative cost-saving ideas.

Uploaded by

Anu Andrews
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Cost Control and Cost

Reduction
Meaning
Elements
Techniques
Essentials for Success
Applications
Differences
Cost Control
A process of preventing costs from varying from
the amount planned.
The CIMA, London defines it as the guidance
and regulation by executive action of the cost of
operating an undertaking, particularly where
such action is guided by cost accounting.
Aims at reducing inefficiencies and wastages
and setting up predetermined costs and in
achieving them.
In short, Cost control is exercised by executive
action by comparing actual performance against
some standard and taking corrective action.
Important Elements of Cost
Control

Set up policy, goals and immediate


objectives to be achieved.
Clearly defined authority and
responsibilities.
Comparison of the actual and standard
performance.
An effective reporting system.
Investigating variances and Corrective
action.
Cost Control Techniques
Material control.
Labour control.
Overhead control.
Budgetary control.
Standard costing.
Control of Capital Expenditure.
Productivity and Accounting Ratios.
Essentials for success of Cost
Control
Definite plans and targets.
Clearly defined authority and responsibility.
Effective reporting system.
Motivated employees.
Effective budgetary control and proper setting of
standards.
One of the eminent director of a large company
once said, We plug our cost leaks before they
become cost-holes. If small leaks are plugged
in time, a lot can be saved and contributed
towards profits and productivity.
Cost Reduction
Aims at achieving real savings in cost.
Achieved either by reducing expenditure or
increasing productivity.
The CIMA, London, defines it as Achievement
of real and permanent reduction in the unit cost
of goods manufactured or services rendered
without harming their suitability for the use
intended or diminution in the quality of the
product.
Essentials for the Success of
Cost Reduction Programme
Should be a continuous activity aimed at
reducing cost continuously by innovating ideas
from time to time.
Should be real and permanent reduction in cost.
Co-operation of all persons involved in the
programme.
Persons giving innovative ideas for cost
reduction should be rewarded.
Should be considered all the factors that will be
affected by cost reduction.
Application of Cost Reduction
The critical areas or fields covered by cost
reduction programmes:
1. Product Design.
Design of the product provides the
greatest scope for cost reduction.
Possibilities in the reduction of cost should
be investigated, both when improving
existing design or introducing new design.
2. Factory Organization and Production
Methods.
Cost reduction can be achieved by
improving factory organization in the form
of clear-cut lines of authority and
responsibility, well defined channels of
communication, co-operation and close
relationship between the various
executive.
3. Factory layout and equipment should be
improved to achieve cost reduction.
4. Marketing.
Cost reduction programme should aim at
economizing the channels of selling and
distribution without harming the efficiency
of the sales department.
5. Finance.
Cost reduction programme should aim at
securing capital at economical cost,
employing capital to give the maximum
returns and eliminating capital waste and
overcapitalization.
Tools and Techniques of Cost
Reduction
Budgetary Control.
Standard Costing.
Improvement in design.
Material Control.
Labour Control.
Overhead Control.
Production and Planning Control.
Operation and Market Research.
Planning and Control of Finance.
Value Analysis etc.
Advantages of Cost Reduction
Increases Profit.
Provide more money for labour welfare schemes
and thus improve men-management
relationship.
Helps in making goods available to the
consumers at cheaper rates.
As a result of reduction in cost, export price may
be lowered which may increase total exports.
Higher profit will provide more revenue to the
government by way of taxation.
Difference between Cost Control
and Cost Reduction
Cost Control Cost Reduction
Represents efforts made Represents
towards achieving a achievement in
target. reduction of cost.

Aims at achieving the Aims at reduction of


predetermined costs. costs by finding new
methods to have
continuous economy on
costs.
Cost Control Cost Reduction
Preventive Function: Corrective Function: By
Costs are optimized continuous process of
before they are incurred. analysis of costs and
function.
Applicable to items of Applicable to every
costs which have activity of business.
standards.
Cost Control Cost Reduction
Emphasis is on present Emphasis is on present
and past. and future.

Seeks adherence to A challenge to standards


standards. themselves.

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