Cost Control and Cost Reduction
Cost
Control is a process in which we focus on controlling the total cost through
competitive analysis. It ensures that the cost incurred on a business process
should not go beyond the pre-determined cost. Cost Control involves a chain of
various activities, which starts with the preparation of the budget in relation
to production. Thereafter we evaluate the actual performance. After that we
compute the variances between the actual cost and the budgeted cost and
further, we find out the reasons for the same. Finally, we implement the
necessary actions for correcting discrepancies.
Advantages
of Cost Control:
i)
Cost control helps to achieve expected return on the capital invested in a
company, by resolving deviations between actual and expected standards. ii)
Cost control leads to improved standards of production with the limited
resources of the company.
iii)
Cost control reduces the prices or tries to maintain them by reducing the cost.
iv)
Cost control leads to the economic use of resources.
v)
It increases the profitability and competitive position of a company.
vi)
It enhances credit worthiness of the company.
vii)
It prospers and increases the economic stability of the industry.
viii)
It increases the sales of the company and maintains the level of
employment.
Disadvantages
of Cost Control:
i)
It reduces the flexibility and process improvement in a company.
ii)
It restricts innovation by emphasizing to reaching the preset standards
iii)
It requires skilled personnel to set standards.
iv)
It lacks creativity as it is concerned with following the current
standards.
v)
It does not lead to improvement in standards.
Steps Involved in
implementing cost control in an organization:
1. Plan your
budget: The first step is to plan your budget for each business activity.
Define standards for your business activity for which a cost control
program is intended to be implemented.
2. Monitor all
expenses: Once the budget has been planned/standard defined, all expenses need
to be monitored regularly.
3. Use
change control systems: Change control systems should be used to manage any
changes that occur during the project.
4. Manage
your time: Time management is crucial for effective cost control. With the
passage of time even otherwise also cost tend to increase.
5. Track
earned value: Earned value is the value of work completed compared to the
planned value.
6. Costs
should be analyzed as the cost incurred, cost to be incurred vis a vis earned
value.
7. Estimate
the overall cost of resources needed for the work: The overall cost of
resources needed for the work should be estimated.
8. Allocate
the budget to each task: The budget should be allocated to each task.
9. Measure
differences from baseline budget: Differences from the baseline budget should
be measured regularly.
10 Forecast
final costs: Final costs should be forecasted based on the progress made so
far.
11. Determine
the causes of cost overruns: Causes of cost overruns should be determined so
that corrective action can be taken. The process shall also help in reviewing the
standards and also setting standards in the future.
Techniques of Cost Control:
1.
Budgetary control:
The budgetary control is the process of continuous comparison. It works with
creating budgets and continuous comparison of these budgets with the actual. It
is finding the reasons for deviations and revising the budgets with needs. It
helps in planning coordination and controlling.
2.
Standard costing:
Standard costing is setting a standard cost and using this standard cost with
actual and analyze the variances. It helps in identifying the causes of
variances and cost estimation.
3.
Inventory control: Inventory control is regulating the purchase, and
usage of materials to maintain production without blocking the extra funds into
it. It tries to reduce the wastage of the material and leads to effective
utilization of it.
4.
Ratio analysis:
Ratio analysis identifies the relationship among different variables. It helps
to identify the trends in an organization. Ratio analysis is also used for the
comparison of different organizations on different aspects. It is mainly used
for comparing performance with other organizations and external standards.
5.
Variance analysis: Variance analysis is a method of cost control. It
involves the identification of the amount of variance and to analyze the
reasons for these variances. A variance is which varies from the standards set.
It can be favorable or unfavorable.
Is the Cost
Control and Cost Reduction are the same? Difference
between Cost Control and Cost reduction:
Cost
control and cost reduction are two different concepts. Cost control is the
process of managing costs to ensure that they do not exceed the budgeted
amount. It involves identifying and analyzing the costs of various business
activities and then taking steps to measure, compare & then reduce
them. Cost reduction, on the other hand, is the process of reducing costs to
improve profitability. It involves identifying and eliminating unnecessary
costs without affecting the quality of the product or service.
|
BASIS |
COST CONTROl |
COST REDUCTION |
|
Steps involved |
Cost Control
process involves defining the standards, measuring actual performance, comparing actuals
with standards, estimating variances and taking corrective actions. |
Cost Reduction is critical
analysis of existing standards to improve the standards rather
than creating the standards. |
|
Techniques |
Cost Control uses techniques like budgetary control and
standard costing |
Cost Reduction uses tools like simplification, standardization, value engineering, ABC analysis, etc. |
|
Focus |
Cost Control focuses on maintaining
the standards and achieving
the established standards |
Cost Reduction is challenging all the predefined standards and brings cost down
further. |
|
Time period |
Cost Control is not a dynamic function; it tries to reach to the minimum cost at a given
point of time |
Cost Reduction is a continuous process. It is not a period based
concept but it analyses new ways to reduce cost. |
|
Orientation |
Cost Control is focused on the past and present cost data. |
Cost Reduction is a future oriented concept. |
|
Nature |
Cost Control can be regarded as a preventive function as it attempts
to maintain the cost at the required pre-set standards |
Cost Reduction is a corrective measure. It tries to improve the
efficiency of the existing control
mechanism. It assumes that there is always scope of reduction. |
|
Permanency |
Cost Control is temporary in nature. It is just a measure to reduce variances between actual and budgeted. |
Cost Reduction is permanent reduction in cost
of a good or a service |
|
Cost concerned |
Cost Control focuses on reducing the overall cost. |
Cost Reduction is an attempt to reduce
the per unit cost |
|
Quality concerns |
Cost Control does not talk of quality
of the product; it focusses on reduction only. |
Cost Reduction is reducing
the cost whole maintain the quality of the product. |
|
Frequency |
Cost Control is more of a routine activity. It requires
close monitoring. |
Cost Reduction is
research oriented; it is a form of improvement so it demands creativity. |
How to measure the
effectiveness of control
To measure the
effectiveness of your cost control measures, you can use a cost-effectiveness
analysis. This involves measuring the outcome of the activities or
interventions you are comparing and calculating the costs of those activities
or interventions. You can then divide the costs by the outcome to get the
cost-effectiveness ratio. This ratio indicates how much it costs to achieve one
unit of outcome. The lower the ratio, the more cost-effective the activity or
intervention is1.
Example
of Cost Control:
·
Renegotiating contracts with
more favorable terms
·
Getting more competitive bids
from different vendors
·
Improving product quality to
reduce rework and scrap
·
Reducing the number of items
carried in inventory
·
Reducing employee expenses with
better expense management
·
Accounts payable outsourcing
·
Increasing efficiency with
automation software
·
Taking early payment discounts
on accounts payable
control and cost reduction?
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