Cost Control an effective tool for better management

                                

 

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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Limited Liabilities Partnership Firms and its comparison with other forms of business organization structure.

 

 

A detailed Article on Limited Liability Partnership Firm & Its comparative analysis with other forms of business organisations

A Limited Liability Partnership (LLP) is a form of business organization that combines the features of a partnership and a company. It is registered under the Limited Liability Partnership Act, 2008 in India and has a separate legal identity from its partners. The liability of each partner is limited to the extent of his or her contribution to the LLP and the actions done by him or her in the course of business. Unlike a partnership, an LLP has perpetual succession and can continue its existence irrespective of changes in its partners.

 

An LLP has several advantages over other forms of business entities, such as:

 

- No minimum capital requirement: An LLP can be formed with any amount of capital and the contribution of each partner can be in cash or kind.

- Ease of formation and management: An LLP can be formed by filing an incorporation document and an LLP agreement with the Registrar of LLPs. The LLP agreement defines the rights and duties of the partners and the management of the LLP. An LLP does not need to hold annual general meetings or file annual returns unless its turnover exceeds Rs. 40 lakhs or its contribution exceeds Rs. 25 lakhs.

- Tax benefits: An LLP is taxed as a partnership firm and not as a separate entity. The profits of an LLP are taxed only in the hands of the partners and there is no dividend distribution tax or minimum alternate tax applicable to an LLP. The partners can also claim deduction for interest, salary, commission or remuneration paid to them by the LLP under section 40(b) of the Income Tax Act, 1961.

- Flexibility: An LLP has the freedom to design its own internal structure and governance as per the LLP agreement. The partners can decide how to share profits, losses, management rights and responsibilities among themselves. An LLP can also admit new partners or change existing partners without affecting its continuity or legal status.

 

However, an LLP also has some disadvantages, such as:

 

- Lack of awareness: Many people are not aware of the concept and benefits of an LLP and may prefer to opt for a more familiar form of business entity like a sole proprietorship, partnership or company.

- Limited access to funds: An LLP may face difficulties in raising funds from external sources like banks, financial institutions or investors as they may not have confidence in the credibility and stability of an LLP. An LLP cannot issue shares or debentures to raise capital from the public.

- Regulatory compliance: An LLP has to comply with various provisions of the LLP Act, 2008 and the rules made thereunder. For instance, an LLP has to maintain proper books of accounts, audit its accounts if its turnover exceeds Rs. 40 lakhs or its contribution exceeds Rs. 25 lakhs, file annual statements of accounts and solvency with the Registrar of LLPs, inform the Registrar of any changes in its partners or registered office, etc.

 

An LLP can be compared with other forms of business entities on various parameters, & Tabulated as given hereunder:

 

 

 

 

 

Sr No	Basis	LLP	Sole Proprietorship	Partnership	Private Limited
01	Governing Law	An LLP is governed by the LLP Act, 2008 and the rules made thereunder.	A sole proprietorship is governed by the general laws applicable to contracts and torts.	A partnership is governed by the Indian Partnership Act, 1932 and the common law principles.	A private limited company is governed by the Companies Act, 2013 and the rules made thereunder.
02	Registration	An LLP has to be registered with the Registrar of LLPs by filing an incorporation document and an LLP agreement.	A sole proprietorship does not need any registration unless it is required by any specific law.	A partnership has to be registered with the Registrar of Firms if it wants to sue or be sued by third parties.	A private limited company has to be registered with the Registrar of Companies by filing a memorandum and articles of association.
03	Number of partners/member	An LLP requires a minimum of two partners and there is no maximum limit on the number of partners.	A sole proprietorship can have only one owner.	A partnership can have a minimum of two partners and a maximum of twenty partners (ten in case of banking business)	A private limited company can have a minimum of two members and a maximum of two hundred members.
04	Minimum capital	An LLP does not have any minimum capital requirement.	A sole proprietorship does not have any minimum capital requirement.	A partnership does not have any minimum capital requirement unless it is specified by any law or agreement.	A private limited company has to have a minimum paid-up share capital of Rs. 1 lakh.
05	Suffix used in name	An LLP has to use the suffix 'Limited Liability Partnership' or 'LLP' at the end of its name.	A sole proprietorship can use any name as long as it is not misleading or identical to any existing business name.	A partnership can use any name as long as it is not misleading or identical to any existing business name.	A private limited company has to use the suffix 'Private Limited' or 'Pvt. Ltd.' at the end of its name.
06	Perpetual succession	An LLP has perpetual succession and can continue its existence irrespective of changes in its partners.	A sole proprietorship ceases to exist on the death or insolvency of the owner.	A partnership dissolves on the death, retirement, insolvency or expulsion of any partner unless the partnership agreement provides otherwise.	A private limited company has perpetual succession and can continue its existence irrespective of changes in its members.
07	Legal identity	An LLP has a separate legal identity from its partners and can own property, enter into contracts, sue and be sued in its own name.	A sole proprietorship does not have a separate legal identity from its owner and the owner is personally liable for all the debts and obligations of the business.	A partnership does not have a separate legal identity from its partners and the partners are jointly and severally liable for all the debts and obligations of the firm.	A private limited company has a separate legal identity from its members and can own property, enter into contracts, sue and be sued in its own name.
08	Common seal	An LLP may have a common seal if it decides to do so by a resolution of the partners.	A sole proprietorship does not have a common seal.	A partnership does not have a common seal.	A private limited company has to have a common seal and affix it on all its documents.
09	Liability of partners/members:	The liability of each partner in an LLP is limited to the extent of his or her contribution to the LLP and the actions done by him or her in the course of business.	The liability of the owner in a sole proprietorship is unlimited and he or she is personally liable for all the debts and obligations of the business.	The liability of each partner in a partnership is unlimited and he or she is jointly and severally liable for all the debts and obligations of the firm.	The liability of each member in a private limited company is limited to the extent of his or her shareholding in the company.
10	Agreement	An LLP is governed by an LLP agreement which defines the rights and duties of the partners and the management of the LLP. An LLP agreement can be oral or written but it is advisable to have a written agreement to avoid disputes.	A sole proprietorship does not have any agreement as there is only one owner.	A partnership is governed by a partnership deed which defines the rights and duties of the partners and the management of the firm. A partnership deed can be oral or written but it is advisable to have a written deed to avoid disputes.	A private limited company is governed by a memorandum and articles of association which define
11	Ownership of assets	An LLP owns all the assets acquired in its name and can dispose them as per its discretion.	The owner of a sole proprietorship owns all the assets acquired in his or her name and can dispose them as per his or her discretion.	The partners of a partnership own all the assets acquired in the name of the firm and can dispose them as per their consent.	The members of a private limited company do not own the assets acquired in the name of the company and cannot dispose them without the approval of the board of directors.
12	Principal/agent relationship	Each partner in an LLP is an agent of the LLP and can bind it by his or her acts done in the course of business unless he or she has no authority to do so or exceeds his or her authority.	The owner of a sole proprietorship is both the principal and agent of his or her business and can bind it by his or her acts done in the course of business.	Each partner in a partnership is an agent of the firm and can bind it by his or her acts done in the course of business unless he or she has no authority to do so or exceeds his or her authority.	The members of a private limited company are neither agents nor principals of the company and cannot bind it by their acts.

 

Conclusion: Each of the forms of business organization has its own relative merits and demerits. What is best of these, shall depend on case to case basis and choice shall depend on subjective factors. Having said that, while the sole proprietorship gives absolute control over the management of the business, it may not be suitable for the medium to large businesses, it might be most appropriate for micro level businesses. Partnership forms of business organization, might be best suited for small to mid level businesses, as it brings larger and capital and diverse experience from the partners. However, these two form of forms of business organisations bring higher risk due to the fact that liability is unlimited. The other two LLP and Limited companies reduces risk but increases the compliance.