Fundamentals of Cost Accounting

Cost Control and Cost Reduction

Most of the enterprise is want to maximize the profit, which is possible by decreasing the production cost. For this purpose, management uses two efficient tools, i.e. cost control and cost reduction. Cost Control is a technique which makes available the necessary information to the management that actual costs are aligned with the budgeted costs or not. Cost Reduction is a technique which we used to save the unit cost of the product without compromising its quality.

Cost control and Cost reduction

Definition of Cost Control

Cost Control is a process in which we focus on controlling the total cost through competitive analysis. It is a practice which works to align the actual cost in agreement with the established norms.

It ensures that the cost incurred on production 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 & the budgeted cost and further, we find out the reasons for the same. Finally, we implement the necessary actions for correcting discrepancies.

The major techniques which used in cost control are standard costing and budgetary control. It is a continuous process which helps in analyzing the causes for variances. For example- control wastage of material, any embezzlement and so on.

It involves:

  1. Determination of standards;
  2. Ascertaining actual results comparing the standards;
  3. An analysis of the variances;
  4. Establishing the action that may be taken.

Characteristics of a Good Cost Control System

According to backer and Jacobson, effective cost control should have the following characteristics :

(a) Delineation of centers responsibility, i.e., deciding responsibility centers;

(b) The delegation of prescribed authority;

(c) Various cost standards;

(d) The relevance of controllable cost;

(e) Cost reporting; and

(f) Cost reduction

Understand Meaning of Cost, Costing and Cost Accounting here in detail

Definition of Cost Reduction

Cost Reduction is a process, which aims to lower the unit cost of a product manufactured or service rendered without affecting its quality. It can be done by using new and improved methods and techniques. It ascertains substitute ways to reduce the production cost of a unit.

Thus, cost reduction ensures savings in per unit cost and maximization of profits of the enterprise. Cost Reduction aims at cutting off the unnecessary expenses which occur during the production Process, storage, selling and distribution of the product. To identify cost reduction we should focus on the following major elements:

  • Savings in per unit production cost.
  • The quality of the product should not be affected.
  • Savings should be non-volatile in nature.

Tools of cost reduction focus on Quality operation and research, Improvement in product design, Job Evaluation & merit rating, variety reduction, etc.

Cost Control

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Difference Between Cost Control and Cost Reduction

The following are the main differences between Cost Control and Cost Reduction:

  1. Cost Control focuses on decreasing the total cost of production while cost reduction focuses on decreasing per unit cost of a product.
  2. Cost Control is a temporary process in nature. Unlike Cost Reduction which is a permanent process.
  3. The process of cost control will be completed when the specified target is achieved. Conversely, the process of cost reduction is a continuous process. It has no visible end. It targets for eliminating wasteful expenses.
  4. Cost Control does not guarantee quality maintenance of products. However, cost reduction assured 100% quality maintenance.
  5. Cost Control is a preventive function because it ascertains the cost before its occurrence. Cost Reduction is a corrective function.

Solved Example for You

What is the area of cost reduction process?

Ans:

Areas of Cost Reduction are:

  1. Design of the product to be produced – Standardization and simplification of the product, this is the most important activity for controlling and reducing cost. once a design of the product is approved and arrangements for production made, choices available in the firm will be limited.
  2. Factory layout organization and production methods, and
  3. Marketing – points of selling and distribution, transport, channels of distribution, etc.
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