Cost Control and Cost Reduction
A business enterprise must survive, grow, and prosper. Cost Control and Cost Reduction are activities necessary for ensuring that these objectives are fulfilled. With the liberalization of the Indian Economy and Globalization, there is now a cut throat competition from various concerns of the world. As a result there is now a race to secure a place for survival. This has increased the importance of cost control and Cost Reduction.
“Cost control is the regulation by executive action of the costs of operating an undertaking particularly where such action is guided by cost accounting.”
Cost Control is function, which makes sure that actual work is done to fulfill the original intention. It is a widely accepted notion that the actual costs for each cost element should be within the budget.
Cost control is thought of as a managerial effort to attain cost goals within a particular environment. Cost control is not a specific program. Rather, it is a routine activity to be frequently carried out. Cost must be controlled; otherwise, there will be wastage, misappropriation and embezzlement. Checking such wastage and misappropriation of resources is a continuous activity.
A firm exercising a better control last year does not mean that it has now been relaxed from the cost control function. Cost control relies heavily on accounting techniques. Some of the key cost control techniques are responsibility accounting control system, standard costing, budgetary control and cost management ratios. Therefore, cost control includes the routine management of the organizational activities, such as controlling of wastage, misappropriation, loss of work time, set up time etc.
The cost control definition suggests that a company should investigate good procedures for finding out the reason why the costs of the company are not as per the pre-decided or budgeted costs. Thus, cost control can help a company determine, if it is really spending more than it should actually spend. Though it is not essential to be a finance expert to understand the definition of cost control, planning and actually implementing the cost control techniques can be quite a big challenge. It is essential for the senior level managers to have a good understanding of the cost control software which is a part of effective cost control techniques.
Importance of Cost Control
i) It enables the firm to achieve its defined objectives.
ii) It leads to proper utilization of the firm's resources
iii) It ensures the survival and growth of a firm by preserving its competitive capability iv) It makes sure that organization remains efficient.
“Cost Reduction is to be understood as the achievement of real and permanent reduction in the unit cost of goods manufacture or services rendered without impairing their suitability for the use intended”. Cost Reduction is a systematic effort to improve profit margins by eliminating all forms of waste and unnecessary expense without impairing the generation of revenues. Some commonly used synonyms for this activity are profit improvement, cost improvement, and methods improvement. But, regardless of the terminology used, the aim of cost reduction is to offset the impact of a squeeze on profits by getting the maximum return for every rupee of funds spent by the company.
Cost reduction, should therefore, not be confused with cost saving and cost control. Cost saving could be a temporary affair and may be at the cost of quality. Cost reduction implies the retention of essential characteristics and quality of the product and thus it must be confined to permanent and genuine savings in the costs of manufacture, administration, distribution and selling, brought about by elimination of wasteful and inessential elements form the design of the product and from the techniques and practices carried out in connection therewith.
In other words, the essential...
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