Cost Control – Definition, Meaning, Differences between Cost control and Cost reduction, pdf

What is cost control?

cost control is a process of regulating or control the cost of operation within an organization. Basically, it is the practice of identifying and reducing business expenses to increase profits. Cost control starts with the product planning process.

The owner of the company compares the company’s actual financial results with the budgeted expectations, and if actual costs are higher than pre-planned costs, management needs to take action. Thus, cost control makes actual costs conform to planned costs.

Definition of Cost Control

Cost control can be defined as a tool of management executives to regulate the working of the manufacturing concern. Cost control helps business firms to producing the product at a minimum cost in order to achieve maximum profit. 

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Cost Control meaning

Every organization aims to produce the product at the minimum cost. The success of financial management is judged by the action of the business administration in controlling the cost of production. In other words, it can be explained that it is a scientific management technique to control and reduce the costs of doing business.

Every industry and company has established its own standards to control the costs. Cost control is concerned with the ways and means of keeping the costs as lower level as possible, without affecting efficiency and effectiveness. Cost control is simply the prevention of waste of resources within the existing environment. This organizational environment is made up of agreed operating methods for which standards have been developed.

According to Eric L. Kohler, the author of a widely used dictionary of accounting cost control is the employment of management devices in the performance of any necessary operation so that pre-established objectives of quality, quantity and time may be attained at the lowest possible outlay for products and services.

These standards may be declared in a variety of ways, from the broad budget levels to detailed standard costs. Cost control is the procedure whereby actual results are compares against the company standard so that waste can be measured and appropriate action taken to correct the activity.

Important deviations must be identified, examine and brought to the attention of those responsible for results. The administrator must also find out the reasons for deviations and initiate remedial measures immediately. Important methods like standard costing and budgetary control may be put to use in order to ensure effective cost control.

It is achieved by improving the standards of performance, collecting actual cost data for each area of responsibility, comparing actual data with standard data and forwarding the efficient report to top-level management highlighting the deviations from standards from prompt corrective action.

Example of Cost Control

Company can find bids from different vendors that provide the same product or service at a lower costs. Cost control is very important factor in maintaining and growing profitability of a business.

What are the Advantages of Cost Control?

Cost control is necessary for a business, because –

1. Profit making capacity of a business is guided by the efficiency with  which various costs are controlled. 
2. Cost control is leads to increase the efficiency in use of material, machinery and labour. 
3. Cost control provides a basis for cost reduction. 
4. Cost reduction is necessary in order to – 
   • Stand in competition in a specific production line. 
   • Reduce the selling price of a product to grab the market.
5. Continuing employment and job opportunity for the workers.
6. Successfulness and economic stability of the industry.

Steps involved in Cost Control method

Below are the steps that have been adopted to exercise cost control.

1. Planning – Planning of the product may be done as in the form of budget, standard, estimate, etc. The past standards have been considered for proper planning.

2. Communication – The planning and policy should be communicated to the employees so, that they can aware of the standards of the organization and work for the same organizational goal.

3. Motivation – After evaluating the performance, costs are determined and reported to the management about the results of performance. Such report acts as a motivating force and leads to better performance in the future.

4. Appraisals and Reporting – In this step the actual performance is compared with pre-estimated standard and find the deviations. The causes for such deviations are also examined. Finally, the deviations with reasons are reported to the top level of management for the effective cost control.

5. Decision Making –

Decision making is the judgment of the process by which one can choose between a number of alternative courses of action for the purpose of achieving goals.  Managerial decision making is synonymous with the whole process of management. It decides, what should be done? how should it be done? when and by whom should be done? 

A decision may also be conceived as a conclusion that a manager has reached so as to know what he should do later on. It calls for both judgemental and imagination activity to select one from many alternatives, so decision making is an intellectual activity.

Techniques of cost control

There are many techniques are involved in a cost control process, some of them are-

1. Standard Costing

Standard costing is the practice of substituting an expected cost for an actual cost in the accounting records. afterwards, variances are recorded to show the difference between the expected and actual costs. Standard costing involves the creation of estimated costs for all activities within a company. The main reason for employing standard costs is that there are a number of applications where it is too time-consuming to collect actual costs, so standard costs are used as a close approximation to actual costs.

2. Budgetary Control

Budgetary control is a system where the budgets are used as a means of planning and controlling costs. Budgeting lays down as to what is to be attained and how to be attained, while control ensures that the objectives are following and actual results do not deviate from the planned course more than necessary. An efficiently planned budgeting improves cost control.

3. Inventory Control

Keeping control of the company’s inventory so that you’re able to hold the least amount of inventory in your warehouses makes for easier organization, lower holding costs, better cash flow, and more space within your warehouses. It helps to control the cost of inventory.

4. Control of Capital Expenditure

Capital expenditure controlling indicates the actions, processes and tools used to identify, forecast, assess, control and manage capital expenditure. To estimation of capital expenditure and to see that the total cash outlay is within the financial resources of the company.

5. Quality Control

Quality control in manufacturing is a process through which a production system ensures that standard product quality is maintained or improved according to customers’ needs. Cost control should be such that the product can meet the customer’s satisfaction.

6. Performance Evaluation

Performance evaluation is the process by which a manager examines and evaluates an employee’s work performance by comparing it with preset standards, documents the results of the comparison and uses the results to provide feedback to the employees to show where improvements are needed and why. Performance evaluation helps to control the cost of wages.

7. Accounting Ratio

Accounting ratio is the comparison of two or more financial data of a company that are used for analyzing the financial statements. By the accounting ratios, managers can compare and find un-efficient spending of money.

8. Work-Study

Work-study investigates the work done in an organization and it aims to find the most effective way of using industrial resources like man, material, machinery, money, etc. Work-study improves the process through which cost can be controlled. Read more about Work-study >>

9. Production Planning and Control

Production is the transformation of raw material into finished goods. planning looks ahead anticipate possible problems and decides in advance as to how the production carried out in the best way. Control makes sure that the programmed production is constantly maintained. It controls production costs by proper estimation. Read more about production planning and control >>

10. Automation

Automation is the application of technologies to produce goods and services with minimal human intervention. The implementation of automation technologies, techniques and processes improve the efficiency, reliability, and speed of production that were previously performed by humans. That means by the implementation of automation we can produce more goods in the same amount of time.

11. Improvement of Design

Good product design will call for a minimum number of operations and needed less raw material. The product should be designed with a material that is cheaper, machinable, and long-lasting at the same time. The product should be made from minimum material to reduce machining and material cost. A product should be designed with fewer parts. The lesser the number of components lesser the product cost. Read more about product design >>

12. Operational Research

Operations research is an analytical method of problem-solving and decision-making that is useful in the management of a company. By applying the operations research professionals can help companies to achieve more complete datasets, consider all available options, predict all possible outcomes and estimate risk.

Difference between cost control and cost reduction

1. Objective of Cost control is to maintain the cost accordance with the pre-determinent standard. On the other hand, objective of the cost reduction is makes continuous effort to reduce the cost. It’s challenge all existing standard to establish new and improved standard.

2. Cost control approaches to lock the momentum to reach the lower possible costs under existing circumstances. Where, approach of the Cost reduction as no condition is permanent, it continuously tries to find new method to reduction cost.

3. In nature Cost Control is a preventive function. All costs are optimized before they are obtained.

Unlike the Cost Reduction, which is a corrective function in nature. It presume that there is always a chance for reduction in the achieved costs.

4. Cost Control does not ensures quality maintenance of products. However, cost reduction ensures 100% quality maintenance.

5. Cost control assumes the existence of certain standards which can not be challenged. On the other hand, Cost reduction assumes the existence of hidden potential savings in the standards which are therefore capable of constant challenge or improvement.

6. The important tools of the cost control are Standard costing and Budgetary control. And important tools of cost reduction are Value Analysis, work study, operations research, simplification and standardisation, etc.