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One of the important functions of cost accounting is cost control and cost reduction. Cost control implies various actions taken in order to ensure that the cost do not rise beyond a particular level while cost reduction means reducing the existing cost of production. Both these concepts are discussed below.
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Cost Control
As mentioned above, cost control
means keeping the expenses within limits or control. Cost control has the
following features.
Cost control is a continuous process.
It involves setting standards and budgets for deciding targets of different
expenses and constant comparison of actual the budgeted and standards.
Cost control involves creation of
responsibilities center with clearly defined authorities and responsibilities. It
also involves, timely cost control reports showing the variances between
standard and actual performance.
Motivating and encouraging employees
to accomplish budgetary goals is also one of the essential aspects of cost
control.
Actually cost control not only means
monetary limits on cost but it also involves optimum utilization of resources
or performing the same job at same cost.
Techniques of Cost Control
Costs can be controlling by employing the following methods:
Material Control
Labor Control
Overheads Control
Standard costing
Budgetary Control
Capital Expenditure Control
Cost Reduction
Every plan of cost reduction
proceeds with this assumption that there is always scope for cost reduction. A
continuous research is made into various areas for finding out the best
possible methods of performance for ensuring minimum possible costs.
The reduction in costs should be
real and permanent. Reduction due to wind falls, changes in government policy
like a reduction in taxes (or duties or due to temporary) and measures taken
for tiding over financial difficulties do not strictly come under the purview
of cost reduction.
Cost control means attempts to
reduce the costs. For example, if the present costs are Rs. 1,000 per unit, attempts can be made to reduce it to
bring it down below Rs. 1,000. For doing this, all out efforts will have to be
made for achieving this target. The goal of cost reduction can be achieved in
two ways, first is reducing the cost per unit and the second one is increasing
productivity. Reducing wastages, improving efficiency, searching for
alternative materials, and a constant drive to reduce costs, can effect cost
reduction.
The following tools and techniques
are used to reduce costs:
Simplification and Variety Reduction
Planning and Control of Finance
Cost Benefit Analysis
Value Analysis
Quality control
Inventory management
Contribution Analysis
Job Evaluation and Merit Rating
Improvement in Design
Business Process Re-engineering
Productivity and Accounting Ratios
Market Research
Differences between Cost Control and Cost Reduction
The following are the major
differences between Cost Control and Cost Reduction:
Cost Control does not guarantee quality maintenance. However,
100% quality maintenance is assured in case of cost reduction.
The activity of maintaining cost as
per the established norms is known as cost control. The activity of decreasing
per unit cost by applying new methods of production in such a way that it does
not affect the quality of the product is known as cost reduction.
The process of cost control is completed when the specified
target is achieved. Conversely, the process of cost reduction has no visible
end as it is a continuous process that targets for eliminating wasteful
expenses.
Cost Control is a preventive function as it ascertains the cost
before its occurrence. Cost Reduction is a corrective action.
Cost Control focuses on decreasing the total cost while cost
reduction focuses on decreasing per unit cost of a product.
Cost Control is temporary in nature. Unlike Cost Reduction which is permanent.
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