RK&S SMART SOLUTIONS, INC.

EXCELLENT IDEAS, SMART SOLUTIONS

Cost Control
There tends to be confusion in businesses between Costs and Expenses. That is why in economics and accounting, we Control Costs and Manage Expenses. Understanding Costs Costs are derived, used as a measure for economic purposes, which measure the economic performance across multiple dimensions of business, (organization, product, customer, etc.). A cost is a derived value of money consumed to produce a current or future outcome; hence, costs provide management a decision supporting view to improve business economics. Costs are expressed as a value measured in relationship to a causal volume of consumption. There are also different types of costs. Generally, we define costs based on revenue. These are Fixed Costs; SemiVariable Costs; and Variable Costs. A fixed cost does not change as revenue changes. Such a cost would be rent. Whether revenue goes up or down, the cost of rent remains the same. Semi variable costs are partially fixed and partially variable, which means there is some change as revenue fluctuates but not in the same percentage. Variable costs follow the fluctuation in revenue. If revenue goes up 10%; variable costs go up 10%. We use such costs in manufacturing to allocate the cost to each unit manufactured. However, these costs are fixed, semi-variable and variable based solely on the way a business is operating. Factors such as Change Management; Process Improvement or Organizational Restructure can be used to reduce or modify each type of cost. Without belaboring the subject, different disciplines use different costs to explain other factors: In finance we have acquisition costs and opportunity costs; in accounting we have sunk costs, imputed costs, explicit costs and incremental costs; in economics we have economic costs, social costs, private costs and book costs. These signify the purpose of the cost and should be subject to the same controls as the costs mentioned above. Understanding Expenses Expenses are incurred, used as a measure for accounting purposes, which measure the financial performance of an organization. Accounting for expense is standardized by Generally Accepted Accounting Principles (GAAP) to provide shareholders, regulators, and management a standard and comparable view of financial information across diverse industries. Technically, an expense is a specific accounting event related to the outflow of cash reducing corporate equity. Expense simply record the event and used to understand what happened from an accounting perspective.

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EXCELLENT IDEAS, SMART SOLUTIONS With this as a background, it is essential for a company to adapt to changes in the long run. Cost control is, basically an adaptation by companies to improve their profitability with less expenses. It is imperative to control the cost when you venture into the market. Cost control management deals, particularly with the control of various costs associated with running a business. Moreover, it happens to be a shared responsibility and requires the effort of every individual related to the company. It can have three basic aspects under its purview: 1. To find out the cost centers and their variance (if any) with the industry standards. 2. To find out why we are incurring more cost than our competitors. 3. To deal with ways by which, we can drive our cost to the level at which our competitors are, or lower. Steps Involved In Cost Control There are a few steps that lead us to the corrective form of cost control and increase the profitability of a company. All steps involved play an important role in framing a company's policy to stand tall in the market. The steps include: Establishment of Standards The primary step that a company has to follow is setting up objectives and targets that it wants to achieve in the near future. The set targets are the initials of the planning stage and act as a reference line for appraisal of the actual performance. The targets should not be set so high that they become impossible to achieve. Making proper decisions is an important factor, which affects the achievement of targets in the long run. Cost Analysis The second important step that a company has to take is cost analysis. This yields the cost sheet and gives a detailed report of the costs obtained by the company at the cost centers. Cost centers are subunits of various departments in a company where costs are incurred, i.e., purchase, production, administration, sales and marketing, distribution, etc. The total cost is broken down into average price per unit. Comparison of Cost After determining the costs incurred in each department of the company, we compare the individual costs of the company to that of the competitors. The main aim of cost control exercise is to maximize the profits by reducing the cost incurred in production. If the 2|Page

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EXCELLENT IDEAS, SMART SOLUTIONS competitors' costs are lower than the company's, it means that the gap has to be narrowed. The difference between a company's cost and the competitors' cost is known as cost variance. Monitoring the Process After the cost differences are figured, it is important to have a close look at the process through which, the company works. By monitoring the departmental cost properly, it becomes easier for a company to focus on the areas in which it is lagging behind. Moreover, the monitoring process leads to better utilization of resources. The SWOT analysis (used to assess the Strengths, Weaknesses, Opportunities, and Threats) can be of great help to the company. Through this method, the company gets a clear picture of its strengths and weaknesses. It is rather important for a company to work out on its weaknesses rather than competing with a strong competitor. Also, the company has to take corrective measures regarding the elements of cost. Implementing the Approach It is very important that the corrective measures that have been framed are properly implemented. The previous step helped us find the chinks in our cost armor. It is now time to fix it and come back strongly. The company should set a cost target for the year based on current results and competitors' costs and try achieving it by the end of the year. It is imperative that revision and review be done throughout the year to see if things are going according to the conceived plan. Elements of Cost It is quite important to know about the elements of cost when we talk about cost control management, which is why we incorporated the cost elements in the introduction and compared the cost elements with the elements of an expense. Proper and timely review of these costs can help in good control of the cost incurred by the company.

Nowadays, cost control software largely helps in computerizing the process. Cost management is crucial for any company to survive in the market and hence, these days, companies take it very seriously. Business is a constant fight for survival, self-improvement, and cost-cutting. So, a company needs to be dynamic in trying to implement the changes, if it wants to survive in the market. In most sectors today, the market is uber competitive, and the only way to not see your company being gobbled up by the competitors is to implement positive changes in yourself.

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EXCELLENT IDEAS, SMART SOLUTIONS This white paper was written by Richard B. Soscia, president of RK&S Smart Solutions and Arjun Kulkarni and is an essential element in business growth, expansion and success.

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