Module 8

COST CONTROL AND COST REDUCTION

COST CONTROL
MEANING:It is an comparative analysis of an actual cost with an standards to facilitate evaluation and formulation of corrective measures.

DEFINITION
It is defined as the comparative analysis of actual cost with appropriate standards or budgets to facilitate performance evaluation and formulation of corrective measures. It aims at accomplishing conformity between actual results and the standards or budgets.

FEATURES
Creation of responsibility. Formulation of standards and budgets. Timely cost control reports. Formulation of corrective measures. A systematic budgetary goals Follow-up.

COST REDUCTION
MEANING:It is an attempt of reducing the cost or bring down the cost. It implies real and permanent reduction of cost of goods manufactured or services.

DEFINITION
It defined as an attempt to brings cost down. Cost reduction implies real and permanent reduction in the unit cost of goods manufactured or services rendered without impairing their suitability for the use intended.

COST REDUCTION IS ACHIEVED

The 2 ways of cost reduction are: By reducing cost per unit. By increasing the productivity.

Difference b/w cost control and cost reduction

COST CONTROL It involves (a) setting targets and standards (b) ascertaining actual performance (c) comparing actual performance with targets (d) investigating the variances (e) taking corrective action. COST REDUCTION Cost reduction is not concerned with setting targets and standards and maintaining performance according to standards. Cost reduction is a final result in the cost control process.

Cost control aims at achieving standards i.e. Cost reduction aims at improving the cost targets. It assumes existence of standards standards

It follows a conservative procedure and lack It is continuous, dynamic and innovative in of dynamic approach nature, looking always for measures and alternative to reduce cost
It is a preventive function It is a corrective function

In cost control cost are optimized before In cost reduction there is always assumed a they are incurred scope for reducing the incurred cost under controlled conditions

It is generally applicable to items which This is applicable to every activity of the have standards business. It contains guidelines and directive of It adds thinking and analysis to action at all management as to how to do a thing levels of management

Tools and techniques of cost reduction

Value analysis /value engg. Work study. Job evaluation and merit rating. Production planning & control (PPC). Organization and method study. Operations and method study. Rationalization. Quality control.

Contd
Economic order quantity (EOQ). Use of better technology. Mechanization and automation. Standardization. Simplification. Classification and codification. Variety reduction.

Contd
Improvement in the design of a product. Market research. Inventory management and control (IMC).

COST REDUCTION FIELDS/AREAS.

Product improvement: Factors in product improvement Quality of the product, waste and loss to be eliminated, reduction of unnecessary material, labour, machine operations Proper designing of the product

Production methods & layout.

Materials control . Labour control . Production layout . System analysis . Time and motion study . Designing of tools . Modernization of plant and equipment .

Production methods & layout.

Materials control . Labour control . Production layout . System analysis . Time and motion study . Designing of tools . Modernization of plant and equipment .

Marketing areas.
Channel of distribution. Sales promotion schemes. Marketing research plan. Advertising methods. After sales service cost. Transport arrangement.

Administrative areas.
Investment planning. Cash discount policy. Mechanized system of accounting. Labour relations. Labour welfare measure. Availability of servicing facilities.

What is Cost Auditing?

As per the Chartered Institute of Management Accounts (UK)
The verification of cost accounts and check on the adherence to the cost accounting Plan

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Scope of cost audit

1. MATERIAL
Goods inward procedure Store keeping arrangement Accounting for scrap, wastage, material transfer Material pricing methods used Adequacy of stock checking

2. WAGES
Documents used in preparation of payroll Wage rate change authorization for wage payments & overtime payments. Time recording Internal check system

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Continued
3. OVERHEAD
Overhead budgets Appointment & allocation of O/H Methods of absorption Policy regarding inclusion of O/H in WIP

4. GENERAL
Methods of establishing standards, revision of standards Methods of calculating standard cost variances Accounting codes and instructions

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Advantages
It will establish the accuracy of cost accounts & assists in prevention of errors and frauds. To improve cost account method & technique to facilitate prompt & reliable information to management It will help management in taking important decision Reduction cost of production Assists financial auditors It provides information relating to weak, inefficient or mismanaged units for proper corrective actions Helps to identify the symptoms of sickness in a unit. Reveals whether funds invested by shareholders are profitably used in the business.

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