ME/U3 Topic 4 Cost Control and Cost Reduction
One of the major concern of the enterprise is to maximize the profit, which is possible only through decreasing the cost of production. For this purpose, two efficient tools are used by the management, i.e. cost control and cost reduction. Cost Control is a technique which provides the necessary information to the management that actual costs are aligned with the budgeted costs or not. Conversely, Cost Reduction is a technique used to save the unit cost of the product without compromising its quality.
While cost control, regulates the action to keep the cost elements within the set limits, cost reduction refers to the actual permanent reduction in the unit cost. At this juncture, it would be desirable to know the difference between cost control and cost reduction.
Cost Control is a process which focuses on controlling the total cost through competitive analysis. It is a practice which works to maintain the actual cost in agreement with the established norms. It ensures that the cost incurred on an operation should not go beyond the pre-determined cost.
Cost Control involves a chain of functions, which starts from preparation of the budget in relation to the operation, thereafter evaluating the actual performance, next is to compute the variances between the actual cost & the budgeted cost and further, to find out the reasons for the same, finally to implement the necessary actions for correcting discrepancies.
The major techniques used in cost control are standard costing and budgetary control. It is a continuous process as it helps in analysing the causes for variances which control wastage of material, any embezzlement and so on.
Cost Reduction is a process, aims at lowering the unit cost of a product manufactured or service rendered without affecting its quality by using new and improved methods and techniques. It ascertains substitute ways to reduce the cost of a unit. It ensures savings in per unit cost and maximization of profits of the organization.
Cost Reduction aims at cutting off the unnecessary expenses which occur during the production, storing, selling and distribution of the product. To identify cost reduction, the following are the major elements:
- Savings in per unit cost.
- No compromise with the quality of the product.
- Savings are non-volatile in nature.
Tools of cost reduction are Quality operation and research, Improvement in product design, Job Evaluation & merit rating, variety reduction, etc.
Key Differences between Cost Control and Cost Reduction
The following are the major differences between Cost Control and 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.
- 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.
- 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 does not guarantee quality maintenance. However, 100% quality maintenance is assured in case of cost reduction.
- Cost Control is a preventive function as it ascertains the cost before its occurrence. Cost Reduction is a corrective action.
The two techniques cost control and cost reduction are used by many manufacturing concerns to diminish the cost of production. Cost Reduction has a larger scope than cost control as cost reduction is applicable for all the industries, but cost control is applicable only to the industries where pre- optimisation of the cost which is not yet incurred is possible. Cost Control works as a road map for the organisation to incur costs as per the set standard. On the other hand, cost reduction challenges the established standards by decreasing the costs and increasing the profit.