Meaning of Cost control and Cost Reduction

24/02/2021 2 By indiafreenotes

Cost Control is a process in which we focus on controlling the total cost through competitive analysis. It is a practice which works to align the actual cost in agreement with the established norms.

It ensures that the cost incurred on production should not go beyond the pre-determined cost. Cost Control involves a chain of various activities, which starts with the preparation of the budget in relation to production.

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 which used in cost control are standard costing and budgetary control. It is a continuous process which helps in analyzing the causes for variances. For example- control wastage of material, any embezzlement and so on.

It involves:

  1. Determination of standards
  2. Ascertaining actual results comparing the standards
  3. An analysis of the variances
  4. Establishing the action that may be taken

Characteristics of a Good Cost Control System

According to backer and Jacobson, effective cost control should have the following characteristics:

(a) Delineation of centers responsibility, i.e., deciding responsibility centers

(b) The delegation of prescribed authority

(c) Various cost standards

(d) The relevance of controllable cost

(e) Cost reporting

(f) Cost reduction

Cost Reduction

Cost Reduction is a process, which aims to lower the unit cost of a product manufactured or service rendered without affecting its quality. It can be done by using new and improved methods and techniques. It ascertains substitute ways to reduce the production cost of a unit.

Thus, cost reduction ensures savings in per unit cost and maximization of profits of the enterprise. Cost Reduction aims at cutting off the unnecessary expenses which occur during the production Process, storage, selling and distribution of the product. To identify cost reduction, we should focus on the following major elements:

  • Savings in per unit production cost.
  • The quality of the product should not be affected.
  • Savings should be non-volatile in nature.

Tools of cost reduction focus on Quality operation and research, Improvement in product design, Job Evaluation & merit rating, variety reduction, etc.

Cost Control

Cost Reduction

Meaning A technique used for maintaining the costs as per the set standards is known as Cost Control. A technique used to economize the unit cost without lowering the quality of the product is known as Cost Reduction.
Savings in Total Cost Cost Per Unit
Retention of Quality Not Guaranteed Guaranteed
Nature Temporary Permanent
Emphasis on Past and Present Cost Present and Future Cost
Ends when The pre-determined target is achieved. No end
Type of Function Preventive Corrective

The upcoming difference will update you about the difference between cost control and cost reduction.

  1. Aim:

Cost control aims at achieving the predetermined costs, whereas cost reduction aims at reduction of costs by finding new ways or methods to have continuous economy on costs.

  1. Exercise:

Cost control is a routine exercise which is carried out for attainment of operational efficiency whereas cost reduction aims at permanent and real savings by a continuous search for improvement. Thus, cost control follows a conservative procedure and lacks a dynamic approach whereas cost reduction is dynamic and innovative in nature.

  1. Concerned with:

The process of cost control is to lay down a target, ascertain actual performance, compare it with the target and take corrective action. On the other hand, cost reduction is not concerned with maintenance of performance according to the predetermined standards.

  1. Approach:

Cost control seeks adherence to standards whereas cost reduction is a challenge to the standards themselves. Cost reduction assumes that there are chances of improvements in predetermined standards.

  1. Function:

The aim of cost control is to see that actual costs do not exceed the predeter­mined costs; so, it is a preventive function. On the other hand, cost reduction is a corrective function because it challenges the predetermined costs and seeks to improve the perfor­mance by reducing cost of increasing production. It is a continuous function of self-analysis for making more and more improvement in performance.

  1. Applicability:

Cost control is generally applicable to items of costs which have standards whereas cost reduction is applicable to every activity of the business.

  1. Tools of Techniques:

Budgetary Control and Standard Costing are important tools of cost control whereas cost reduction makes use of techniques like value engineering/value analysis, work study, operation research, simplification and standardisation, ABC analysis, etc.

  1. When Achieved:

Cost control is achieved once the costs do not exceed the standards whereas cost reduction is never ending. In fact, cost reduction begins when cost control ends.

  1. Operation/Research Oriented:

Cost control is operation oriented whereas cost reduction is research oriented, always trying to reduce costs through planned research.