Cost Control

Managerial Economics

Cost Control And Cost Reduction

Cost Control Def:- The process of monitoring and regulating the expenditure of funds is know as cost control. In other words , it means to regulate/control the operating costs in a business firm.

Features of Cost control • Cost control process involves setting targets and standards, ascertaining the actual performance, comparing the actual performance with standard, investigating the variances and taking corrective action. • It aims at achieving the standard. • It is a preventive function. • In cost control, costs are optimized before they are incurred. • It is generally applicable to items which have standards. • It contains guidelines and directive management such as, how to do a thing.

Aspects Of Cost Control 1)Planning:- Initially a plan or set of targets is established in the form of budgets and standards. 2)Communication:- The next step is to communicate the plan to those whose responsibility is to implement the plan. 3)Motivation:- Motivation is defined as the process that initiates, guides and maintains goal-oriented behaviors. cont..

4)Appraisal and Reporting:- comparison has to be made with the predetermined targets and actual performance. Deficiencies are noted and discussion is started to overcome deficiencies.

5)Decision-making:- Finally, corrective actions and remedial measures are taken or the set of targets are revised, depending upon the administration’s understanding of the problem.

Main Areas of cost control • Materials • Labor • Overheads • Sales

• Energy

Advantages cost control • It helps the firm to improve its profitability and competitiveness. • It helps the firm in reducing its costs and thus reduce its prices. • It is indispensable for achieving greater productivity. • If the price of the product is stable and reasonable, it can maintain higher sales and thus employment of work force.

Disadvantages of cost control • Reduces the flexibility and process improvement in a company. • Restriction on innovation. • Requirement of skillful personnel to set standards.

Factors hampering cost control in India • Cost of raw materials and other intermediate products is high. • High foreign commodity prices, particularly oil.

• Power shortages and underutilization of capacity. • Delay in the issue of licenses. • High rates of taxes tend to raise the overall costs of production in India.

General techniques of Cost cutting • Use Skype to make domestic and international phone calls. • Establish presence on social media sites such as Facebook and Twitter instead of newspaper, magazine, mail. • Use electronic communication, cut down on print and paper communication. • Outsource computer maintenance. • Lease equipments. • Share office or building space with another business.

Techniques of cost control • Budgetary control • Standard costing

• Inventory control • Ratio analysis • Variance analysis

Ratio Analysis Def:-

A ‘Ratio: is defined as an arithmetical/quantitative/numerical relationship between two numbers. Ratio analysis is a very important and age old technique of financial analysis.

A tool used by individuals to conduct a quantitative analysis of information in a company's financial statements.

Features of Ratio Analysis • It is mainly used as an external standard, that is, for comparing performance with the other organization in the industry. • Statistical yardstick that provides a measure of the relationship between two figures. • It may be expressed in percentage terms as a proportion or as a rate. Some of the most commonly used ratios for cost comparison are as follows:• • • •

Sales / total assets Production costs / cost of sales Administration costs / cost of sales Sales / inventory

Variance analysis Def:-Variance is defined as the difference between the expected amount and the actual amount of costs or revenues. Variance analysis is the investigation of the difference between actual and planned behavior. For example, if you budget, for sales to be Rs.10,000/- and actual sales are Rs.8,000/-, variance analysis yields a difference of Rs.2,000/-.

Causes for Variance If variance exist, their causes have to be determined for taking the corrective actions. There are many causes for variations which are listed below:

• Changes in productivity can alter the cost levels. • Change in product design will alter the cost levels. • Investment in new capital and replacement of old equipments can have immediate effects on both operating costs and overhead costs. • Changes in hours of working time will have its influence on costs.

Cost Reduction

Def:-The process of identifying and eliminating unnecessary costs to improve the profitability of a business is know as cost reduction.

Features of Cost reduction • Cost reduction is not concerned with setting targets and standards. Cost reduction is the final result in the cost control process. • Cost reduction aims at improving the standards. • It is continuous, dynamic and innovative in nature, looking always for measures and alternative to reduce costs. • It is a corrective function. • This is applicable to every activity of the business. • It adds thinking and analysis to action at all levels of management.

Techniques of cost reduction • • • • • • • • • •

Organization and methods Work study Material handling Automation Value analysis Variety reduction Production control Design Materials control Quality control