Cost Control and Cost Reduction Essay

ASSIGNMENT ON COST CONTROL AND COST FREDUCTION SUBMITTED BY, MOHAMMED NAFAISE E. K ROLL NO: 1600 COST CONTROLL & COST REDUCTION COST CONTROL The practice of managing and/or reducing business expenses. Cost controls starts by the businesses identifying what their costs are and evaluate whether those costs are reasonable and affordable . Then if necessary, they can look for ways to cut costs through methods such as cutting back, moving to a less expensive plan or changing service providers.

The cost-control process seeks to manage expenses ranging from phone, internet and utility bills to employee payroll and outside professional services. Cost control is operated through setting standards of targets and comparing actual performance therewith, with a view to identify deviations from standards or norms and taking corrective action in order to ensure that future performance conforms to standards or norms.

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To exercise cost control, broadly speaking the following steps should be observed: Determine clearly the objective, that is pre-determine the desired results: The target cost and/ or targets of performance should be laid down in respect of each department or operation and these targets should be related to individuals who, by their action, control the actual and bring them in to line with the targets.

Measure the actual performance: Actual cost of performance should be measured in the same manner in which the targets are set up, that is ;if the targets are set up operation- wise, then the actual costs should also be collected operation-wise and not cost centre or department-wise as this would make comparison difficult. COST REDUCTION Cost reduction may be defined as the achievement of Real and Permanent Reduction in the unit cost of goods manufactured or services rendered without impairing their suitability for the use intended or diminution in the quality of the product.

Cost reduction, should therefore, not be confused with cost saving and cost control. Cost saving could be a temporary affair and may be at the cost of quality. Cost reduction implies the retention of essential characteristics and quality of the product and thus it must be confined to permanent and genuine savings in the costs of manufacture, administration, distribution and selling, brought about by elimination of wasteful and inessential elements form the design of the product and from the techniques and practices carried out in connection therewith.

In other words, the essential characteristics and techniques and quality of the products are retained through improved methods and techniques used and thereby a permanent reduction in the unit cost is achieved. The definition of cost reduction does not howeverinclude reduction in expenditure arising from reduction or similar govt. action or the effect of price agreements. The three fold assumption involved in the definition of cost reduction may be summarized as under:- 1. There is saving in a cost unit 2. Such saving is of a permanent nature . The utility and quality of goods remain unaffected, if not improved Cost reduction examples The client is an $10,000,000 division glob petroleum company. A single power idea session was held to identify prioritize opportunities for cost reduction and overall corporate improvement. That single day session produced the following cost reduction results. Phenomenal success by the numbers: 12 attendees for 7. 5 hours 306 ideas developed during training 25. 5 ideas per attendee on average 11 priority ideas identified 500,000 total estimated value of 11 key ideas identified during training IMPLEMENTATION $66,666 per hour estimated value of the training before complete Training pays when it’s done our way. DIFFRENCE BETWEEN COST REDUCTION ;amp; COST CONTROL Cost control aims at maintaining the costs in accordance with the established standards. While cost reduction is concerned with reducing costs. It challenges all standards and endeavours to better them continuosly. Cost control seeks to attain lowest possible cost under existing conditions.

While cost reduction recognises no condition as permanent, since a change will result in lower. In case of cost control, emphasis is on past and present while in case of cost reduction it is on present and future. Cost control is a preventive function, while cost reduction is a corrective function. It operates even when an efficient cost control system exist. Cost control ends when targets are achieved while cost reduction has no visible end. BIBLIOGRAPHY Cost accounting and financial management, part1: cost accounting vol. 1 The Institute of Chartered Accountants Of India) Website:www. icai. org