What is Cost Control and Reduction?
Cost control and cost reduction are the two very efficient tools used to reduce the cost of production and maximise profit. In simple words, Cost control is a technique used to provide the management with all the necessary information regarding the actual costs and also align them properly with the budgeted costs. On the other hand, the term cost reduction is used to save the unit cost of the product, without causing any compromise to its quality. The companies use a wide variety of techniques of cost control and cost reduction in order to carry out the process effectively.
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Cost Control
The definition of cost control states that it is a process which focuses on trying to control the total cost through competitive analysis. Such practices help in aligning the original cost in agreement with the established costs.
Through this process, firms can ensure their production costs do not soar higher than the predetermined expenses. The cost control process involves several stages, which begins with the budget preparation related to production. Next, the actual performance is evaluated, followed by the calculation variances between the original cost and the budgeted cost. The next task is to investigate the reasons for the same, and the final stage involves implementing necessary actions to mend the discrepancies.
Standard costing and budgetary control are two techniques used in the cost control process. The process is a continuous one and helps to analyse the causes for the variances. It involves:
Determining the standards
Comparing the standards and looking at the results
Analysing the variances
Establishing the action needed to be taken by the firm
Cost Reduction
The definition of cost reduction states it to be a process which aims to reduce the unit cost of a product or service manufactured by the firm without harming its quality. A number of modern and improved techniques can be used for this purpose which serves as an insight to the alternative methods to lower the production costs of every unit.
Cost reduction has a significant role in reducing the per unit costs of products and are thus essential for firms to maximise their profits. This process helps in pointing out and reducing the unnecessary expenses during the production process, storage, selling or distribution of the products. The cost reduction process emphasises the following:
Savings in every unit cost of production
The product quality should not be compromised
Non-volatile nature of the savings
The primary tools involved in cost reduction involve quality operation and research, better designs in products, reducing variety and evaluating jobs amongst others.
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Difference Between Cost Control and Cost Reduction
The importance of cost control and cost reduction are massive in businesses, but they have a few differences. The key difference between cost control and reduction include:
Cost control is a process which focuses on reducing the total cost of production. However, cost reduction aims at reducing the per unit cost of a product.
Cost control is a quick process by nature, while cost reduction is a more permanent process.
The cost control process ends when the required target is met. On the other hand, the cost reduction process is a continuous process which does not end after a certain time. It is primarily focused on eliminating unnecessary costs.
Cost control does not provide any promises regarding maintaining the quality of the products, but cost reduction does not affect the quality of the product even slightly.
The cost control process is more of a function to prevent the cost before their occurrence while the cost reduction process is more of a function used to resurrect the expenses.
Thus cost control and reduction are an essential part of any organisation willing to boost their profits.
Did You Know?
The meaning of cost of control is to identify and reduce the expenses in business to maximise profit. It is a useful factor in maintaining and growing the earnings of the company. The budgeting process helps massively in this regard as the actual results of the company are compared with the budget. If the actual costs are more than what planned, then the company needs to take action.
Solved Examples
1. Cost Measure is What Kind of Control?
Corrective
Preventive
Both
None of the above
Ans: (b) Preventive
2. Which Type of Control Process Does Not Affect the Quality of the Products?
Cost control
Cost reduction
Cost-cutting
None of the above
Ans: (b) Cost reduction
Importance of Cost Control and Cost Reduction in Commerce
Cost control mainly focuses on bringing down the total cost of production whereas cost reduction focuses on decreasing the per unit cost of a particular product. Cost Control is thus temporary but Cost Reduction is permanent in nature. In Commerce, students will learn how cost control gets completed once all the business targets are achieved. It is an important chapter that will pave the way for other related chapters later on. Getting the very fundamentals right at this stage will then assist the students in understanding all the challenging concepts later on. It is one of the most important chapters of Commerce and must be prepared for in a proper manner.
How to Prepare for a Commerce Test on Cost Control and Cost Reduction
Students can go through Cost Control and Cost Reduction – Explanation, Difference and Solved Examples on Vedantu
This page has all the information that they need to be aware of
Read everything on the page and then make notes on certain topics using your own words
Go through the solved examples properly
Assess what you’ve learnt by writing each of the concepts down in your own words
Revise from this page before all tests
FAQs on Cost Control and Reduction Strategies
1. What is the primary difference between cost control and cost reduction in Commerce?
The primary difference lies in their focus and approach. Cost control is a process focused on maintaining costs within pre-set budgets or standards. It aims to ensure that actual costs do not exceed the planned costs. In contrast, cost reduction is a planned and positive approach to permanently reduce the per-unit cost of a product or service without compromising its quality or function. Cost control is a preventive measure, while cost reduction is a corrective one that challenges existing cost standards.
2. What does 'cost control' specifically refer to in a business context?
In a business context, 'cost control' refers to the management practice of monitoring and regulating business expenses to align them with a planned budget. It involves a systematic process of setting cost standards, measuring actual performance, comparing it against the standards, and taking corrective actions for any variances. Key tools used for cost control include budgetary control and standard costing.
3. What are some common examples of cost reduction strategies a company can implement?
Companies can implement various cost reduction strategies to improve profitability. Common examples include:
Improving Product Design: Simplifying the design or standardising components to use less material or cheaper manufacturing processes.
Technological Upgradation: Automating manual processes to reduce labour costs and increase efficiency.
Supply Chain Optimisation: Negotiating better prices with suppliers, reducing transportation costs, or improving inventory management.
Waste Reduction: Implementing lean manufacturing techniques to minimise waste of materials, time, and effort.
4. In which key business areas can cost reduction techniques be applied?
Cost reduction is a comprehensive effort that can be applied across several key business areas, such as:
Production: Improving factory layout, adopting more efficient production methods, and reducing idle time.
Administration: Streamlining office procedures, reducing paperwork, and optimising administrative overheads.
Marketing and Distribution: Choosing more effective distribution channels, optimising advertising spend, and reducing packaging costs.
Personnel: Enhancing employee training to improve productivity and reduce errors.
5. Why is it important that cost reduction does not negatively affect product quality?
It is crucial that cost reduction does not harm product quality because the fundamental goal is to achieve permanent and genuine savings while maintaining customer value. If quality is compromised, it can lead to customer dissatisfaction, loss of brand reputation, and a decrease in sales. True cost reduction focuses on eliminating waste and inefficiency from processes, not on using inferior materials or cutting corners, which ultimately protects the company's long-term market position.
6. How does 'strategic cost management' go beyond simple cost reduction?
Strategic cost management is a broader concept than simple cost reduction. While cost reduction focuses on lowering unit costs, strategic cost management integrates cost analysis with a company's strategic goals. It involves making decisions about which costs to incur (good costs that create value) and which to reduce or eliminate (bad costs that don't add value). It is a long-term, proactive approach that aims to build a sustainable competitive advantage rather than just achieving short-term savings.
7. Can a business focus only on cost reduction and ignore cost control? Why or why not?
No, a business cannot effectively focus on cost reduction while ignoring cost control. The two are complementary and must work together. Cost reduction sets new, lower cost targets by improving processes. However, without cost control, there is no mechanism to ensure that the new, reduced costs are actually maintained. Cost control provides the discipline and monitoring to sustain the gains achieved through cost reduction efforts, preventing costs from creeping back up over time.
