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COST CONTROL AND COST
REDUCTION
Module 8
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COST CONTROL
MEANING:-
It is an comparative analysis of an actual
cost with an standards to facilitate evaluation
and formulation of corrective measures.
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DEFINITION
It is defined as the comparative analysis of
actual cost with appropriate standards or
budgets to facilitate performance evaluation
and formulation of corrective measures.
It aims at accomplishing conformity between
actual results and the standards or budgets.
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FEATURES
Creation of responsibility.
Formulation of standards and budgets.
Timely cost control reports. Formulation of corrective measures.
A systematic budgetary goals
Follow-up.
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COST REDUCTION
MEANING:-
It is an attempt of reducing the cost or
bring down the cost. It implies real and
permanent reduction of cost of goods
manufactured or services.
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DEFINITION
It defined as an attempt to brings cost down.
Cost reduction implies real and permanent
reduction in the unit cost of goods
manufactured or services rendered without
impairing their suitability for the use intended.
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COST REDUCTION IS ACHIEVED
The 2 ways of cost reduction are:-
By reducing cost per unit. By increasing the productivity.
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Difference b/w cost control and cost reduction
COST CONTROL COST REDUCTION
It involves (a) setting targets and standards
(b) ascertaining actual performance (c)
comparing actual performance with targets
(d) investigating the variances (e) taking
corrective action.
Cost reduction is not concerned with setting
targets and standards and maintaining
performance according to standards. Cost
reduction is a final result in the cost control
process.
Cost control aims at achieving standards i.e.cost targets. It assumes existence of
standards
Cost reduction aims at improving thestandards
It follows a conservative procedure and lack
of dynamic approach
It is continuous, dynamic and innovative in
nature, looking always for measures and
alternative to reduce cost
It is a preventive function It is a corrective function
In cost control cost are optimized before
they are incurred
In cost reduction there is always assumed a
scope for reducing the incurred cost under
controlled conditions
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It is generally applicable to items which
have standards
This is applicable to every activity of the
business.
It contains guidelines and directive of
management as to how to do a thing
It adds thinking and analysis to action at all
levels of management
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Tools and techniques of cost reduction
Value analysis /value engg.
Work study.
Job evaluation and merit rating.
Production planning & control (PPC).
Organization and method study.
Operations and method study.
Rationalization.
Quality control.
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Contd
Economic order quantity (EOQ).
Use of better technology.
Mechanization and automation. Standardization.
Simplification.
Classification and codification. Variety reduction.
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Contd
Improvement in the design of a product.
Market research.
Inventory management and control (IMC).
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COST REDUCTION FIELDS/AREAS.
Product improvement:
Factors in product improvement
Quality of the product, waste and loss to be eliminated,
reduction of unnecessary material, labour,
machine operations Proper designing of the product
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Production methods & layout.
Materials control .
Labour control .
Production layout . System analysis .
Time and motion study .
Designing of tools . Modernization of plant and equipment .
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Production methods & layout.
Materials control .
Labour control .
Production layout . System analysis .
Time and motion study .
Designing of tools . Modernization of plant and equipment .
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Marketing areas.
Channel of distribution.
Sales promotion schemes.
Marketing research plan. Advertising methods.
After sales service cost.
Transport arrangement.
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Administrative areas.
Investment planning.
Cash discount policy.
Mechanized system of accounting. Labour relations.
Labour welfare measure.
Availability of servicing facilities.
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What is Cost Auditing?
As per the Chartered Institute of Management
Accounts (UK)
The verification of cost accounts and check on
the adherence to the cost accounting Plan
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Scope of cost audit
1. MATERIAL
Goods inward procedure
Store keeping arrangement
Accounting for scrap, wastage, material transfer
Material pricing methods used Adequacy of stock checking
2. WAGES
Documents used in preparation of payroll
Wage rate change authorization for wage payments & overtime payments.
Time recording
Internal check system
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Continued
3. OVERHEAD
Overhead budgets
Appointment & allocation of O/H
Methods of absorption
Policy regarding inclusion of O/H in WIP
4. GENERAL
Methods of establishing standards, revision of standards
Methods of calculating standard cost variances
Accounting codes and instructions
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Advantages
It will establish the accuracy of cost accounts & assists in prevention of
errors and frauds.
To improve cost account method & technique to facilitate prompt &
reliable information to management
It will help management in taking important decision
Reduction cost of production
Assists financial auditors
It provides information relating to weak, inefficient or mismanaged units
for proper corrective actions
Helps to identify the symptoms of sickness in a unit.
Reveals whether funds invested by shareholders are profitably used in the
business.
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