Cost reduction, Cost Control & Challenges

Cost reduction should not be confused with cost control.@cost cutting

Cost reduction is an extension of cost control. Cost reduction is a much wider concept than cost control. Cost control is essentially a short-term programme in as much as it relates to objective and standards. But cost reduction could have both short-term and long-term programmes.

Cost control is the regulation of the costs of operating a business and is concerned with the keeping expenditure within acceptable limits. The major assumption in cost control is that unless costs exceed budget or standard by an excessive amount, the control of costs is satisfactory.

?According to the Terminology of Cost Accountancy of the Institute of Cost and Management Accountants London, Cost reduction is to be understood as the success of real and unchanging reduction in the unit costs of goods manufactured without impairing their suitable for the use intended.

?Features of Cost Reduction

These are Features of Cost Reduction given below:

1.?????? Cost reduction is not concerned with setting targets and standards. Cost reduction is the final result in the cost control process.

2.?????? Cost reduction aims at improving the standards.

3.?????? It is continuous, dynamic, and innovative in nature, looking always for measures and alternatives to reduce costs.

4.?????? It is a corrective function.

5.?????? This is applicable to every activity of the business.

6.?????? It adds thinking and analysis to action at all levels of management.

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Cost?control is a process of regulating or control the cost of operation within an organization. Basically, it is the practice of identifying and reducing business expenses to increase profits. Cost control starts with the product planning?process.

?The owner of the company compares the company’s actual financial results with the budgeted expectations, and if actual costs are higher than pre-planned costs, management?needs to take action. Thus, cost control makes actual costs conform to planned costs.

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Cost control can be defined as a tool of management executives to regulate the working of the manufacturing concern. Cost control helps business firms to producing the product at a minimum cost in order to achieve maximum profit.?

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Difference between cost control and cost reduction

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1.?Objective?of Cost control is to maintain the cost accordance with the?pre-determinant standard. On the other hand,?objective?of the cost reduction is makes continuous effort to?reduce the cost.?It’s challenge all existing standard to establish?new and improved standard.

2.?Cost control?approaches?to lock the momentum to reach the lower possible costs under existing circumstances. Where,?approach?of the Cost reduction as no condition is permanent, it continuously tries to find new method to reduction cost.

3.?In?nature?Cost Control is a?preventive function. All costs are optimized before they are obtained.

Unlike the Cost Reduction, this is a?corrective function?in?nature. It presumes that there is always a chance for reduction in the achieved costs.

4.?Cost Control does not ensure?quality maintenance?of products. However, cost reduction ensures 100% quality maintenance.

5.?Cost control assumes the existence of?certain standards?which cannot be challenged. On the other hand, Cost reduction assumes the existence of?hidden potential savings?in the standards which are therefore capable of constant challenge or improvement.

6.?The important tools of the cost control are?standard costing?and?budgetary control. And important tools of cost reduction are?Value Analysis, work study, operations research, simplification and standardization, etc.

Pitfalls to avoid

?Reducing costs can have a negative effect, so you’ll need to be sure that changes will not compromise your operational performance.

Some common pitfalls include:

? Over-dependence on one supplier could put you at risk if your supplier fails.

? Reducing your marketing budget could affect your marketing strategy.

? Tighter control of business finances could leave you without a safety margin if cash flow becomes tight.

? Cutting short-term costs such as training, research and development, or advertising can lead to long-term weaknesses.

Current Challenges

Most business organizations find themselves involved in cost reduction initiatives from time to time. To sustain an organization over the long term, cost reduction efforts need to become deeply ingrained in the business structure itself and that is usually accomplished through a Spend Management or Purchasing Department. Purchasing is typically charged with sourcing, quoting, negotiation, implementation and supply base management responsibilities including compliance audits.

If ownership and management is really serious about impacting and controlling expenses, the current tactical approach to cost reduction needs to change. Tactical, short term cost reduction efforts often resemble fire-fighting. Put out the fire and move on to something else. Then when sales dip, re-organize the team and repeat the effort to feel good about impacting expenses.

Cost cutting refers to?measures implemented by a company to reduce its expenses and improve profitability. Cost cutting measures are typically implemented during times of financial distress for a company or during economic downturns. Cost-saving initiatives can?help offset rising expenses or falling profits.

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