The basic and primary objective of cost accounting system is cost control ultimately leading to cost reduction. It is commonsense that higher costs of production means smaller profits and lower costs larger profits. Therefore, management tries to bring down the costs as far as possible through planning and monitoring of costs. A large number of techniques have been developed in modern times to assist the management in controlling costs such as marginal costing, budgetary control, standard costing, variance analysis etc.
Definition of Cost: Control Cost control may be defined as the process of directing a set of variables toward a preconceived objective to control the costs of operations. It is the guidance of the internal operations of all divisions of the business to produce the most satisfactory profits at the lowest costs. In this sense, the cost control objective refers to the process of preventing costs from varying from the amount planned.
The Institute of Cost and Works Accountants, London defines it as, “The guidance and regulation by executive action of the costs of operating an undertaking.”
Thus, cost control is an executive function that aims at keeping costs under a specified ceiling or at the lowest possible level consistent with the performance of a specified task. The basic purpose of cost control function is compel actual costs to conform to planned costs (or budgeted costs). It is a continuing function.
Meaning of Cost Reduction: The Institute of Cost and Management Accountants, London defines cost reduction as follows
Cost reduction is to be understood as the achievement of real and permanent reduction in the unit costs of goods manufactured or services without impairing their suitability for the use intended.
Characteristics of cost reduction:
The definition given above brings to light the following characteristics of cost reduction
(i) The reduction must be a real one in the course of manufacture or services rendered. Real cost reduction comes through greater productivity.
(ii) The reduction must be a permanent one. It is short-lived if it comes through reduction in the prices of inputs, such as materials, labour etc. The reduction should be through improvements in methods of production from research work.
(iii) The reduction should not be at the cost of essential characteristics, such as quality of the products or service rendered.
Thus, cost reduction is reduction of expenditure of production. It aims at effecting economies in costs or alternatively at cost savings. It is an attempt to bring costs down on a long term basis by eliminating waste.
So, cost reduction must be a genuine one and should aim at the elimination of wasteful operations, increasing efficiency and effecting genuine cost saving.
Difference between Cost Control and Cost Reduction
Cost control and cost reduction are twin objectives of management but their concepts, procedures and approaches are widely different. The main points of differences between the two are the following :
(1) Cost control aims at achieving the predetermined cost, whereas cost reduction aims at reduction of costs.
(2) The process of cost control is to lay down a target, ascertain actual performance from the target and take corrective action. On the other hand, cost reduction is not concerned with maintenance of performance according to the predetermined standards. On the other hand, it challenges the standards.
(3) Cost control seeks adherence to standards whereas cost reduction is a change to the standards themselves; cost reduction assumes that there are chances of improvements in predetermined standards.
(4) The aim of cost control is to see that actual costs do not exceed the predetermined costs, so it is preventive function. On the other hand, cost reduction is a corrective function because it challenges the predetermined cost and seek to improve the performance by reducing cost or increasing production.
(5) Emphasis in Cost control is on present and past while in Cost reduction it is on present and future.
(6) Cost control is redundant in nature. It tends to setup a conservative procedure and lacks dynamic approach. On the other hand, cost reduction is a continuous and dynamic function. It is innovative executive function.
(7) Cost Control is largely a preventive measure. Through budgets an standards, is seeks to keep the costs within the limits of budgets and standard costs. On the other hand, cost reduction is a corrective measure and the campaign, therefore, is munched even when an efficient cost control system is in operation in an organization.