COST CONTROL AND COST

REDUCTION

Cost Control

Cost control is simply the prevention of waste within the existing environment.

Cost control is the procedure where by actual results are compared against the standards, so that waste can be measured and corrective action can be taken.

Cost control is process of utilizing the available resource economically.

Cost Reduction

Cost reduction may defined as an attempt to bring cost down.

Cost reduction implies real and permanent reduction in the unit costs.

The goal of cost reduction is achieved in two waysBy reducing the cost per unitIncreasing the productivity

The manufacture of plastic articles using injection die casting technology gives rise to small quantities of waste, which previously went to the recycling industry. A crusher has been installed in order to return this waste material directly into the production process, after transforming the waste material to a granulate.

The granulate obtained in this way can be added to the production process without impairing product quality. The savings are about 220,000 kilograms of new injection die casting granulate per annum. As the cost of making the granulate is 75% below the cost of new material, It also eliminates the disposal charge for used plastic.

Transport and travel

Replacement of business travel by using modern electronic communications

Cost control Vs Cost reductionCost control

1. Cost control process involves setting targets and standard, ascertaining the actual performance, comparing the actual performance with standard, investigating the variances and taking corrective action.

2. It aims at achieving the standard3. Follows conservative procedure4. It is a preventive function5. In cost control, costs are

optimized before they are incurred

6. It is generally applicable to items which have standards

7. It contains guidelines and directive management as to how to do a thing.

Cost reduction1. 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. It challenges standards and assumes existence of concealed potential savings in standards.

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

4. It is a corrective function5. In cost reduction, there is always

assumed a scope for reducing the incurred costs under controlled conditions.

6. This is applicable to every activity of the business

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

Better and economic use of men, machines and money

Optimum level of productivity

Reasonable prices

Better standing in competitive market

Increased exports More foreign earningsOptimum level of quality

Optimum return on capital employed

Confidence in investorsBetter chance for expansionEconomic stabilityIncreased credit worthiness

Optimum return on shareholder’s funds

Optimum profitability

Benefits from cost control and reduction programme

Cost reduction areas Product improvement

Quality, time, minimisation of waste, design Production method and layout

Material control, labour control, production layout, systems analysis, time and motion study, work measurement, Standardisation, tools, equipment, modernization and apply incentives

Marketing areas Channels, promotion schemes, research, area responsibility,

remuneration to executives, advertising methods, after-sales-services, packaging method, material handling, transport arrangement

Administrative areaspolicies, procedures, rules, efficiency, economies of scale, welfare measures, availability servicing facility, and constant motivation to staff

Cost Indicators Resource Reducing Projects

Staffing by activityStaffing on a 12 hours shift basisDecentralizing transport servicesClosing low activity departments during holidaysShared services arrangementTelephone interconnect systemsWaste deposal system/ treatment plant Development of accurate census forecastsEmployee incentive planComputerized inventory systems

Cost Indicators Price Reducing Projects

Group purchasing arrangementsNegotiating professional contacts on volume of

professional work and not percentage of revenueRebates from state workers’ compensation funds due

to safety programsSelf insuring unemployment insurance benefitsInstalling own well and water system

The Effective Utilization of Capacity and Cost Behavior Management

Capacity utilization is a key driver in cost management and production efficiency .

Capacity utilization is important for all organizations, and at all levels of an organization.

In addition, it becomes important in many industries where fixed costs are high.

The capacity utilization decisions have a real impact on product lead times, customer responsiveness, costs and a firm’s ability to compete: output, customer demand, operational costs, improved production capacity, long-term resource commitment, and competitiveness

Minimizing Total Cost of Operation

In this case, the company’s attention turns to finding low-cost alternatives to meeting customer demand, such as moving production to areas where labor rates are low.

The company can use other alternatives to deploy this approach such as reducing material costs but not at the cost of quality, substituting technology for people when economies of scale provide savings.

Minimizing Investment

Organization has few fixed assets - few core competencies critical to long-term market success

While any non-core activity or capacity resource is outsourced.

This way has strengths such as increased flexibility and responsiveness, reduced inventory risk, and improved returns on investment. However, optimization capacity utilization through this way is not without weaknesses or risks.

Thus, the cost and profit performance should be compared to investment levels in order to detect these undesirable trends. In addition, using the bundling of several optimization ways provides the greatest potential for overall performance improvements.

Conclusion

Finally, any of the previous ways can be used alone, however, it is best to choose several dimensions of capacity as the basis for the capacity optimization effort.

For example, low cost and profit maximization may be pursued jointly if resources are focused on the areas where cheap resources are available to meet a currently unmet level of demand.

For each way, the goal must be to identify what business risks each represents to the organization, and then choose one or more offsetting ways to ensure that these risks are reduced or managed.