What is Cost Control? Definition, Features, Process, Advantages, Disadvantages

What is Cost Control?

Cost control is the practice of identifying and reducing business expenses to increase profits, and it starts with the budgeting process. A business owner compares the company’s actual financial results with the budgeted expectations, and if actual costs are higher than planned, management has the information it needs to take action.

Cost Control aims at achieving the pre-determined cost targets and ends when the targets are achieved. It entails target setting, ascertaining the actual performance and comparing it with the targets, investigating the variances and taking preventive measures.

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Definition of Cost Control

Cost Control is the process of monitoring and regulating the expenditure of funds is known as cost control. In other words, it means regulating/control the operating costs in a business firm.

Cost control is the practice of identifying and reducing business expenses to increase profits, and it starts with the budgeting process. A business owner compares the company’s actual financial results with the budgeted expectations, and if actual costs are higher than planned, management has the information it needs to take action.

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Features of Cost control

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

1. It aims at achieving the standard.
   
   
2. It is a preventive function. In cost control, costs are optimized before they are incurred.
   
   
3. It is generally applicable to items which have standards.
   
   
4. It contains guidelines and directive management such as, how to do a thing.

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Advantages of Cost Control

The advantages of cost control are mainly as follows:

1. Achieving the expected return on capital employed by maximizing or optimizing profit.
   
   
2. Increase in productivity of the available resources.
   
   
3. Reasonable price for the customers.
   
   
4. Continued employment and job opportunities for the workers.
   
   
5. Economic use of limited resources of production.
   
   
6. Increased credit-worthiness.
   
   
7. Prosperity and economic stability of the industry.

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Disadvantages of cost control

These are disadvantages of cost control:

• Reduces flexibility and process improvement in a company.
  
  
• Restriction on innovation.
  
  
• Requirement of skillful personnel to set standards.

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Process of Cost Control

1. Planning: Initially a plan or set of targets is established in the form of budgets and standards.
   
   
2. Communication: The next step is to communicate the plan to those whose responsibility is to implement the plan.
   
   
3. Motivation: Motivation is defined as the process that initiates, guides, and maintains goal-oriented behaviors.
   
   
4. Appraisal and Reporting: comparison has to be made with the predetermined targets and actual performance. Deficiencies are noted and discussion is started to overcome deficiencies.
   
   
5. Decision-making: Finally, corrective actions and remedial measures are taken or the set of targets are revised, depending upon the administration’s understanding of the problem.

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Areas of Cost Control

These important cost control areas which are given below:

1. Control of labour cost
2. Material cost may be controlled
3. Overhead may be controlled

Control of labour cost

Control of labour cost is relatively simpler. The standard or estimated time required for an operation and the trade and grade of the worker who would perform it are laid down after careful work study. The actual time taken for the operation is recorded and variances from the standard time as also any deviation in the actual employment of the specified trade and grade of labour are highlighted.

Material cost may be controlled

Material cost may be controlled in a similar manner. Standards or estimates of direct material requirements of a job are established both in quantity and price and the actual consumption is compared with the standard. While quantity control may be exercised by the shop foreman who draws the material for consumption in production, price is mainly controlled by the purchase department at the stage when orders are placed on suppliers.

Overhead may be controlled

Overhead may be controlled through budgets established in terms of costs for each item and for each shop. Many of the items of overhead costs like power, maintenance, overtime, shift work, and idle time may also be budgeted in physical units to enable immediate control being exercised in the shops’.

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Difference between Cost Control and Cost Reduction

S.No.	Cost Control	Cost Reduction
1	It is management by directive dictating how to do a thing.	It adds thinking to doing at all levels of management.
2	It represents efforts made towards achieving a target/goal.	It represents achievement in reduction of costs in all effort to reach the goal.
3	Cost control is a base of cost reduction.	Cost reduction is an extension of cost control.
4	The process of cost control is to set target, ascertain actual performance, and compare it with target, investigate the variances and correct them.	It is not concerned with maintenance of performance according to standards. It challenges standards.
5	Emphasis is on present and past.	Emphasis is on present and future.
6	It tends to set up a conservative procedure and lacks dynamic approach.	It is a continuous process searching for alternatives all the time & is innovative in nature.
7	Usually limited to items which have standards.	Applicable to every section of the business.
8	It is preventive function; costs are optimised before they are incurred.	It is corrective function and does operate even when a cost control system exists.
9	It seeks to attain lowest cost possible under existing conditions.	Recognises no conditions as permanent, since a change will result in a lower cost.

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