Enterprises exist to make a profit. Hence, minimising costs is key to maximising profits.

Businesses
use cost control and cost reduction to compare the value of output and estimate the expenses of
various operations in a particular project. As a result of calculating cost control and cost
reduction correctly, organisations maximise profit while minimising production costs. 
However, both procedures are different from each other. For example, cost control provides the
necessary information for aligning actual and budgeted costs; cost reduction reduces production
costs without compromising product quality.
What is meant by Cost Control? 
Cost control is the first step in cost control and cost reduction, where the primary focus is on
controlling total costs through competitive analysis. 
Enterprises control the actual cost of the product with the help of several practices. It guarantees
that the total cost of operation does not exceed the budget.
With cost control, firms ensure that the product cost does not exceed the production cost. It is a
continuous process where variables are analysed to find the reason for high costs, and necessary
steps are taken at the final stage.
The steps followed while implementing cost control are:
 Setting Predetermined Standards
Before beginning any operation, the company must make a performance goal or standard cost for
each cost centre. Then, further works are done with the help of these prearranged costs.
 Assessing Actual Performance 
Companies determine the actual cost of each product. Later, they measure the performance as
per targets. For example, if the target is operation-wise, you can calculate and collect actual costs
on an operation-by-operation basis to provide a standard benchmark for comparison.
 Comparing Output with Initial Standards
After calculating the actual cost, we can compare it to the desired outcome. Any discrepancy
between the two is identified and communicated to the person in charge.
 Analysing Action Variations
We review and identify discrepancies and their causes in the previous steps. Following that, we
take the necessary actions, and if necessary, we can incorporate standards into developments to
control the price. 
What is Cost Reduction?
Cost reduction is the process that concentrates on reducing the unit price of a factory-made
service or product. It is done without compromising quality through new and better technologies.
This is possible by actively adapting to the latest product designs and implementation
improvements. In addition, several methods are used to reduce production costs. The most
common way is to use a unit’s cost, ensuring per-unit price savings and profit maximisation.
The primary goal of cost reduction is to eliminate unnecessary expenses during production,
storage, sale, and distribution. It works on cost-cutting measures for the major systems. Savings
are non-volatile assets.
Companies can follow these steps to achieve cost reduction:
 Continual Research 
Companies conduct numerous studies and research to determine the most optimal and cost-
effective ways to manufacture a product or provide a service. Then, to reduce the costs, they can
improve their existing manufacturing structures.
 Value Chain Analysis
Businesses can analyse and identify activities that add no value to a company’s profit potential and
remove them. Conversely, this will strengthen activities that add substantial value to the
company’s functioning. 
Differences Between Cost Control and Cost Reduction
The differences between cost control and cost reduction are as follows:
1. Cost control refers to keeping costs within prearranged limits. Cost reduction is about
lowering the cost per unit by implementing new production methods that do not
compromise product quality.
2. Cost control centres on lowering the total cost of a product, whereas cost reduction
centres on lowering the product’s unit price.
3. Cost control is a temporary measure, whereas cost reduction is permanent.
4. The cost control process is completed when a particular target is met. In contrast, the cost
reduction process has no visible end because it is implemented from time to time to
eliminate profligate expenses.
5. Cost management does not engage in standard quality maintenance, whereas cost
reduction does.
6. Cost control is an inhibitory function that determines the cost before it occurs i.e. a
preventive action. A cost-cutting measure is a corrective action.
Importance of Cost Control and Cost Reduction 
For any enterprise, both cost control and cost reduction play a significant role. Cost control centres
on bringing down the total cost; cost reduction is concerned with decreasing the per-unit price of
a particular product. 
Through cost control and cost reduction, an enterprise can increase its profit on various levels and
help it achieve the target and manage its company very well. 
Conclusion 
Cost control and cost reduction are critical processes for many organisations that reduce
production costs. Therefore, a decrease in total production cost and reduction in cost per unit is
necessary, which we can perform using cost control and cost reduction.
Cost control requires the predetermination of an estimated cost, which is not applicable in all
industries. In contrast, cost reduction is applicable in all industries as it centres on lowering
production costs while increasing profit. 
Finally, we can conclude that cost control provides a road map for organisations, while cost
reduction challenges brands by lowering product costs.

What is Cost Control? What is importance of Cost Control techniques in industry? Explain the
methods of cost control techniques? Cost control is the process of managing and reducing
expenses within an organization to achieve profitability and improve efficiency. It involves
identifying, analyzing, and controlling expenses to ensure that they are in line with the
organization’s budget and objectives. The importance of cost control in industry cannot be
overemphasized. Cost control helps organizations to optimize their operations, reduce waste,
increase efficiency, and improve profitability. Effective cost control can help organizations to: 1.
Improve their bottom line: By reducing expenses and optimizing operations, organizations can
increase their profits. 2. Remain competitive: Organizations that can produce goods or provide
services at a lower cost than their competitors can offer more competitive prices, which can help
them to win more customers. 3. Increase efficiency: By identifying and eliminating wasteful
practices, organizations can increase their efficiency, which can help them to produce more with
less. 4. Improve decision making: Accurate cost information can help organizations to make
better decisions about pricing, product development, and investment. There are several
methods of cost control techniques that organizations can use to manage their expenses. Some
of these techniques include: 1. Budgeting: Creating a budget can help organizations to plan their
expenses and ensure that they are in line with their revenue. 2. Standard costing: This technique
involves setting a standard cost for a product or service and comparing the actual cost against
this standard to identify variances. 3. Activity-based costing: This technique involves identifying
the activities that drive costs and allocating those costs to products or services based on the
resources used. 4. Inventory management: Managing inventory levels can help organizations to
reduce waste and avoid stockouts. 5. Process improvement: Analyzing and improving business
processes can help organizations to reduce waste and increase efficiency. 6. Outsourcing:
Outsourcing non-core functions can help organizations to reduce costs and focus on their core
competencies. 7. Negotiation: Negotiating with suppliers and vendors can help organizations to
reduce costs and improve their bottom line. In conclusion, cost control is essential for
organizations looking to improve their profitability, efficiency, and competitiveness. By using
various cost control techniques, organizations can reduce expenses, optimize operations, and
make better decisions.

COST CONTROL AND COST REDUCTION INTRODUCTION

This chapter studies two important and related problems of cost control and cost reduction and
cost estimation which are very important for the financial management of a firm.
COST CONTROL
Meaning
Business firms aim at producing the product at the minimum cost. It is necessary in order to
achieve the goal of profit maximisation. Profit is the diference between selling price and cost of
production. Generaly, selling price is not within the control of a firm but it can minimise the cost.
In fact, the success of a business firm is judged in controlling its costs. Cost control by
management means a search for better and more economical ways of completing each operation.
Cost control is simply the prevention of waste within the existing environment.
It aims at reducing costs and increasing the profitability of the firm. This is done by reduction in
specific expenses of the firm and making a better use of the money spent. If a firm is producing a
certain quantity of product, it should ensure that it is produced at the minimum cost and gives
more profit.
Management should follow three rules in cost control activities (i) It is easier to keep costs down
than to bring costs down. (ii) The amount of effort put into cost control tends to increase when
business is bad and decrease when business is good. (iii) Cost control is more profitable when
business is good than when it is bad.
Aspects of Cost Control
Cost control involves the following steps and covers various aspects of management. It has to be
brought in the following manner:
(i) Planning. Initially a plan or set of targets is established in the form of budgets, standards or
estimates.
(ii) Communication. The next step is to communicate the plan to those whose responsibility is to
implement the plan.
(iii) Motivation. After the plan is put into action, evaluation of the performance starts. Costs are
ascertained and information about achievements is collected and reputed. The Cost Control and
Cost Reduction – / 107 fact that the costs are being reported for evaluating performance acts as a
prompting to
(IV) Appraisal. Comparison has to be made with the predetermined targets and actual
performance. Deficiencies are noted and discussion is started to overcome deficiencies.
(v) Decision-making. Finally, the reported variances are received. Corrective actions and remedial
measures are taken or the set of targets is revised, depending upon the administration’s
understanding of the problem.
Advantages of Cost Control
Cost control has the following advantages:
(i) It helps the firm to improve its profitability and competitiveness.
(ii) In the absence of cost control, profits may be drastically reduced despite a large and increasing
sales volume.
(iii) It is indispensable for achieving greater productivity.
(iv) Cost control may also help a firm in reducing its costs and thus reduce its prices. If the price of
the product is stable and reasonable, it can maintain higher sales and thus employment of
workforce.
MAIN AREAS OF COST CONTROL
Costs have been rising faster than ever before. The business executives have neglected the more
important task of providing effective information to management for the control and reduction of
costs. Waste is growing at an enormous rate. It has increased costs in each of the prime resources,
namely material, labour, sales, etc. Cost control is essential in the following main areas:
(i) Labour
Labour costs have risen in three ways: (a) higher basic pay, (b) shorter working hours, and (c)
reduced output.
Reducing labour costs is a little tricky question. It is not possible to reduce wage rates due to the
existence of trade unions and minimum wage legislations. So to motivate the workers, wage rates
would need to be revised upwards. The reduction in labour costs would be possible only if over
time, the rate of output per worker increases faster than the wage rate increase. This is possible
by raising labour productivity. This can be possible either by (i) producing more for the same cost,
or (ii) producing the same for a lower cost. Productivity means labour cost reduction. This can be
achieved by proper recruitment and training. rewards and punishment, reducing absenteeism and
late coming of workers, improved method of production and working conditions, etc.
(ii) Material
The inefficient use of materials is one of the prime causes of increased costs. Wastage through
poor control and design has risen much. Waste must be reduced if costs are to be controlled.
There are different ways of reducing material cost. If purchasing of materials is done properly, the
firm can get various types of discounts. A number of decisions are involved in the case of materials
used by a firm. They are availability of cheap and better materials and even substitutes, buying in
bulk, reduction in freight cost, etc. Since material costs form a major part of the total cost of
production, control and reduction of material cost in these cases is of vital importance. R&D
efforts, inventory management, improved production planning, elimination of slow moving stocks,
and improved flow of parts and materials, etc. can be effective in controlling and reducing these
costs.
(iii) Sales
Sales are another area of cost control. Sales control requires making sure that the company is not
overspending to achieve its sales goals. In order to sell, a firm maintains a sales force and spends
on an advertisement, etc. The key ratio to watch is advertisement expense to sales.
If the advertisement expenditure is more than the returns from sales, this expenditure will be a
waste. Therefore, sales cost can be controlled by rearranging market segments on the basis of
demand and plan its advertisement policy accordingly. Consumer choices should be ascertained
and communicated to the management so that products are altered according to consumer needs.
(iv) Overheads
Overhead costs are fixed costs that remain the same at a given capacity. A proper selection of
capacity, a right choice of equipment and its proper maintenance, reduction in power, fuel and
lighting costs, reduction in transport costs by using trucks and wagons, reduction in advertisement
costs, reduction in wastages, reduction in bad debts, etc. will control overheads and keep them
down.
 TOOLS (OR TECHNIQUES) OF COST CONTROL
Business firms use two tools of cost control.
Budgetary control and Standard costing
1 Budgetary Control
Every business firm prepares a budget for planning, coordination and control. It is an anticipated
financial statement of revenue and used for a specified period. Thus budgetary control is a system
which is used for planning and controlling the entire working of a Business.
According to Floyd H. Rowland and William. H. Barr, “Budgetary control is a tool of management
used to plan, carry out and control the operation of business. It establishes objectives and
provides the basis for measuring performance against these objectives.”
Budgetary control provides a yardstick against which actual results can be compared. It provides a
planned approach for expenditure and financing of the activities of the firm. This results in
economy in the utilisation of funds for the maximum benefit of the firm. Budgetary control
improves the overall performance of the firm by directing, guiding and supervising its financial
management.
The process of budgetary control begins by preparation of cost and revenue budgets hy each
department such as sales, distribution, advertising, production, warehousing. sport,
administrative, financial and accounts departments. Besides, a capital budget is prepared which
contains estimated expenditure on plant, machinery, tools, etc.
After the departmental budgets, a master budget is prepared which covers all departmental
budgets, profit and appropriation of profit and major financial ratios. The master budget shows
anticipated profit and loss account and balance sheet of the firm for the year.
Fixed and flexible Budgets. For effective cost control a business firm may prepare a fixed or
flexible budget.
A fixed budget is a short period budget. It is prepared for a specific output level when the
possibilities of changes in the level of activity of the firm are the minimum.
A flexible budget is a variable budget. It provides a basis for determining costs at various levels of
activity. It provides a flexible standard to a financial manager for comparing the costs of an actual
volume of activity and not with the anticipated costs as given in the fixed budget. To prepare a
flexible budget, items of anticipated expenditure are first classified into fixed and variable. The
costs remain the same for all levels of activity in the fixed cost budget. But the costs for each item
in the variable category are varied for different levels of activity.
Advantages of Budgetary Control
The following are the main advantages of budgetary control :
(i) Budgetary control integrates and brings together all activities of the firm right from planning to
controlling.
(ii) Budgetary control provides a yardstick against which actual results can be compared
(iii) Budgetary control provides a clear definition of the objectives and policies of the concern.
(iv) Budgetary control is a useful tool in profit-planning.
(v) Budgetary control helps to eliminate or reduce unproductive activities and minimise waste.
(vi) Budgetary control acts as a basis for internal audit by providing a method for appraisal of
performance.
Limitations of Budgetary Control
Budgetary control has several limitations:
(i) As budgets are based on future estimations, there are uncertainties of future.
(ii) The budgetary programme takes a long time to develop a reasonably good system of
budgetary control.
(iii) Any deviation from budgeted figures is looked upon with contempt by the management. This
contributes negatively to the firm’s objectives.
(iv) The effectiveness of the budget depends largely on the dedication and coordination of the top
management which is often lacking.
(v) Budgetary control system requires a lot of paperwork which the technical personnel always
resent.
(2) Standard Costing
Standard costing is one of the prominently used systems of cost control. It aims at establishing
standards of performance and target costs which are to be achieved under a given set up working
conditions. It is a pre-determined cost which determines what each product or service should cost
under certain situation.
Standard costing is defined as the preparation and use of standard costs, their comparison with
actual costs and the measurement and analysis of variances between actual and standard costs.
Standard costs are calculated from efficient operations of the firm on the basis of technical and
engineering factors. Cost standards may be set for direct materials, direct labour, overheads,
marketing etc. It starts with an estimate of what a product should cost during a future period
given reasonable efficiency. Standard costs are established by bringing together information
collected from various sources within the firm. The degree of success is measured by a comparison
of actual performance (cost) and standard performance (cost). For example, if the standard
material input for a unit of production is Rs. 500 and the actual cost is Rs 475 then the variance of
Rs. 25 is the measure of performance, which shows that the actual performance is an
improvement over the standard. An adverse variance from standard cost may be due to excessive
use of materials, higher prices of materials, higher wage rate, less output, more overhead
expenditure, etc.
Standard costs are not rigid. They provide a yardstick against which actual costs are measured.
Without standard costs, a company’s management has no way of knowing its overall performance.
The standard costs are to be established by collecting all information pertaining to different cost
functions. The main basis of setting standard costs are technical and engineering aspects.
This comparison of actual costs with standard cost will help in fixing responsibility for non-
standard performance and will focus attention on areas in which cost improvement should be
sought by showing the source of loss and inefficiency.
Advantages of Standard Costing
Standard costing has the following merits:
(i) It helps in establishing a yardstick with which the efficiency of performance is measured that
helps in cost control.
(ii) It provides how the clear goal is to be achieved by providing incentive and motivation to work.
(iii) It provides the management the basic information to fix selling price, transfer pricing, etc.
(iv) It facilitates delegation of authority and fixation of responsibility.
(v) It helps in achieving optimum utilisation of plant capacity.
(vi) It provides means for cost reduction.
(vii) Variance analysis and reporting is helpful for taking corrective measures. Limitations of
Standard Costing
This method has the following limitations:
(i) Application of standard costs is quite difficult in practice.
(ii) Standards become rigid over time and do not keep pace with changes in conditions.
(iii) If the standards are outdated, loose, inaccurate and unreliable, they are very harmful.
(iv) If standards set are higher than reasonable, they act as discouraging factor.
(V) Standard costing may be found to be unsuitable and costly in the case of dealing in non-
standard products.
(vi) Setting the standard costing are highly technical and mechanical.
RATIO ANALYSIS
Ratio analysis is mainly used as an external standard, that is, for comparing performance with the
other organisations in the industry. It can also be effectively used for comparing the performance
of the firm over time. It is used for cost control. Ratio is a yardstick which provides a measure of
relationship between the two figures compared. The ratio may be expressed in percentage terms
as a proportion or as a rate.
In the ratio analysis, an acceptable ratio is determined first and then it is compared with actual
performance and the corrective measures can be taken. The significant aspect in this analysis is
that the management can take a greater interest in relative as opposed to absolute figures for cost
control.
A particular ratio can be chosen depending on the need. It is possible to calculate different ratios
relating to aspects like liquidity, profitability, capital structure, etc. But for a programme of cost
control and cost reduction, one need to concentrate only on the operating cost ratios.
Ratio analysis is used as an instrument of cost control in two ways:
(1) Ratios can be used to compare the performance of a business firm between two periods. It
helps to identify areas which need immediate attention.
(ii) Besides, standard ratios are used to compare actual areas. Standard ratios are averages of the
results achieved by several firms in the same line of business.
If these comparisons reveal any significant differences, the firm can take suitable action to
eliminate the causes responsible for increase in costs. Some of the most commonly used ratios for
cost comparison are listed below:
(i) Net Profits/Sales
(ii) Gross Profits/ Sales
(iii) Net Profits/Total Assets
(iv) Sales/ Total Assets
(v) Production Costs/Cost of Sales
(vi) Selling Costs/Costs of Sales
(vii) Administration Cost / Cost of Sales
(viii) Sales/Inventory
(ir) Material Cost/ Production Costs
(x) Labour Cost/ Production Costs
(xi) Overheads/ Production Costs
It is possible to indicate trends in a firm’s performance overtime by plotting successive ratios on a
graph for showing trends. The cause of this trend may be found by going down from top of the
ratio pyramid towards bottom
OTHER TECHNIQUES OF COST CONTROL
There are two other techniques which are sometimes used by firms for cost control and reduction.
These are : (i) Value Analysis (ii) Method Study
(i) Value Analysis
Value analysis is an important technique of cost reduction. It is defined as “the identification and
elimination of unnecessary cost without reducing the quality, reliability, and aesthetic appeal of
the product or service concerned”. The objectives of value analysis are:
(a) To analyze the value of the product and its components parts.
(b) To establish the cost of materials and production involved in creating the value.
(c) To determine whether the same or greater value can be created with a reduction in cost.
Value analysis is an approach to cost saving that deals with product design. Here, before buying
any equipment or materials, a study is made as to what purpose these things serve? Would other
lower-cost designs work as well? Is there a cheap material which can serve the same purpose? So
value analysis is a procedure which specifies the function of products or components, establishes
appropriate costs, determines the alternatives and evaluates them. It is a process which aims at
having a most favourable product design, process design, material use and mix, etc. Thus the
objective of value analysis is the identification of such costs in a product that do not in any manner
contribute to its specification or functional value. Thus, it is the process of reducing the cost
without sacrificing the predetermined standards of performance. It is a supplementry device in
addition to the conventional cost reduction methods.
Value analysis is closely related to Value Engineering. It is very helpful in industries where
production is done on a large scale and in such cases even a fraction of savings in cost per unit
results in substantial savings. Some examples of savings through value analysis are:
(i) Discarding tailored products where standard components can do.
(ii) Dispensing of facilities not required by the customer.
(iii) Use of newly developed materials in place of traditional materials.
(iv) To examine the use of alternatives which are available at a lower price.
(ii) Method Study
Method Study is a systematic study of work data and critical evaluation of the existing and
proposed ways of undertaking the work. This technique is known as work study and organisation
and method. Work study helps to investigate all factors which enable the management to get the
work done efficiently and economically. Its objectives are :
(i) The prime objective is to analyse all factors which affect the performance of a task,
(ii) to develop and install work methods which make optimum use of human and material
resources available,
(iii) to establish suitable standards by which the performance of the work can be measured.
Method study aims at analysing and evaluating all those conditions which influence the
performance of a task. It is the creative aspect of work study.
FACTORS HAMPERING COST CONTROL IN INDIA
The factors which cause difficulty in cost control in India are the following:
Cost of raw materials and other intermediate products is generally high.
(ii) High foreign commodity prices, particularly oil.
(iii) The effects of inflation and waste.
(iv) Management has little control on wage rates.
(V) Uneconomic size of the business firm.
(VI) Power shortages and underutilisation of capacity.
(vii) Tied credit and high cost of holding money.
(viii) Delays in the issue of licences and red tapism.
(ix) High rates of taxes and levies.
(x) Increase in administered prices.
(xi) Existence of unseen overheads.
COST REDUCTION
Cost reduction refers to bringing down the cost of production. This involves the examination of the
purposes for which costs are incurred and by a variety of means. It eliminates or reduces the
reasons for spending. The existing standards are closely examined at the broad and detailed levels
with a view to improvement. Cost reduction is a continuing process of improving productivity
within the organisation. Any cost reduction service must be based on a full knowledge of the
organisation’s use of its resources. To achieve success in cost reduction, the management must be
convinced of the need for cost reduction. It is a corrective function. It is concerned with the
stoppage of unnecessary activity and curtailing of expenditure on non-essentials
Cost reduction is possible only when the firm makes the optimum utilisation of resources. It is
possible by incorporating internal and external economies. This means that by economising the
cost of manufacture, administration, selling and distribution, the average cost reduction may be
achieved. Cost reduction is thus stated as the real and permanent reduction in unit cost of goods
manufactured or services without affecting their quality..
Reduction in per unit cost of production can be achieved broadly in two ways:
(i) Reducing expenses, given the volume of output.
(ii) Increasing the volume of output through increased productivity, given the same level of
expenditure.
Cost reduction is achieved only through a process of analytical appraisal of all aspects of using
resources, carried out on a continuous basis from the moment the product is conceived to the
moment the consumer uses it. This calls for specialist knowledge of a technical nature.
Cost Reduction Techniques
Techniques for reducing the cost are:
(1) Product Design. Product design influence all other functions and cost of materials, labour and
overheads, etc. The manager can start cost reduction from the design stage. Research can also
help in developing various designs and their cost analysis.
(2) Materials Handling and Control. Availability of cheaper substitutes, physical properties of
materials, storage, loading and unloading problems, and inventory control problems.
(3) Labour. Increased productivity per man hour, reducting time of operations, etc.
(4) Tools and Equipment. Reduction in the cost of tools, jigs, fixtures and other equipment
necessary to make the product on the basis of design.
(5) Sales and Distribution. Selling and distribution costs can be analysed in a variety of ways,
depending upon the needs and desires of management. Cost reduction is possible in the areas of
product, product lines, channels of distribution, terms of sales, and order sizes.
(6) Administration. Administration is a strategic area, which has cost-saving potetial. Therefore, a
manager should make efforts for cutting down expenditures incidential to recruitment of staff,
economising stationery cost, reducing travelling expenses, overtime, etc.
(7) Organisation and Methods. Organisation and Methods are defined as, “The systematic
examination of activities in order to improve the effective use of human and other material
resources”. It is concerned with improving the administrative work, the way it is organised and the
way methods and procedures are used. Cost reduction benefits cannot be secured without a good
plant layout and factory organisation. Cordial relations between the management and workers are
also essential for the successful implementation of a cost reduction programme.
(8) Quality Control. The main role of quality control is to ensure that no defective products leave
the company. This can be achieved by checking every one, by sampling, and by automated control.
Important Aspects of Cost Reduction Programme
Following are the important aspects of cost reduction programme:
(i) Cost reduction should cover the various centres, where costs are incurred.
(ii) It should seek the assistance of specialists from outside to plan the programme.
(iii) It should set targets and priorities.
(iv)It should improve the design and methods of production.
(v) It should review the progress made towards cost reduction from time to time.
(vi) It should motivate employees to achieve the target.
Essentials for the success of Cost Reduction Programme:
(a) Every individual within the factory should recognise his responsibility.
(b) Employee resistance to change should be minimised
(c) Cost reduction efforts should be continuously maintained.
(d) Efforts should be concentrated in the areas where the savings are likely to be the maximum.
(e) There should be routine business meetings with the employees to review the cost reduction
programmes. Differences Between
Cost Control and Cost Reduction
Cost control and cost reduction are by-products of effective management. Every firm should
devise and develop systematic methods of cost control and reduction. Cost control differs from
cost reduction in the following ways:
1 Cost control is practiced by the management by assuming standard costs and attempting to
keep the actual costs within these standard costs. This promotes the competitiveness of business
firm domestically as well as internationally. Cost reduction begins, where cost control ends. It
helps the firms to reduce prices, which is very important for a developing economy like India,
where there are high costs, high rates of taxes, inefficiency and wastes in production.
2. Cost control is more dynamic in the sense that the standard costs set by the firm are constantly
required for improvement. The management has to formulate a detailed and coordinated plan of
cost reduction identify the areas of potential savings, fix responsibilities, etc. There is a need for
close cooperation between the management and labour in this process. Cost reduction process
should be reviewed periodically.
3. Cost control is accomplished by setting targets of performance and striving hard to achieve
them by avoiding wastes and inefficiencies. Cost reduction does not concern itself with the
maintenance of performance according to the targets set.
4. Cost control helps in achieving the management goals, whereas cost reduction has no such
visible and ultimate goal. Cost control techniques aim at preventing costs from rising. When this
goal is reached, costs become optimised under controlled conditions.
5. The emphasis in cost control is on past and present while in cost reduction, it is on present and
future.
6. Cost control aims at the lowest possible costs under the prevailing conditions. Cost reduction
aims at the lowest possible costs in every department of the business firm.
7. Cost control is a preventive measure where costs are optimised before they are incurred. Cost
reduction is a corrective measure that operates even in cases where efficient cost control is taking
place in a firm
Cost control is defined and understood as the process of regulating the costs of operating an
undertaking. The process of regulation is guided by cost accounting. Further, cost control needs
executive action. It does not come about automatically.
Cost control is achieved by fixing standards of performance, collecting actual cost data for each
area of responsibility, comparing actual data with standards and forwarding prompt report to top
management highlighting the deviations from standards from immediate corrective action. Thus,
cost control compels actual costs to conform to planned costs.
Contents
1. Introduction to Cost Control
2. Meaning of Cost Control
3. Definitions of Cost Control
4. Features of Cost Control
5. Elements Involved in Cost Control System
6. Steps Involved in Designing a Cost Control System
7. Aspects of Cost Control
8. Importance of Cost Control
9. Techniques of Cost Control
10. Key Points Exercising Effective Cost Control
11. Measures to be Adopted for Effective Cost Control System
12. Difference between Cost Control and Cost Reduction
13. Myths and Facts
14. Benefits of Cost Control and Cost Reduction
15. Advantages of Cost Control
What is Cost Control: Meaning, Definitions, Cost Reduction, Features, Elements, Steps, Aspects,
Techniques, Key Points, Measures, Difference, Advantages and More…
What is Cost Control – Introduction
Modern management is becoming increasingly cost-conscious and is constantly in search of new
ways of controlling costs and eliminating wastages. One of the basic objectives of cost accounting
is to achieve cost control.It is not enough if costs are worked out and presented regularly to the
management. The effectiveness of cost accounting is judged primarily from the extent to which it
has been able to bring about a control over the manufacturing and other expenses.
ADVERTISEMENTS:
The Terminology of Cost Accountancy of the Institute of Cost and Management Accountants,
London, defines ‘cost control’ as “the guidance and regulation by executive action of the costs of
operating an undertaking, particularly where such action is guided by cost accounting.”
In cost control, the first step is to set up the target to be achieved, i.e., the goal or objective to be
attained. The cost control system guides the organisation to reach that goal. For this purpose,
budgets or standards are used. These budgets or standards provide the yardstick against which
actual costs and performances may be compared.
If at any stage, it is noticed that the expenses are showing a trend away from the goal, resulting
thereby in a variation from the target, the cost control systems help to regulate this trend and to
eliminate the variations. This guidance and regulation is by executive action, i.e., through an action
taken by the executive who is responsible for the incurring of the expenditure.
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It should be clearly understood that a cost accountant by himself does not control the expenses.
He merely assists in the control of expenses since an expenditure can be controlled only by the
person who incurs the expenditure. The cost accountant brings to the notice of the executive
concerned, the exact point on which an action is required of him for regulating the expenses.
Thus, cost control is the guidance and regulation through an executive action and this executive
action is exercised in respect of all the expenses incurred in operating an undertaking. Cost control
comprises all procedures and measures by which the cost of carrying out an activity is kept under
check and aims at ensuring that costs do not go beyond a certain level.
Cost Control – Meaning
“Cost control” is operated through setting standards of targets and comparing actual performance
therewith, with a view to identify the deviations from standard norms and taking corrective
actions in order to ensure that future performance conforms to standard norms. In other words it
can be explained that it is a scientific management technique to control and reduce the costs of
doing business.
It is more of an activity than a theory. Every industry and company has its own standards to
control costs. Cost control is concerned with the ways and means of keeping the costs at a lower
level, without affecting efficiency and effectiveness.
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According to Eric L. Kohler, cost control is the employment of management devices in the
performance of any necessary operation so that pre-established objectives of quality, quantity and
time may be attained at the lowest possible outlay for goods and services.
Such devices include a carefully prepared and reviewed bill of materials; instructions; standards of
performance; competent supervision; cost limits on items and operations; and studies, interim
reports and decisions based on these reports.
In short, it is the regulation by executive action of the costs of operating and undertaking. The
essential requirement of cost control is to fix reasonable targets for all important activities, in
consultation with employees who are responsible for achieving them. In the next step, the actual
performance should be compared with the targets at periodic intervals.
Important deviations must be identified, analysed and brought to the notice of those responsible
for results. The executives must also find out the reasons for deviations and initiate remedial
measures immediately. Important techniques like standard costing and budgetary control may be
put to use in order to ensure cost control. Cost control means regulation of the costs of operating
a business by executive action, i.e., it is the function of keeping expenditure within acceptable
limits. It should not be confused with cost reduction.
Cost control is achieved by fixing standards of performance, collecting actual cost data for each
area of responsibility, comparing actual data with standards and forwarding prompt report to top
management highlighting the deviations from standards from immediate corrective action. Thus,
cost control compels actual costs to conform to planned costs.
Cost Control – Definitions
Cost control is defined as “the guidance and regulation, by executive action, of the cost of
operating an undertaking.” It is exercised through numerous techniques such as standard costing,
budgetary control etc. It is to improve performance or efficiency to achieve the target.
It involves the following:
1. Setting up standards
2. Finding out the difference between actual and standard (variance)
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3. Analysing the variance
4. Taking up corrective measures to eliminate variance.
The dictionary meaning of the word ‘Control’ is regulation of the activities. Harper defined it
“Compelling events to conform to the plans”.
To achieve control each of the following elements must be present:
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(a) Plan,
(b) Comparison with the plan, and
(c) Action to correct variances from plans.
Kohler defined the word “Control” as “The process by which the activities of an organisation are
conformed to a desired plan of action and the plan is confirmed to the organisation’s activities.”
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Cost control has been defined by Kohler as “The employment of management devices in the
performance of any necessary operation so that pre-established objectives of quality, quantity and
time may be attained at the lowest possible outlay for goods and services. Such devices include a
carefully prepared and reviewed bill of materials; instructions, standards of performance;
competent supervision; cost limits on items and operations; and studies, interim reports and
decisions based on these reports”.
The technique of cost control involves the determination of standards in respect of each item of
cost, ascertainment of actual costs regarding those very items, detection of variations of actuals
from the standards laid down, analysis of these variances so as to determine the responsibility and
the cause and cost of each variance, and then taking necessary action to ensure that actual costs
conform to standard costs in future.
The job of cost control is not as simple as a casual reader may suppose. There are a number of
problems which have to be successfully solved if cost control is to be applied in any industrial unit.
The Institute of Cost and Management Account, London define Cost Control as- “The regulation by
executive action of the cost of operating an undertaking particularly where such action is guided
by cost accounting”. The terms ‘regulation’ and ‘executive’ ‘action’ indicate conscious attempt of
regulating the cost on the basis of predetermined ideas about what cost should be.
Top 4 Features of Cost Control
The following features of cost control are:
Feature # (a) Existence of Cost Accounting:
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If cost accounting should guide executive action to regulate costs, it is, first of all, necessary to
install a suitable system of cost accounting. The system introduced, should be designed to suit the
undertaking.
It should not be introduced merely because other concerns have done it, and it is fashionable to
do so. The cost accounting system so installed, accomplishes one of the twin objectives of cost
accounting, viz., cost ascertainment.
Feature # (b) Predetermined Standards:
Another requirement of cost control is the fixation of attainable targets of performance. The
targets set, should be scientific, taking into consideration all practical aspects governing
production as well as the related costs. For fixation of targets of performance, it is not necessary
to introduce standard costing.
The same may be accomplished by the budgeting process also. The persons responsible for
achieving the targets should be convinced that they are capable of achieving the same under
normal conditions.
Feature # (c) Cost Reporting:
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As pointed out above cost control does not come about automatically. Executive action for cost
control should be guided by cost accounting. If cost accounting should guide the executives, there
should be an effective system of reporting cost information. The reports should point significant
deviations from the predetermined targets, and not merely historical costs. Cost reporting is to be
accomplished at the appropriate time and not when it is too late to do anything.
Feature # (d) Corrective Action:
Even effective and timely reporting of cost information would be of little use if corrective action is
not taken then and there. Action should also be taken to see that significant deviations which are
now corrected by executive action are not allowed to appear all over again. In other words,
corrective action should be to prevent the recurrence of deviations.
5 Elements Involved in Cost Control System
Efficient organisation and operation of cost control system involves the following elements:
1. Setting up the targets.
2. Measurement of the actuals.
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3. Comparison of actuals with the targets to ascertain variances.
4. Analysis of variances (between the targets and the actuals) to their causes.
5. Taking such corrective actions as are necessary to eliminate the variations.
Steps Involved in Designing a Cost Control System
The steps involved in designing a cost control system are as follows:
1. Establishing norms –
To exercise cost control, it is essential to establish norms, targets or parameters which may serve
as yardsticks to achieve the ultimate objective. These standards, norms or targets may be set on
the basis of market research.
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2. Appraisal –
The actual results are compared with the set norms to ascertain the degree of utilization of men,
machines, and materials. The deviations are analysed so as to arrive at the causes which are
controllable and uncontrollable.
3. Corrective measures –
The variances are reviewed and remedial measures or revision of targets, norms, standards, etc.,
are taken.
Cost Control – Aspects
There are two important techniques of cost control. They are budgetary control and standard
costing. These are also known as ‘systems’ of cost control.
Any scheme of cost control, whether by budgetary control or standard costing, should comprise
the following aspects:
(i) Laying down targets or standards of performance.
(ii) Measuring actual performance against the standards.
(iii) Computing variances, analysing them by causes, localising them and presenting timely reports.
(iv) Enforcing accountability of the executives concerned.
(v) Reviewing periodically the standards in the light of changed circumstances, in order to prevent
their recurrence.
Cost Control – Importance
In the initial stages of its evolution, the only object of cost accounting was cost ascertainment.
Historical costs, about which management could not do anything, were ascertained and used for
the purpose of price fixation. Gradually, however, it was felt that cost control was more important
than cost ascertainment, since a post-mortem examination of historical costs was of little practical
use in improving the efficiency of the undertaking.
Cost control is defined and understood as the process of regulating the costs of operating an
undertaking. The process of regulation is guided by cost accounting. Further, cost control needs
executive action. It does not come about automatically.
It necessitates bringing to the notice of executives responsible for controlling costs, the strategic
points at which interference is needed. Thus, cost control implies action by managerial personnel,
on the basis of cost information, to see that the actual costs do not deviate from the targets or
standard previously lay down.
Cost Control – Top 18 Techniques
Cost control is exercised through numerous techniques some of which are given below:
1. Standard Costing,
2. Budgetary Control,
3. Inventory Control,
4. Control of Capital Expenditure,
5. Quality Control,
6. Performance Evaluation,
7. Accounting Ratios etc.
8. Work Study
9. Market Research
10. Value Analysis
11. Production Planning and Control
12. Standardisation and Simplification
13. Automation
14. Job Evaluation and Merit Rating
15. Study of Organisation and Methods.
16. Improvement of Design.
17. Operational Research
18. Statistical Techniques
6 Key Points for Exercising Effective Cost Control
The cost control process involves setting of cost centers (responsibility centers), both personal or
impersonal, followed by pre-determination of costs function-wise or product- wise. This is
followed by monitoring and control and by comparing actuals with standards.
Standard costing is one of the techniques widely used for cost control purpose. In addition,
budgetary control provides the basis for controlling expenditure and means to appraise, the
potential profitability of an alternative course of action.
The following key points are worth mentioning for exercising effective cost control:
(i) Quantity and price standards should be set to, or be estimated for, each physical unit. The
factors influencing variances should not be ignored (inadequate facilities, poor organisation and
poor materials).
(ii) To make the standards realistic, all concerned should be associated in determining standard
costs.
(iii) The data collected should be kept to a minimum, and proper collection and processing of cost
control data are important.
(iv) The different variances, price, usage, mix and efficiency should be considered, whether they
are relating to materials, labour or overheads.
(v) No amount of detailed analysis of the cost of variances can undo what has already been done;
however, control measures should ensure that such mistakes are not repeated. The only way to
prevent excess costs in practice is for the manager to take action before the event.
(vi) The essentials of effective cost control not only include realistic targets (based on work study
data) but also flexible attitudes regarding the standards set.
Cost control does not necessarily mean reducing the cost but its aim is to have the maximum
utility of the cost incurred. In other words, the objective of cost control is the performance of the
same job at a lower cost or a better performance for the same cost.
8 Basic Measures to be Adopted for Effective Cost Control System
In order to carry out cost control system efficiently so as to obtain the required results, there are
certain basic measures which should be adopted.
These measures may be given as follows:
1. The targets for performance of work as well as the costs to be incurred for the purpose should
be laid down for each area of responsibility as far as practicable.
It would enable to locate the exact person responsible for a given state of affairs. The powers,
responsibilities and obligations of each executive in the organisation should be clearly defined.
2. The target should always be fixed up in consultation with the individual responsible for attaining
the target. The impression should never be created that the target is purely a result of some
calculations in the accounting department. Further, the targets should be ‘attainable’ and not
merely ‘ideal’.
If the targets are not attainable even in the best of circumstances, a certain amount of frustration
will be created in the minds of the persons concerned and the whole object of the cost control will
thereby get defeated.
3. The targets fixed in an undertaking should not be treated as permanent. They should be
reviewed whenever necessary and should be revised when conditions change.
4. Collection of costs should be made by each area of responsibility and reports thereon should be
drawn up similarly. These reports should clearly indicate in monetary terms the effect of efficiency
or inefficiency shown by each section or department. 
5. The reports should be presented sufficiently in time for necessary action to be taken. Belated
presentation of reports will only give statistical information and cannot be helpful in taking an
action.
6. Utmost care should be exercised while making a judgement about the efficiency or inefficiency
of various persons on the basis of the reports. A single report is likely to be misleading under
certain circumstances and hence a number of reports should be considered together.
7. A proper and thorough enquiry into factors leading to exceptionally good or bad performance
should be made and appropriate remedial action should be taken. The main objective should be to
locate and remove the factors leading to wastage and losses rather than to punish people. If there
is too much emphasis on punishment, it is possible that figures will be cooked and the truth
hidden.
8. A good performance should attract immediate reward and consistently bad performance should
attract the necessary dis-incentive. It should also cover those whose task is to prepare reports.
Difference between Cost Control and Cost Reduction
Controlling the costs, already pre-determined on the basis of assumption of reasonable level of
efficiency taking the past, present and future into account, is the main focus of cost control. The
actuals are tried to be brought within the ambit of targets. Cost accounting is primarily concerned
with controlling the costs so that losses and wastages are eliminated or at least minimised to the
extent possible.
While cost reduction is entirely a matter which goes much beyond cost control and hence it is not
synonymous with cost control at all, now cost accounting aims at cost reduction also, besides cost
control. Cost reduction is a process which actually starts from where cost control ends.
Management has to ponder over in terms of bringing down costs to levels lower than the targeted
ones so as to face fierce competition and exist in this highly competitive business environment.
How, without sacrificing quality or compromising with the utility of the products and services the
cost can be permanently cut down, is the real objective of cost reduction. Thus, new ways and
means are required to be desired, researches are to be carried out and management has to be
innovative.
The main distinctions between cost control and cost reduction can be discussed under various
subheadings as under, though both underline what costs ought to be:
Cost Control:
1. Objectives – Cost control aims at maintaining the cost in accordance with the established
targets or standards.
2. Approach – Cost control locks dynamism since it aims to attain lowest possible costs under
existing circumstances.
3. Nature – Cost control is a preventive function. Under it, costs are optimized before they are
incurred.
4. Emphasis – In case of cost control, the emphasis is on the past. It aims at keeping the costs
within the limits already set. In case the cots reach the target level, the objective of cost control is
achieved.
5. Assumptions – Cost control assumes the existence of certain standards or norms which are not
challenged.
Cost Reduction:
1. Objectives – Cost Reduction is directed to explore the possibilities of improving the targets or
standards themselves. It challenges all standards and makes continuous efforts to better them.
2. Approach – Cost reduction is a continuous process and recognizes no condition as permanent. It
involves a continuous process of analysis and tries to find out new means to achieve reduction in
costs.
3. Nature – Cost reduction is corrective function. It operates even when effective cost control
system exists. It presupposes that there is always a room for reduction in the achieved costs.
4. Emphasis – In case of cost reduction, the emphasis is on the present and the future. The
emphasis is not o what have been the cost but what could be the possible improved in the costs.
Thus, there is no end to cost reduction.
5. Assumptions – Cost reduction assumes the existence of concealed potential savings in the
standards or norms which are therefore subject to constant challenge or improvement.
Thus cost control is only a means to achieve the end of cost reduction.
Some of the other differences are –
1. Cost control seeks adherence to standards. Cost reduction is a challenge to standards. It
assumes that there are chances of improvements in predetermined standards.
2. Cost control is the achievement of predetermined costs. Cost reduction is the achievement of
real and permanent reduction in cost.
3. Cost control is concerned with predetermined costs, comparing it with actual costs, analysing
the variances and taking corrective action. Cost reduction is concerned with improvement in
performance.
4. Cost control is a preventive function. It aims to prevent the costs from exceeding the
predetermined costs. Cost reduction is a corrective function. It challenges the predetermine costs
and seeks to improve the performance by reducing cost.
5. Cost control is achieved once the costs do not exceed the standards. Cost reduction is a never
ending process.
6. Standard costing and Budgetary control are the important tools of cost control. Value Analysis,
work study, operations research, simplification and standardisation are the important tools of cost
reduction.
Cost Control – Well-Known Myths and Facts
There are a number of misconceptions regarding cost control. Cost control may not be beneficial
in every situation.
The following are the well- known myths (M) and facts (F):
1. Controlling costs means increasing profitability. (M)
Cost control measures lead to decreased profitability, particularly when such control measures are
unimaginatively implemented in an organization. (F)
2. Cost control is needed the most when the company is not doing well. (M) In fact, injudicious
spending decisions are taken mostly when the going is good. (F)
3. Costs are to be controlled at the point they are incurred. (M) Needless to say, decisions to incur
costs are always made elsewhere. (F)
4. Costs are to be controlled at the time they are incurred. (M) Again, in most cases, the timing of
control is different from that of incurrence of cost. (F)
5. Costs can be classified as controllable and non-controllable. (M)
In fact, controllability of costs would depend on the person in charge, the level of the person in the
organization, particular situations, and the timeframe. No costs are really non-controllable, at least
in the long run. (F)
6. Costs can be reduced or at least prevented from going up in absolute terms. (M)
The reality is that in an ongoing healthy organization, costs always tend to go up in absolute terms.
Cost reduction can only be relative to the level of activity. (F)
7. Cost control is only a short-term measure and it cannot be sustained for long. (M)
Cost control efforts, on the contrary, can and should be interlocked with the long-range corporate
planning of an organization. (F)
It is widely believed that costs can be controlled by administrative circulars and directives, and it’s
the cost accountant’s responsibility to keep a check on costs. But these are misconceptions. Cost
control requires collective effort from the employees at each phase of production.
Benefits for Exercising Cost Control and Cost Reduction
Exercising cost control and cost reduction becomes imperative when a company’s financial health
is deteriorating. Even those companies which are running well have to take cost control and cost
reduction measures to sustain continuous growth.
Exercising cost control and cost reduction offers the following benefits:
i. Better utilization of resources.
ii. To prepare for meeting a future competitive position.
iii. Reasonable price for the customers.
iv. Firm standing in domestic and export markets.
v. Improved methods of production and use of latest manufacturing techniques which have the
effect of rising productivity and minimizing cost.
vi. A continuous search for improvement creates proper climate for increased efficiency.
vii. Improves the image of company for long-term benefits.
viii. Improves the rate of return on investment.
Cost Control – 7 Main Advantages
The advantages of cost control are given below:
1. Achieving the expected return of capital employed by maximising or optimising profit.
2. Increase in productivity of the available resources.
3. Reasonable price for the customers.
4. Continued employment and job opportunity for the workers.
5. Economic use of limited resources of production.
6. Increased credit-worthiness.
7. Prosperity and economic stability of the industry

What is cost control?

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.

What is Cost Control

Definition of Cost Control
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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Cost Control meaning
Every organization aims to produce the product at the minimum cost. The success of financial
management is judged by the action of the business administration in controlling the cost
of production. In other words, it can be explained that it is a scientific management technique to
control and reduce the costs of doing business.
Every industry and company has established its own standards to control the costs. Cost control is
concerned with the ways and means of keeping the costs as lower level as possible, without
affecting efficiency and effectiveness. Cost control is simply the prevention of waste of
resources within the existing environment. This organizational environment is made up of agreed
operating methods for which standards have been developed.
According to Eric L. Kohler, the author of a widely used dictionary of accounting cost control is
the employment of management devices in the performance of any necessary operation so
that pre-established objectives of quality, quantity and time may be attained at the lowest
possible outlay for products and services.
These standards may be declared in a variety of ways, from the broad budget levels to detailed
standard costs. Cost control is the procedure whereby actual results are compares against the
company standard so that waste can be measured and appropriate action taken to correct the
activity.
Important deviations must be identified, examine and brought to the attention of those
responsible for results. The administrator must also find out the reasons for deviations and initiate
remedial measures immediately. Important methods like standard costing and budgetary
control may be put to use in order to ensure effective cost control.
It is achieved by improving the standards of performance, collecting actual cost data for each area
of responsibility, comparing actual data with standard data and forwarding the efficient report
to top-level management highlighting the deviations from standards from prompt corrective
action.
Example of Cost Control
Company can find bids from different vendors that provide the same product or service at a lower
costs. Cost control is very important factor in maintaining and growing profitability of a business.
What are the Advantages of Cost Control?
Cost control is necessary for a business, because –
1. Profit making capacity of a business is guided by the efficiency with  which various costs
are controlled. 
2. Cost control is leads to increase the efficiency in use of material, machinery and labour. 
3. Cost control provides a basis for cost reduction. 
4. Cost reduction is necessary in order to – 
 Stand in competition in a specific production line. 
 Reduce the selling price of a product to grab the market.
5. Continuing employment and job opportunity for the workers.
6. Successfulness and economic stability of the industry.
Steps involved in Cost Control method
Below are the steps that have been adopted to exercise cost control.
1. Planning – Planning of the product may be done as in the form of budget, standard, estimate,
etc. The past standards have been considered for proper planning.
2. Communication – The planning and policy should be communicated to the employees so, that
they can aware of the standards of the organization and work for the same organizational goal.
3. Motivation – After evaluating the performance, costs are determined and reported to the
management about the results of performance. Such report acts as a motivating force and leads to
better performance in the future.
4. Appraisals and Reporting – In this step the actual performance is compared with pre-estimated
standard and find the deviations. The causes for such deviations are also examined. Finally, the
deviations with reasons are reported to the top level of management for the effective cost control.
5. Decision Making –
Decision making is the judgment of the process by which one can choose between a number of
alternative courses of action for the purpose of achieving goals.  Managerial decision making is
synonymous with the whole process of management. It decides, what should be done? how
should it be done? when and by whom should be done? 
A decision may also be conceived as a conclusion that a manager has reached so as to know what
he should do later on. It calls for both judgemental and imagination activity to select one from
many alternatives, so decision making is an intellectual activity.
Techniques of cost control
There are many techniques are involved in a cost control process, some of them are-
1. Standard Costing
Standard costing is the practice of substituting an expected cost for an actual cost in the
accounting records. afterwards, variances are recorded to show the difference between the
expected and actual costs. Standard costing involves the creation of estimated costs for all
activities within a company. The main reason for employing standard costs is that there are a
number of applications where it is too time-consuming to collect actual costs, so standard costs
are used as a close approximation to actual costs.
2. Budgetary Control
Budgetary control is a system where the budgets are used as a means
of planning and controlling costs. Budgeting lays down as to what is to be attained and how to be
attained, while control ensures that the objectives are following and actual results do not deviate
from the planned course more than necessary. An efficiently planned budgeting improves cost
control.
3. Inventory Control
Keeping control of the company’s inventory so that you’re able to hold the least amount of
inventory in your warehouses makes for easier organization, lower holding costs, better cash flow,
and more space within your warehouses. It helps to control the cost of inventory.
4. Control of Capital Expenditure
Capital expenditure controlling indicates the actions, processes and tools used to identify,
forecast, assess, control and manage capital expenditure. To estimation of capital expenditure and
to see that the total cash outlay is within the financial resources of the company.
5. Quality Control
Quality control in manufacturing is a process through which a production system ensures that
standard product quality is maintained or improved according to customers’ needs. Cost control
should be such that the product can meet the customer’s satisfaction.
6. Performance Evaluation
Performance evaluation is the process by which a manager examines and evaluates an
employee’s work performance by comparing it with preset standards, documents the results of
the comparison and uses the results to provide feedback to the employees to show where
improvements are needed and why. Performance evaluation helps to control the cost of wages.
7. Accounting Ratio
Accounting ratio is the comparison of two or more financial data of a company that are used for
analyzing the financial statements. By the accounting ratios, managers can compare and find un-
efficient spending of money.
8. Work-Study
Work-study investigates the work done in an organization and it aims to find the most effective
way of using industrial resources like man, material, machinery, money, etc. Work-study improves
the process through which cost can be controlled. Read more about Work-study >>
9. Production Planning and Control
Production is the transformation of raw material into finished goods. planning looks ahead
anticipate possible problems and decides in advance as to how the production carried out in the
best way. Control makes sure that the programmed production is constantly maintained. It
controls production costs by proper estimation. Read more about production planning and control
>>
10. Automation
Automation is the application of technologies to produce goods and services with minimal human
intervention. The implementation of automation technologies, techniques and processes improve
the efficiency, reliability, and speed of production that were previously performed by humans.
That means by the implementation of automation we can produce more goods in the same
amount of time.
11. Improvement of Design
Good product design will call for a minimum number of operations and needed less raw material.
The product should be designed with a material that is cheaper, machinable, and long-lasting at
the same time. The product should be made from minimum material to reduce machining and
material cost. A product should be designed with fewer parts. The lesser the number of
components lesser the product cost. Read more about product design >>
12. Operational Research
Operations research is an analytical method of problem-solving and decision-making that is useful
in the management of a company. By applying the operations research professionals can help
companies to achieve more complete datasets, consider all available options, predict all possible
outcomes and estimate risk.
Difference between cost control and cost reduction
1. Objective of Cost control is to maintain the cost accordance with the pre-determinent
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, which is a corrective function in nature. It presume that there is always
a chance for reduction in the achieved costs.
4. Cost Control does not ensures quality maintenance of products. However, cost reduction
ensures 100% quality maintenance.
5. Cost control assumes the existence of certain standards which can not 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 standardisation, etc
Most of the enterprise is want to maximize the profit, which is possible by decreasing the production
cost. For this purpose, management uses two efficient tools, i.e. cost control and cost reduction. Cost
Control is a technique which makes available the necessary information to the management that
actual costs are aligned with the budgeted costs or not. Cost Reduction is a technique which we used
to save the unit cost of the product without compromising its quality.
Table of content
1 Cost control and Cost reduction
1.1 Definition of Cost Control
1.2 Browse more Topics under Fundamentals Of Cost Accounting
1.3 Characteristics of a Good Cost Control System
1.4 Definition of Cost Reduction
1.5 Difference Between Cost Control and Cost Reduction
2 Solved Example for You
Cost control and Cost reduction
Definition of Cost Control
Cost Control is a process in which we focus on controlling the total cost through competitive analysis.
It is a practice which works to align the actual cost in agreement with the established norms.
It ensures that the cost incurred on production should not go beyond the pre-determined cost. Cost
Control involves a chain of various activities, which starts with the preparation of the budget in
relation to production.
Thereafter we evaluate the actual performance. After that we compute the variances between the
actual cost & the budgeted cost and further, we find out the reasons for the same. Finally, we
implement the necessary actions for correcting discrepancies.
The major techniques which used in cost control are standard costing and budgetary control. It is a
continuous process which helps in analyzing the causes for variances. For example- control wastage
of material, any embezzlement and so on.
It involves:
1. Determination of standards;
2. Ascertaining actual results comparing the standards;
3. An analysis of the variances;
4. Establishing the action that may be taken.
Browse more Topics under Fundamentals Of Cost Accounting
 Origin and Evolution of Cost Accounting
 Meaning of Cost, costing and cost accounting
 Importance of Cost Accounting
 Financial Account vs Cost Account
 Meaning of Management Accounting
 Scope and Functions of Cost Accounting
 Objectives of Cost Accounting
 Advantages of Cost Accounting
 Costing – an aid to management
 Characteristics of an Ideal Costing System
 Classification of Cost
 Methods of Costing
 Techniques of Costing
 Cost Unit and Cost Centre
 Elements of Cost
 The format of the Cost Sheet
Characteristics of a Good Cost Control System
According to backer and Jacobson, effective cost control should have the following characteristics :
(a) Delineation of centers responsibility, i.e., deciding responsibility centers;
(b) The delegation of prescribed authority;
(c) Various cost standards;
(d) The relevance of controllable cost;
(e) Cost reporting; and
(f) Cost reduction
Understand Meaning of Cost, Costing and Cost Accounting here in detail
Definition of Cost Reduction
Cost Reduction is a process, which aims to lower the unit cost of a product manufactured or service
rendered without affecting its quality. It can be done by using new and improved methods and
techniques. It ascertains substitute ways to reduce the production cost of a unit.
Thus, cost reduction ensures savings in per unit cost and maximization of profits of the enterprise.
Cost Reduction aims at cutting off the unnecessary expenses which occur during the production
Process, storage, selling and distribution of the product. To identify cost reduction we should focus on
the following major elements:
 Savings in per unit production cost.
 The quality of the product should not be affected.
 Savings should be non-volatile in nature.
Tools of cost reduction focus on Quality operation and research, Improvement in product design, Job
Evaluation & merit rating, variety reduction, etc.

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Difference Between Cost Control and Cost Reduction
The following are the main differences between Cost Control and Cost Reduction:
1. Cost Control focuses on decreasing the total cost of production while cost reduction
focuses on decreasing per unit cost of a product.
2. Cost Control is a temporary process in nature. Unlike Cost Reduction which is a
permanent process.
3. The process of cost control will be completed when the specified target is achieved.
Conversely, the process of cost reduction is a continuous process. It has no visible end.
It targets for eliminating wasteful expenses.
4. Cost Control does not guarantee quality maintenance of products. However, cost
reduction assured 100% quality maintenance.
5. Cost Control is a preventive function because it ascertains the cost before its
occurrence. Cost Reduction is a corrective function.
Solved Example for You
What is the area of cost reduction process?
Ans:
Areas of Cost Reduction are:
1. Design of the product to be produced – Standardization and simplification of the
product, this is the most important activity for controlling and reducing cost. once a
design of the product is approved and arrangements for production made, choices
available in the firm will be limited.
2. Factory layout organization and production methods, and
3. Marketing – points of selling and distribution, transport, channels of distribution, etc.
Cost control and cost reduction are the two very efficient tools used to reduce the cost of
production and maximise profit. In simple words, Cost control is a technique used to provide the
management with all the necessary information regarding the actual costs and also align them
properly with the budgeted costs. On the other hand, the term cost reduction is used to save the
unit cost of the product, without causing any compromise to its quality. The companies use a wide
variety of techniques of cost control and cost reduction in order to carry out the process
effectively.

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Cost Control
The definition of cost control states that it is a process which focuses on trying to control the total
cost through competitive analysis. Such practices help in aligning the original cost in agreement
with the established costs.

Through this process, firms can ensure their production costs do not soar higher than the
predetermined expenses. The cost control process involves several stages, which begins with the
budget preparation related to production. Next, the actual performance is evaluated, followed by
the calculation variances between the original cost and the budgeted cost. The next task is to
investigate the reasons for the same, and the final stage involves implementing necessary actions
to mend the discrepancies.

Standard costing and budgetary control are two techniques used in the cost control process. The
process is a continuous one and helps to analyse the causes for the variances. It involves:

 Determining the standards

 Comparing the standards and looking at the results
 Analysing the variances
 Establishing the action needed to be taken by the firm

Cost Reduction
The definition of cost reduction states it to be a process which aims to reduce the unit cost of a
product or service manufactured by the firm without harming its quality. A number of modern and
improved techniques can be used for this purpose which serves as an insight to the alternative
methods to lower the production costs of every unit.
 
Cost reduction has a significant role in reducing the per unit costs of products and are thus
essential for firms to maximise their profits. This process helps in pointing out and reducing the
unnecessary expenses during the production process, storage, selling or distribution of the
products. The cost reduction process emphasises the following:

 Savings in every unit cost of production

 The product quality should not be compromised 
 Non-volatile nature of the savings

The primary tools involved in cost reduction involve quality operation and research, better designs
in products, reducing variety and evaluating jobs amongst others.

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Difference Between Cost Control and Cost Reduction

The importance of cost control and cost reduction are massive in businesses, but they have a few
differences. The key difference between cost control and reduction include:
 Cost control is a process which focuses on reducing the total cost of production. However,
cost reduction aims at reducing the per unit cost of a product.
 Cost control is a quick process by nature, while cost reduction is a more permanent
process.
 The cost control process ends when the required target is met. On the other hand, the cost
reduction process is a continuous process which does not end after a certain time. It is
primarily focused on eliminating unnecessary costs.
  Cost control does not provide any promises regarding maintaining the quality of the
products, but cost reduction does not affect the quality of the product even slightly.
 The cost control process is more of a function to prevent the cost before their occurrence
while the cost reduction process is more of a function used to resurrect the expenses.
Thus cost control and reduction are an essential part of any organisation willing to boost their
profits.

Did You Know?

The meaning of cost of control is to identify and reduce the expenses in business to maximise
profit. It is a useful factor in maintaining and growing the earnings of the company. The budgeting
process helps massively in this regard as the actual results of the company are compared with the
budget. If the actual costs are more than what planned, then the company needs to take action.

Solved Examples
1. Cost Measure is What Kind of Control?
a. Corrective
b. Preventive
c. Both
d. None of the above
Ans: (b) Preventive
2. Which Type of Control Process Does Not Affect the Quality of the Products?
a. Cost control
b. Cost reduction
c. Cost-cutting
d. None of the above
Ans:  (b) Cost reduction 
Importance of Cost Control and Cost Reduction in Commerce
Cost control mainly focuses on bringing down the total cost of production whereas cost reduction
focuses on decreasing the per unit cost of a particular product. Cost Control is thus temporary but
Cost Reduction is permanent in nature.  In Commerce, students will learn how cost control gets
completed once all the business targets are achieved. It is an important chapter that will pave the
way for other related chapters later on. Getting the very fundamentals right at this stage will then
assist the students in understanding all the challenging concepts later on. It is one of the most
important chapters of Commerce and must be prepared for in a proper manner.

How to Prepare for a Commerce Test on Cost Control and Cost Reduction
 Students can go through Cost Control and Cost Reduction – Explanation, Difference and
Solved Examples on Vedantu
 This page has all the information that they need to be aware of
 Read everything on the page and then make notes on certain topics using your own words
 Go through the solved examples properly
 Assess what you’ve learnt by writing each of the concepts down in your own words
 Revise from this page before all tests