Cost accounting is one of the branches of accounting. Cost accounting has been defined as “that branch of accounting which deals with the classification, recording, allocation and summarization and reporting of current and prospective costs.
Cost accounting includes not merely the maintenance of cost records for cost ascertainment but also for cost analysis, cost comparison, Cost Control and Cost Reduction.
This article contains mainly some of the techniques of cost control and cost reduction in a very simple and in layman's terminology.
It is well known to all of us that the main object of a promoter is to maximize the wealth of its shareholders. In the present era of globalization Cost Management is one of the primary tools that helps the management in this process. Therefore, in today's scenario focus has been shifted to cost control and cost reduction.
The increase in competition from multinational companies has caused us to upgrade our managerial skills on cost front in order to be competitive to combat competition.
COST CONTROL: It is system of controlling or commanding costs through the application of different tools, techniques of the management to the performance of the operations to most determined objective of quality, quantity, value and time at an optimum outlay. It is simply the prevention of waste within the existing environment in the organization and strictly speaking a process of utilizing the available resources most economically.
COST REDUCTION: It is the improvement of the environment. It is an achievement of permanent and actual reduction in the unit cost of products manufactured or services rendered without affecting or impairing the quality or functional suitability. It involves elaborate examinations of the objective for which cost have been incurred and by various methods eliminates or reduces the reasons for spending.
In fact, cost control and cost reduction used frequently and interchangeably are two distinct concepts in the cost accounting systems of an organization which most of the people fail to understand.
Cost control deals with the reporting and review of variance arising between actual results and set of norms whereas cost reduction deals with the means by which the cost is reduced.
Cost reduction is a process which actually starts from where cost control ends. It is a continuous process to have continuous economy in costs.
Today, organizations lay down programmes which are known as Cost Reduction Programme. Its introduction and implementation depends upon the attitude and minds of the managers in the organization in fact cost reduction must be an attitude of mind throughout the organization under supervision of a dynamic management accountant with a team of skilled people. Rather I would suggest that there should be separate cost reduction department with skilled managers responsible for proper planning and its implementation without discounting the fact that it requires the cooperation of all those involved, whether directly or indirectly.
Following are the essential requisites for successful implementation of a cost reduction programme.
The organization should recognize the reluctance of the managers and workers to change their pattern of behavior.
All the members of the organization must be communicated clearly and concisely preferably in writing mechanics and operations of such programme.
The programme must be appropriate and its implementation must be planned soundly.
These measures should not have any undesirable effects or external parties such as buyers of finished products or suppliers of raw materials.
Monitoring and assessment system must be understood by all participants in the programme.
APPROACH:- Mainly there are two basic approaches to cost reduction.
A) CRASH PROGRAMME
B) PLANNED PROGRAMMES
Many organizations tend to introduce crash programs for cost reduction in times of crisis. For example if an organization is having problems with its profitability or cash flow, they decide immediately to defer capital expenditure or stop new recruitment. The absence of careful planning might give such crash programmes the characteristics of panic measures and authoritarian dictatorship form top management. But such crash programmes generally increase costs in the longer term.
Planned programme of cost reduction will begin with an assumption that much cost can be reduced significantly. Areas of potential cost reduction should be investigated, and unnecessary costs identified. These measures should be proposed, agreed, implemented and monitored.
Under planned programmes then there are long term programmes and short term programmes.
Short range programme arise from some of the following considerations:-
a) Inefficient operations provide opportunities for quick and substantial cost savings.
b) Some operations or functions which appear to be costing too much.
c) An impending unfavourable competitive situation and some of the products the competitor are selling at a lower price.
d) A temporary setback in profits which are to be corrected promptly.
Long term programmes mainly arise due to substantial Capital expenditure. This expenditure is planned towards a continual reduction in cost depending on:
- Better Layout
- Relocation of certain plant and equipments.
- Modernization programmes.
- Improvements in material handling such as use of conveyarisation.
Management Accountants role should be positive in the sense that he should guide the companies cost control and cost reduction programme into productive lines and let it degenerate into a morale damaging axing of petty expenditure. A good example of the Japanese car companies which are typically very liberal with expenes like long leave paid holidays and entertainment on business account. On the other hand, their cost control measure is in particular towards everyone doing his job, work efficiently and productivity and not in poring down employees fringe benefits. If one analyses strictly, employee benefits including wage bill may not account for more than 4 or 5 percent of the total cost to the sale.
There are various programme now considered very effectively by the managements which involve evaluation of techniques and functions in the various spheres of an organization with a view to exploring channels or performance improvement so that the value in a particular product can be bettered. These techniques are called Value Analysis and Value Engineering.
In short, the successful implementation of cost reduction programme requires the Management's intention and total team support.
M.Com, FCS, LLB