Chapter 17: Cost Reduction
Concept of Cost ControlS
Cost control is a fundamental objective of cost accounting aimed at reducing costs and
eliminating wastage. It involves setting cost targets or standards (like budgets) and guiding
operations to stay within these limits. The process includes comparing actual performance with
targets and taking corrective action if deviations occur.
According to the Institute of Cost and Management Accountants, cost control is the regulation of
costs through executive actions. While cost accountants help identify cost issues, actual control is
exercised by the executives responsible for spending. Cost control ensures that expenses are kept
within acceptable limits through planned measures and timely interventions.
Concept of Cost Reduction
Cost reduction refers to achieving a real and permanent decrease in the unit cost of goods or
services without compromising their quality or usefulness. It focuses on identifying savings in
materials, labor, and overheads through improved efficiency and productivity.
According to the Institute of Cost and Management Accountants, London, cost reduction must
meet three key criteria:
1. Real – It should reflect actual savings in operations.
2. Permanent – The savings must be long-term, not temporary.
3. Quality Maintained – There should be no negative effect on the product’s quality or
intended function.
Advantages of Cost Reduction
1. Increases profit, enabling higher dividends, bonuses, and retained earnings.
2. Improves worker benefits and reduces labor turnover.
3. Enhances goodwill of the business.
4. Shows better productivity and efficiency.
5. Increases government revenue through higher taxes.
6. Boosts exports by allowing lower prices.
, Pre-requisites and Responsibilities for Cost Reduction
1. Dedicated Cost Reduction Cell – For planning and implementing cost reduction
programs.
2. Effective Reporting System – Clear communication at all management levels.
3. Top Management Support – Ongoing commitment is essential.
4. Operational Research – Use of data and analysis for decision-making.
5. Cross-Department Cooperation – Department heads should identify and suggest cost-
saving areas.
6. Regular Monitoring – Continuous follow-up and performance evaluation.
7. Focus on Necessity – Review expenses to eliminate unnecessary or uneconomical
activities.
Steps of Cost Reduction
1. Selecting a product or service for cost reduction
– Choose high-cost items or services where savings are most possible, considering their
stage in the product life cycle.
2. Obtaining information
– Collect details about current costs, alternatives, and possible cost reduction methods.
3. Analysing the information and evaluating the product
– Study all aspects to find cost-saving options without affecting quality or usefulness.
4. Analysis of alternatives
– Identify and compare different ways to reduce cost and assess their benefits.
5. Selecting of the least cost alternative
– Pick the most cost-effective option for approval and execution.
Areas or Scope of Cost Reduction
Cost reduction can be applied to almost every area of a business. Key areas with high potential
for savings include:
1. Product Design
– Improve design to reduce unnecessary materials, weight, waste, and operations while
maintaining quality and functionality.
Concept of Cost ControlS
Cost control is a fundamental objective of cost accounting aimed at reducing costs and
eliminating wastage. It involves setting cost targets or standards (like budgets) and guiding
operations to stay within these limits. The process includes comparing actual performance with
targets and taking corrective action if deviations occur.
According to the Institute of Cost and Management Accountants, cost control is the regulation of
costs through executive actions. While cost accountants help identify cost issues, actual control is
exercised by the executives responsible for spending. Cost control ensures that expenses are kept
within acceptable limits through planned measures and timely interventions.
Concept of Cost Reduction
Cost reduction refers to achieving a real and permanent decrease in the unit cost of goods or
services without compromising their quality or usefulness. It focuses on identifying savings in
materials, labor, and overheads through improved efficiency and productivity.
According to the Institute of Cost and Management Accountants, London, cost reduction must
meet three key criteria:
1. Real – It should reflect actual savings in operations.
2. Permanent – The savings must be long-term, not temporary.
3. Quality Maintained – There should be no negative effect on the product’s quality or
intended function.
Advantages of Cost Reduction
1. Increases profit, enabling higher dividends, bonuses, and retained earnings.
2. Improves worker benefits and reduces labor turnover.
3. Enhances goodwill of the business.
4. Shows better productivity and efficiency.
5. Increases government revenue through higher taxes.
6. Boosts exports by allowing lower prices.
, Pre-requisites and Responsibilities for Cost Reduction
1. Dedicated Cost Reduction Cell – For planning and implementing cost reduction
programs.
2. Effective Reporting System – Clear communication at all management levels.
3. Top Management Support – Ongoing commitment is essential.
4. Operational Research – Use of data and analysis for decision-making.
5. Cross-Department Cooperation – Department heads should identify and suggest cost-
saving areas.
6. Regular Monitoring – Continuous follow-up and performance evaluation.
7. Focus on Necessity – Review expenses to eliminate unnecessary or uneconomical
activities.
Steps of Cost Reduction
1. Selecting a product or service for cost reduction
– Choose high-cost items or services where savings are most possible, considering their
stage in the product life cycle.
2. Obtaining information
– Collect details about current costs, alternatives, and possible cost reduction methods.
3. Analysing the information and evaluating the product
– Study all aspects to find cost-saving options without affecting quality or usefulness.
4. Analysis of alternatives
– Identify and compare different ways to reduce cost and assess their benefits.
5. Selecting of the least cost alternative
– Pick the most cost-effective option for approval and execution.
Areas or Scope of Cost Reduction
Cost reduction can be applied to almost every area of a business. Key areas with high potential
for savings include:
1. Product Design
– Improve design to reduce unnecessary materials, weight, waste, and operations while
maintaining quality and functionality.
