Cost Control

Cost Control can be defined as a tool that is used by the management of an organization to regulate and controlling the functioning of a manufacturing concern by limiting the costs within a planned level. It involves a series of activities that begins with the preparation of a budget, evaluation of the actual performance and ends with implementing the necessary actions that are required in rectifying discrepancies if any.

This mechanism cost control analysis is beneficial for organizations as it helps them in regulating and controlling the costs that are involved in a particular project. It can also be taken into use by users for determining if the project in question is financially viable or not. This mechanism also helps in enhancing the creditworthiness of an organization and also contributes to the prosperity, wellness, and economic stability of the overall industry.

Cost control is a mechanism that helps the management in regulating the costs of a manufacturing unit. This involves the determination of necessary standards, ascertainment of actual results for comparing the same with the expected data,analyzing variances, and establishing a necessary action that must be taken.

It is often confused or misunderstood for cost reduction, which is a completely different concept altogether because the latter outright focuses on cutting down expenses in a particular regard. The former takes a more nuanced approach to the same by incorporating a systematic analysis of the entire structure of the costs involved and identifying areas that can be trimmed or cut altogether without compromising on the quality of the final product or service.

With technological advancements, the cost control reduction approach has changed worldwide. Organizations are now able to use software tools and analytics to their advantage and conduct a thorough analysis with far more ease than ever before.

In reality or practice, the practical use is inculcated through budgetary discipline. Organizations create plans that are backed by realistic budgets that not only address every necessary expenditure but also ensure that negotiable ones are kept under control to maximize profitability and efficiency and reduce wastage of resources, time, and efforts within the organization.

Therefore, it is important to understand that this is not a one-time process. It has to be monitored continuously, and decisions regarding budgets and execution need to be taken cautiously.

The management uses these technologies to produce a product at the lowest possible cost by identifying and eliminating any unnecessary costs and yielding more profits. In other words, the use of cost control analysis is to prevent cost waste from taking place and execute business operations within the pre-determined cost standards.

Let us understand the characteristics of cost control analysis through the detailed explanation below.

1. The mechanism of cost control can not be exercised if the costs reported are not prepared and presented on time.
2. Adequate and proper delegation of authority is essential for effective control.
3. Deciding responsibility centers is highly crucial in the case of an effective control system.
4. The relevance of costs that are controllable in nature is also a vital characteristic of an effective cost control system.

Different companies or even different situations within the same company call for different methods or approaches to cost control reduction. Let us understand them through the discussion below.

1. Active participation of each and every one in the organization is the first strategy of these systems. The management must ensure that every member of an organization is actively involved in the implementation of a cost control system.
2. The next strategy states that the management must take a fresh look at how they can save more on energy costs.
3. In the third strategy, the company must ensure that it is successful in reducing its office footprints, i.e., if it’s fully utilizing all its commercial space.
4. The fourth strategy states that the company must work with professionals and consultants on a project-to-project basis.
5. The fifth and last strategy states that the company must train and challenge its accounting as well as finance employees to speed up the cost control system.

Now that we understand the process, characteristics, and methods of cost control analysis, let us understand its practical application through the examples below.

Example #1

ABC Limited has a particular project in line. The company is unsure of taking up the project in question. Enlist these steps the company must take to confirm the project.

ABC Limited must take the following steps:

1. The company must use appropriate techniques like reference class forecasting for validating cost estimates of the project.
2. The company must validate planning pertaining to the business, project, and operations and then design a budget for the same.
3. The company must take appropriate financial controls and monitor costs from time to time.
4. The company must report the performance of the project and ensure that there is full governance of the same.

Example #2

IT giants such as Tata Consultancy Services (TCS), HCL Technologies, and Wipro find themselves constrained in their ability to onboard and promote employees as a result of soaring employee costs. This strategic move is a response to the imperative to enforce stringent cost control measures, prompted by a feeble deal pipeline and uncertain visibility for the forthcoming quarters.

The consequences of these cost-cutting actions are seen in the reduced hiring activities, impacting even campus recruitment initiatives. TCS, for instance, witnessed a subdued expansion in its workforce, welcoming 523 recruits as opposed to the 821 recorded in the preceding quarter.

Let us understand the tools of cost control reduction through the points below.

1. Cost Estimate: This tool is used in the initiation phase. In this phase, the users are responsible for evaluating the financial viability of a particular project.ost Estimate:
2. Budget: This tool is used in the planning phase. In this phase, the users plan out the work by considering the overall cost estimates and converting the same into a budget.
3. Cost Monitoring: This is used in the execution phase. In this phase, the users monitor their costs in order to check if there is not any overspending or unnecessary spending so that they can keep the expenditures in line with the budgets.
4. Financial Evaluation: This is used in the closing phase. In this phase, users evaluate if a particular project has met the pre-determined financial targets or not.

Let us understand the importance of cost control analysis through the points below.

• This system is highly helpful for companies in getting rid of the unnecessary costs involved in a particular project.
• Companies can effectively eliminate wastage of costs. It helps the users in evaluating the financial viability of a specific project.
• It helps the users in deriving the cost estimate and accordingly design a budget for a particular project.
• Users can use a cost-control mechanism for regulating and monitoring the costs incurred in a project from time to time.

The advantages of cost control reduction through the points below.

1. It enhances the creditworthiness of a company.
2. It helps in enhancing the return on capital employed for an organization.
3. It helps the management in increasing productivity with the available resources.
4. This mechanism helps an organization in enhancing the volume of profits with minimum sales and output.
5. This system helps the employees in sourcing jobs continuously.
6. This system helps the employees in earning reasonable remuneration and incentives.

Despite the various advantages, these are the disadvantages of this concept:

1. It can sometimes lead to mismanagement, which can further lead to some severe and adverse problems for an organization.
2. The probability of human errors in the cost control system can lead to serious inaccuracies, and the management might end up making certain decisions that can ultimately impact the profitability of an organization.

Both cost control analysis and cost reduction are often misunderstood as being one and the same. However, they are distinct from one another. Let us understand their differences through the comparison below.

Cost Control

• Its primary focus is on managing and optimizing overall costs within the organization without having to compromise on quality.
• Strives to create a balance between operational efficiency and resource utilization.
• Takes a hands-on approach to monitor, streamline, and regulate the expenses within the organization.
• Involves the employees and attempts to cultivate a cost-conscious environment within the company.
• It is implemented through techniques such as budgetary control, employee engagement, and constant monitoring of the progress.

Cost Reduction

• The primary aim is to increase short-term profitability by reducing expenses regardless of their importance.
• No elaborate analysis is conducted. Therefore, a risk of compromise on quality is high.
• The examples of these steps could be laying employees off, elimination of any and every non-essential service, or process simplification.
• It is a more reactive process than strategic move taken to cope with immediate financial obligations.
• While it might prove to be a good move in the short-run, the sustainable financial health of the company might take a hit in the long term.

This article has been a guide to Cost Control Definition. Here we explain its purpose, characteristics, types with examples, and importance. You can learn more about from the following articles –

• Appraisal Costs
• Cost-Plus Contract
• What is Budgetary Control?
• Internal Control