Cost Control and Cost Reduction

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.