In this article we will discuss about Cost Control:- 1. Meaning of Cost Control 2. Elements of a Cost Control Scheme 3. Techniques 4. Steps.
Meaning of Cost Control:
The basic objective of accounting is to provide information which is useful for persons inside the organisation (i.e., owners, management and employees) and for persons or groups outside the organisation (i.e. investors, creditors, government, consumers etc.).
According to Slavin and Reynolds Professors of Accounting, “Conceptually, accounting is the discipline that provides information on which external and internal users of the information may base decisions that result in the allocation of economic resources in society.”
The needs of the majority of the users of accounting information can be satisfied by financial accounting. Financial statements are concerned with the past whereas management’s main interest lies not in past but in future; it is mainly concerned with planning and controlling.
Preparation of various budgets, such as sales budget, production budget, cash budget, capital expenditure budget etc. is an important part of planning and preparing various budgets is an important aspect of Cost Accountancy.
Controlling is the function of seeing that programmes laid down in various budgets are being actually achieved i.e. actual performance is compared with the budgeted performance, enabling the management to exercise control in case of weak performance.
Now-a-days managements are facing problems of survival because of acute competition. Only those organisations can meet the competition effectively and have a hold on the market which is in a position to keep their cost minimum. Cost accounting can be instrumental in this regard by eliminating all inefficiencies and wastages by exercising cost control.
The Chartered Institute of Management Accountants, London defines 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.
It is only when costs are predetermined i.e. a system of standard costing is in operation, that cost control measures can give their best. Thus, cost control aims at reducing inefficiencies and wastages and setting up predetermined costs and in achieving them.
Cost control is exercised through setting standards or norms or targets and comparing actual performance therewith with a view to ascertaining deviations from set targets or norms or standards and taking corrective action to ensure that future performance conforms to the set standards or norms or targets.
Elements of a Cost Control Scheme:
Following are the elements (i.e. major steps) of a cost control scheme:
a. Set down a norm or standard or target.
b. Select a yardstick for measuring the standard or target.
c. Ascertain the actual performance by applying the yardstick which was used for measuring the standard or target.
d. Compare the actual performance with the standard or target and compute the variances.
e. Analyse the variances by causes and fix responsibility for variances.
f. Take corrective action to eliminate the causes of variances so that future performance conforms to standards or targets lay down and cost may be controlled to achieve the maximum efficiency.
g. Periodically review the standards or targets and revise them in the light of changed circumstances.
Cost Control Techniques:
Among the techniques which have become popular for ensuring cost control are:
(a) Material Control,
(b) Labour Control,
(c) Overhead Control,
(d) Budgetary Control,
(e) Standard Costing,
(f) Control of Capital Expenditure,
(g) Responsibility Accounting,
(h) Productivity and Accounting Ratios.
Steps taken for Effective System of Cost Control:
Following steps should be taken in an effective system of cost control:
a. For an effective system of cost control, the firm should have a definite plan of organisation. Authority and responsibility of each executive should be clearly defined. Targets for performance of work as well as the cost to be incurred for the purpose should be laid down for each area of responsibility so that responsibility may be fixed for the deviation of actual cost from the predetermined cost.
b. Costs should be collected for each area of responsibility. One of the recent developments in the field of managerial accounting is the responsibility accounting which is helpful in exercising cost control. It tries to control cost in terms of the persons responsible for their incurrence. It is a method of accounting in which costs are identified with persons responsible for their control rather than with products or functions.
Reporting of efficiency or inefficiency displayed by each person should be prompt. Information delayed is information denied. If a considerable time elapses between happening of events and reporting, opportunity for taking appropriate action may be lost or some wrong decisions may be taken by management in the absence of information.
c. The report should draw management’s attention to exceptionally good or bad performance so that management by exception may be carried out effectively. The aim should be to bring to light the factors leading to increase in cost rather than to punish people to take the remedial action to improve the performance in future.
d. Good performance should be handsomely rewarded so that workers may be motivated towards better performance.
e. For an effective system of cost control, there should be effective budgetary control and there should be proper setting of standards. Budgets and standards should be fixed with realism. Cooperation of all persons who are to achieve the budgeted results or standards should be secured in preparing budgets or setting up standards to get their willing involvement in achieving the desired results.