Module 8

Cost Control and Cost

Reduction, Cost Audit
Presented By:
Pramodh.
Prem Shankar.
Purushotham.
Prakruthi.
Priyank Singh.
Cost Control
 INTRODUCTION :

 Cost control refers to management actions to

keep the costs within standards and budget.
 It is defined as the comparative analysis of

actual costs with appropriate standards or

budgets to facilitate performance evaluation
and formulation of corrective measures.
 It aims at accomplishing conformity between

actual result and standards or budgets.

 FEATURES OF COST CONTROL:

 Creation of responsibility centres with

defined with defined authority and
responsibility of cost incurrence.
 Formulation of standards and budgets that

incorporate objectives and goals to be

achieved
 Timely cost control reports describing the

variance between budgets and standards and

actual performance.
Contd….

 Formulation of corrective measures to

eliminate and reduce unfavorable variances
 A systematic and fair plan of motivation to

encourage workers to accomplish budgetary

goals
 Follow up to ensure that corrective measures

are being effectively applied

 Cost Reduction:

 It may be defined as a planned, positive

approach to bring cost down.

 It implies real and permanent reduction in the

unit cost of goods manufactured or services
rendered without impairing there quality or
suitability for the use intended.
The goal of cost reduction is achieved in two
ways:

 By reducing the cost per unit and

 By increasing productivity.

The steps for cost reduction include elimination

of waste, improving operations, improving
productivity, search for cheaper materials,
improved standards of quality, finding other
means to reduce unit costs.
Difficulties in cost reduction:
 Workers and employees may not welcome
cost reduction programmes and may resist
their implementation.
 These programmes are generally carried on

an ad hoc basis.
 The schemes may be applied in some areas

but it should cover all activities.

 They may be implemented hurriedly, whereas

they should be carried out after careful

thought and in a planned manner.
Difference between Cost Control
and Cost Reduction
Cost Control
•It involves setting targets and
standards, ascertaining actual
performance, comparing actual
performance with targets,
investigating the variances and
taking corrective measures.
•It aims at adherence to and
achieve standards, that is, cost
targets.
•It lacks a dynamic approach as the innovative in nature, looking
only objective is not a exceed the
standards.
Cost Reduction
•It involves critical examination of
the various products, processes,
methods etc. with a view to reduce
costs and improve efficiency and
effectiveness.
•It aims at real and permanent
reduction in costs. Thus it aims at
improving the standards.
•It is continuous, dynamic and
always for measures and
alternative to reduce costs.
•There is always assumed a scope
 Cost control
•It is generally applicable to items
which have standards.
•It contains guidelines and directive
of management as to how to do a
thing.
•It requires close monitoring and
timely corrective actions.
•Budgetary control and standard
costing are important tools of cost
control.
Cost Reduction
•This is applicable to every activity of
the business.
•It adds thinking and analysis to
actions at all levels of management.
•It demands creativity.
•It uses techniques like value
engineering, value analysis, work
study, operation research, ABC
analysis, simplification and
standardization etc.
•It is never ending corrective
function.
 Cost reduction Areas:
 Product improvement.
 Production planning and control.
 Marketing areas.
 Administrative areas.
 Factory organization and methods.
 Utility services.
 Finance.
 Techniques of Cost Reduction
 Value analysis or value engineering
 Work study
 Job evaluation and merit rating
 Production planning and control
 Organization and method study
 Operations and method study, work study
 Rationalization
 Quality control
 Economic order quantity
 Use of better technology
 Mechanization and automation.
 Standardization.
 Simplification.
 ABC analysis
 Budgetary control and standard costing.
 Programme evaluation review technique

analysis.
 Cost benefit analysis.
 Improvement in the design of a product, design

analysis.
 Market research.
 Inventory management and control.
 COST AUDIT :

According to Institute of cost and

Management Accounts (UK) “Cost Audi
is the verification of cost accounts and
a check on the adherence to the cost
accounting plan”.
Scope of Cost Audit:
Materials.
Wages.
Overheads.
General.
TYPES OF COST AUDIT:

 COST AUDIT TO ASSIST MANAGEMENT.

 COST AUDIT ON BEHALF OF GOVERNMENT.

 COST AUDIT ON BEHALF OF CUSTOMER.

 Difference between cost audit and financial
audit :
Cost audit
•Covers cost accounts
•Verification of C A and a
check on adherence to the
cost accounting plan
•Imparts a forward looking
approach
•To verify the accuracy of
costs of each job, product
etc to influence managerial
decisions.
Financial audit
•Covers financial accounts
• verification of final
accounts and reports
whether bal sheets are
drawn correctly.
•Generally a post mortem
report
•Concerned with totality of
costs in respect of financial
position
 Advantages:
 Management: detection of errors, frauds and
irregularities and helps in sound decision making.
 Share holders: analyze the financial position of a
business firm.
 Statutory Auditor: determine scope of his audit and
make audit programme after evaluating cost
accounting system.
 Government and consumers: fixation of prices, cost
plus contract, productivity measurement, evaluation of
management efficiency.
Limitations:

 Time constraint.

 Reliability on Balance sheet and Profit/loss

account.
Thank you.