Indian Streams Research Journal

Volume 3, Issue. 5, June. 2013

Available online at www.isrj.net
ISSN:-2230-7850
ORIGINAL ARTICLE

IMPACT OF COST CONTROL AND COST REDUCTION

TECHNIQUES ON MANUFACTURING SECTOR

BARBOLE A.N. , YUVRAJ D. NALWADE AND SANTOSH D. PARAKH

Head of Department, Commerce and Management,

Chh.Shivaji Night College of Arts & Commerce, Solapur,
Assistant Professor, VIIT, Baramati
Research Scholar, Chh.Shivaji Night College of Arts & Commerce, Solapur,

Abstract:

The survival triplet today for any company is how to manage its product /
service Cost, quality, and performance. The customers are continuously demanding high
quality and better performance products/services and at the same time, they want the
prices to fall. The shareholders are also demanding a required rate of return on their
investment with the company. Thus, cost has become a residual. The challenge is being
able to manufacture or provide service within the stipulated cost framework. Thus, cost
management has to be an ongoing continuous improvement programmed. Today the
market leaders are even pursuing cost-reduction as a strategic Imperative. They want to
stay ahead of the market by continuously widening the gap between their cost and that of
their competitors and re-deploy the resources for profitable growth. The paper will focus
on impact of cost control and cost reduction techniques in present scenario.
KEYWORDS:

Cost Control, Cost Reduction, Manufacturing Sector.

INTRODUCTION:

A business enterprise must survive, grow, and prosper. Cost Control and Cost Reduction both are
the activities necessary for ensuring that these objectives are fulfilled. With the liberalization of the Indian
Economy and Globalization, there is now a cut throat competition from various concerns of the world. As a
result there is now a race to secure a place for survival. This has increased the importance of Cost Control
and Cost Reduction.
Hence it is required to study the different tools and techniques used for the Cost Control and Cost
Reduction. For the same we need to start with understanding deeply the concept of cost. Once we
understand the meaning of cost, its controllability, main areas where cost arises, then we can think of how to
control or reduce the cost. We can classify the cost according to their nature, behavior then we can easily
know the cost which can be controlled or reduced.
Here more emphasis is on the Controllable and Non-Controllable cost, because this classification
of the costs helps us understanding what and how we can control. If the cost can be controlled then what
steps should be taken for controlling purpose; if cannot be controlled, what should be done. It is totally
depends upon the managerial decisions, and it is the activity of Management Accounting.
With the given type of industry the cost element varies for the industry. Piaggio Vehicles Pvt. Ltd.
is a manufacturing industry engaged in producing world-class diesel 3-wheelers and 4-wheelers.
Manufacturing industries are engaged in transforming raw material into finished product with the help of
machines and manpower. The contribution of material cost in the total cost is more than 70%. Hence the
main focus is on raw material for this industry. Therefore, more emphasis should be given to the material
cost and need to find out the possible outcomes to control & reduce the material cost.
Title :IMPACT OF COST CONTROL AND COST REDUCTION TECHNIQUES ON MANUFACTURING SECTOR
Source:Indian Streams Research Journal [2230-7850] BARBOLE A.N. , YUVRAJ D. NALWADE AND SANTOSH D. PARAKH yr:2013
vol:3 iss:5
 IMPACT OF COST CONTROL AND COST REDUCTION TECHNIQUES.........

In this I studied various tools and techniques used / applied / implemented in Piaggio Vehicles Pvt. Ltd. for
controlling and reducing the cost. The company effectively utilizes Budgetary Control System for Cost
Control, as well as Value Engineering and Quality Control for the Cost Reduction.
It is a study of different tools and techniques used for the cost control and cost reduction. In this
project researcher has done this project for knowing the companies cost consciousness, its different
processes, usability of these techniques etc.

OBJECTIVES OF THE STUDY

To understand the basic concept of Cost, Cost Control, and Cost Reduction
To study various Tool and Techniques available for Cost Control and Cost Reduction
To study the Cost Control and Cost Reduction techniques used in manufacturing sector.
To analyze the changes in component cost after implementing these techniques

SCOPE OF THE STUDY

The scope of the study is limited to only the manufacturing industry i.eand production plant. The
more emphasis is given to the material cost. It does not cover the other expense or overheads like Salary,
Marketing expense etc.

LITERATURE REVIEW
Cost:
An amount, that has to be paid or given up in order to get something. In business, cost is usually a
monetary valuation of effort, material, resources, time and utilities consumed, risk incurred, and
opportunities forgone in production and delivery of a goods or service.

Cost Control and Cost Reduction

A business enterprise must survive, grow, and prosper. Cost Control and Cost Reduction are
activities necessary for ensuring that these objectives are fulfilled. With the liberalization of the Indian
Economy and Globalization, there is now a cut throat competition from various concerns of the world. As a
result there is now a race to secure a place for survival. This has increased the importance of cost control and
Cost Reduction.

Cost Control
“Cost control is the regulation by executive action of the costs of operating an undertaking
particularly where such action is guided by cost accounting.”
Cost Control is function, which makes sure that actual work is done to fulfill the original intention.
It is a widely accepted notion that the actual costs for each cost element should be within the budget.
Cost control is thought of as a managerial effort to attain cost goals within a particular
environment. Cost control is not a specific program. Rather, it is a routine activity to be frequently carried
out. Cost must be controlled; otherwise, there will be wastage, misappropriation and embezzlement.
Checking such wastage and misappropriation of resources is a continuous activity.
A firm exercising a better control last year does not mean that it has now been relaxed from the cost
control function. Cost control relies heavily on accounting techniques. Some of the key cost control
techniques are responsibility accounting control system, standard costing, budgetary control and cost
management ratios. Therefore, cost control includes the routine management of the organizational
activities, such as controlling of wastage, misappropriation, loss of work time, set up time etc.
The cost control definition suggests that a company should investigate good procedures for
finding out the reason why the costs of the company are not as per the pre-decided or budgeted costs. Thus,
cost control can help a company determine, if it is really spending more than it should actually spend.
Though it is not essential to be a finance expert to understand the definition of cost control, planning and
actually implementing the cost control techniques can be quite a big challenge. It is essential for the senior
level managers to have a good understanding of the cost control software which is a part of effective cost
control techniques.

Importance of Cost Control

i)It enables the firm to achieve its defined objectives.
ii)It leads to proper utilization of the firm's resources
iii)It ensures the survival and growth of a firm by preserving its competitive capability

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 IMPACT OF COST CONTROL AND COST REDUCTION TECHNIQUES.........

iv) It makes sure that organization remains efficient.

COST REDUCTION
“Cost Reduction is to be understood as the achievement of real and permanent reduction in the unit
cost of goods manufacture or services rendered without impairing their suitability for the use intended”.
Cost Reduction is a systematic effort to improve profit margins by eliminating all forms of waste and
unnecessary expense without impairing the generation of revenues. Some commonly used synonyms for
this activity are profit improvement, cost improvement, and methods improvement. But, regardless of the
terminology used, the aim of cost reduction is to offset the impact of a squeeze on profits by getting the
maximum return for every rupee of funds spent by the company.
Cost reduction, should therefore, not be confused with cost saving and cost control. Cost saving
could be a temporary affair and may be at the cost of quality. Cost reduction implies the retention of
essential characteristics and quality of the product and thus it must be confined to permanent and genuine
savings in the costs of manufacture, administration, distribution and selling, brought about by elimination
of wasteful and inessential elements form the design of the product and from the techniques and practices
carried out in connection therewith.
In other words, the essential characteristics and techniques and quality of the products are retained
through improved methods and techniques used and thereby a permanent reduction in the unit cost is
achieved. The definition of cost reduction does not however include reduction in expenditure arising from
reduction or similar govt. action or the effect of price agreements.

The three fold assumption involved in the definition of cost reduction may be summarized as under:-
1. There is saving in a cost unit
2. Such saving is of a permanent nature
3. The utility and quality of goods remain unaffected, if not improved

Importance of Cost Reduction

i)It leads to an improvement in the competitive capabilities of the company and thereby ensures its survival,
growth, and prosperity
ii)It ensures reasonable prices to customers by not passing on the inefficiency of the business itself
Purpose for Cost Control and Cost Reduction
i)To create cash for reinvest in R&D
ii)To reduce manufacturing cost to stay competitive
iii)To lower cost of service in order to provide additional services
iv)To become more efficient

Reasons for Cost Reduction

i)To increase company value
ii)To get competitive advantage
iii)To eliminate unnecessary expenses
iv)To reduce price of product or service

Difference between Cost Control and Cost Reduction

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 IMPACT OF COST CONTROL AND COST REDUCTION TECHNIQUES.........

SR.
Cost Control Cost Reduction
No
1. Cost control focuses on the minimization Cost reduction focuses on minimization of cost
of wastage than the reduction of cost. through new production process, improved
plant layout, scientific material handling etc.
2. Cost control is routinely applied on a Cost reduction is applied when an opportunity
continuous basis. for cost reduction is identified which offers a
competitive advantage for a longer time.
3. Cost control heavily relies on accounting Cost reduction may not involve the use of
techniques. accounting technique.
4. Cost Control is a preventive action Cost Reduction is a corrective action. It aims at
owing to the fact that it tries to keep costs permanent reduction in the unit cost of goods
confined to the limits set by norm. manufactured or services rendered and such
action must result in potential saving.
5. Cost Control emphasizes the present and Cost Reduction lays stress partly on present
the past behavior of costs. costs and mainly on future costs.
6. Cost Control is exercised by establishing Cost Reduction is accomplished by improving
budget or standards and initiating upon standards and the methods of production.
remedial action where there is a deviation
of actual results from standards.

Table No.1: Difference between Cost Control and Cost Reduction

Tools and Techniques Used For Cost Control and Cost Reduction

Cost Control Techniques

1)Budgetary Control
2)Bench Marking
3)Target Costing

COST CONTROL TECHNIQUES

Budgetary Control

Budgetary Control is an establishment of budgets relating the responsibilities of a policy and the
continuous comparison of actual with budgeted results either to secure by individual action the objective of
that policy, or to provide a basis for its revision.

Bench Marking
It is measuring the company's performance against that of Best-In-Class companies determining
how the Best-In-Class achieve those performance levels and using the information as a basis for the
company's targets, strategies and implementation.
Benchmarking is the process of comparing one's business processes and performance metrics to
industry bests and/or best practices from other industries. Dimensions typically measured are quality, time
and cost. In the process of benchmarking, management identifies the best firms in their industry, or in
another industry where similar processes exist, and compare the results and processes of those studied (the
"targets") to one's own results and processes. In this way, they learn how well the targets perform and, more
importantly, the business processes that explain why these firms are successful.

Target Costing
Target costing refers to the design of product, and the processes used to produce it, so that
ultimately the product can be manufactured at a cost that will enable the firm to make profit when the
product is sold at an estimated market-driven price. This estimated price is called target price.

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Cost Reduction Techniques

1)Value Analysis and Value Engineering
2)Quality Control
3)Business Process Reengineering
4)Inventory Management
5)Kaizen Costing
6)Work Study Method

Value Analysis and Value Engineering

Value Analysis is an activity that typically occurs jointly between purchasing and method
engineering. This activity is aimed at modifying the specifications of materials, parts, and products to
reduce their costs while reducing their original function. Focus is placed on the value of the product. Value
Analysis is also called as Value Engineering.

Quality Control
Quality Control refers to all those functions or activities that must be performed to fill the
company's Quality objectives. Quality Control aims at investigating the root cause for defects indentified
by inspection and take corrective action to overcome the defects for future production. Quality Control
helps to minimize the cost of Inspection and Rejection. Quality Control is an approach to prevent the
defects rather than detecting the defects. The ultimate aim is to provide products which are dependable,
Satisfactory, Economical.

Business Process Reengineering

A fundamental re-thinking and radical re-design of business processes, to achieve dramatic
improvement, in critical contemporary measures of performance such as cost, quality, service and speed to
market.

Requirement of BPR Process

Fundamental Understanding of the process
Creative thinking to break away from old traditions and assumptions
Effective use of Information Technology

Steps in BPR
1)State need for change
2)Identify process of reengineering
3)Evaluate enablers for reengineering (IT & HR)
4)Understanding the current process
5)Create a new process design
6)Implement the reengineered process

Inventory Management
Inventory Management involves administration, policies, and procedures to reduce in inventory
cost. Inventory Management involves the development and administration of policies, systems and
procedures which will minimize total costs relative to inventory decisions and related functions such as
customer service requirements, production scheduling, purchasing and traffic.

Kaizen Costing
Kaizen costing is the process of cost reduction during the manufacturing phase of an existing
product. The Japanese word 'Kaizen' refers to continual and gradual improvement through small activities,
rather than large or radical improvement through innovation or large investment technology.

Work Study
Work Study is a systematic, objective and critical examination of the factors affecting productivity
for the purpose of improvement. It uses techniques of method study and work measurement to ensure the
best possible use of human and material resources in carrying out a specific activity.

DATA ANALYSIS AND INTERPRETATIONS

A.Value Engineering

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1) Value Engineering in case of Rear Wheel Hub

Following table shows the reduction in total cost of Rear Wheel Hub after the Value Engineering.

Rear Wheel Hub (Cost Reduction of Rs. 183/-)

Description Existing (Rs.) New (Rs.)
Spindle Knuckle 263
134.57
Front Wheel Hub 26.01
Nut 17.50 0
Washer 4 0
Cone 7.06 0
Total Cost (Rs.) 317.57 134.57
Cost Reduction (Rs.) 183/-

Table No. 2: Value Engineering in case of Rear Wheel Hub

Graph No. 1

Interpretation:
After implementing the Value Engineering the Cone, Nut, Washer parts get eliminated. The hub is
itself placed in spindle. It reduced the cost around Rs. 183 / Vehicle. Because the parts like Cone, Washer, &
Nut are eliminated and cost of those element is also eliminated.

2) Value Engineering in case of Fuse Box

It is localization --fuse-box of wiring harness 4W, Earlier it was imported from Italy
(Manufacturer –MTA) Now it is localized with Terminal Technology ltd. With same specification and with
reduction in cost. Of Rs. 37 / Vehicle

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Fuse Box with Bracket (Cost Reduction of Rs. 38/-)

SR Description Existing MTA New TT In
No. In Rs. / No Rs. / No

1 Fuse Box with Fuse 75.11 25.11

2 Bracket 0 13
Total (Rs.) 75.11 38.11

Table No. 3: Value Engineering in case of Fuse Box

Graph No. 2

Interpretation
Because of change in location here the cost is reduced up to Rs. 38, where before it was costing Rs. 75.11

3) Radiator Fan motor localization project

Following table shows the impact of Value Engineering in the cost of Radiator Fan Motor

Radiator Fan Motor (Cost Reduction Rs. 140/-)

Description Before After
M/s Indrad,
Source M/s Denso, Italy
Chennai
Cost 335 195
Total Cost
Rs. 140/ Vehicle
Reduction (Rs.)

Table No. 4: Value Engineering in case of Radiator Fan Motor

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Graph No. 3

Interpretation
Radiator Fan motor localization project: In this earlier they were using Fan motor of M/s Denso,
Italy, which was localized with M/s Indrad, Chennai with same specification and with cost reduction of Rs.
140/ Vehicle.

CONCLUSION

In Manufacturing unit, where its main cost element is the Material Cost. Manufacturing
companies are preferringtechniques like Value Engineering, Quality Control, Budgetary Control, for the
purpose of Cost Reduction. This technique fulfills the objective of Company i.e. 'Low Cost Manufacturer'.
The paper specifies that the Cost reduction Techniques are now- a- days required to be
implemented in each and every organization. Objective of the paper is to find the Cost Reduction and Cost
Control Techniques which are being used in the various stages and their effect on the cost of material. The
secondary aim of paper is to find all other cost reduction techniques which are useful.
In times of difficult business climate when sales are reducing and uncertain every business must
adopt to cost reduction strategies as soon as possible to avoid the business running into losses.
By using this company has achieved its basic goal of being 'Low Cost Manufacturer.'

REFERENCES:
i].K. Ashwathappa, K. ShridharaBhat, “Production, and Operations Management”, Himalaya Publications
ii].ManashDutta, “Cost Accounting Principles and practices”, Pearson Education
iii].M. Y. Khan, P. K. Jain, “Cost Accounting and Financial Management”,
iv].TATA McGraw HILL
v].http://ec.europa.eu/research/infrastructures/pdf/cost_control.pdf
vi].http://www.accountlearning.blogspot.com/2011/02/differences-between-cost-control-and.html/
vii].http://www.the-cost-reduction-consultant.com/CostControl.html
viii].http://www.barcodesinc.com/articles/what-is-inventory-mangement.html/

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