INDIRA SCHOOL OF CAREER DEVELOPMENT, INDORE FINANCIAL AND MANAGEMENT ACCOUNTING NOTES

COST CONTROL
Cost control is defined and understood as the process of regulating the costs of operating an undertaking. The process of regulation is guided by cost accounting. Further, cost control needs executive action. It does not come about automatic ally. It necessitates bringing to the notice of executives responsible for controlling costs, the strategic points at which interference is needed. Thus, cost control implies action by managerial personnel, on the basis of cost information, to see that the actual costs do not deviate from the targets or standard previously lay down. FEATURES OF COST CONTROL 1. Existence of Cost Accounting: - If cost accounting should guide executive action to regulate costs, it is, first of all, necessary to install a suitab le system of cost accounting. The system introduced, should be designed to suit the undertaking. The cost accounting system so installed, accomplishes on of the twin objectives of cost accounting, viz., cost ascertainment. 2. Pre-determined Standards: - Another requirement of cost control is the fixation of attainable targets of performance. The targets set, should be scientific, taking into consideration all practical aspects governing production as well as the related costs. 3. Cost Reporting: - As pointed out above cost control does not come about automatically. Executive action for cost control should be guided by cost accounting. If cost accounting should guide the executives, there should be an effective system of reporting cost information. The reports should point significant deviations from the pre-determined targets, and not merely historical costs. Cost reporting is to be accomplished at the appropriate time and not when it is too late to do anything. 4. Corrective Action: - Even effective and timely reporting of cost information would be of little use if corrective action is not taken then and there. Action should also be taken to see that significant deviations which are now corrected by executive action are not allowed to appear all over again. In o ther words, corrective action should be to prevent the recurrence of deviations.

PREPARED BY: PROF. GAURAV MOGHE

INDIRA SCHOOL OF CAREER DEVELOPMENT, INDORE FINANCIAL AND MANAGEMENT ACCOUNTING NOTES

COST REDUCTION
The Official Terminology defines cost reduction as "The reduction in unit cost of gods or services without impairing suitability for the use inten ded"

FEATURES OF COST REDUCTION 1. Reduction in Unit Costs: The aim of cost reduction is to bring down the cost per unit of a commodity or service. 2. Reduction to be permanent: - Reduction in unit cost should not only be real but permanent also. A temporary reduction in the unit cost has no significance if, in the near future, cost per unit goes up for whatever reason. 3. Use Value to be Unaffected: - Any article, produced with the available scarce resources has not only exchange value but use value also. It s value in use depends entirely upon its quality. Cost reduction should not be at the expense of its quality. Any reduction in its cost should not impair or affect the suitability of the article for the intended use. TECHNIQUES OF COST CONTROL There are two important techniques of cost control. They are budgetary control and standard costing. There are also known as `systems' of cost control. Any scheme of cost control, whether by budgetary control or standard costing, should comprise the following aspects:

1. Laying down targets or standards of performance. 2. Measuring actual performance against the standards. 3. Computing variances, analyzing them by causes, localizing them and presenting timely reports. 4. Enforcing accountability of the executives concerned. 5. Reviewing periodically the standards in the light of changed circumstances, in order to prevent their recurrence.

PREPARED BY: PROF. GAURAV MOGHE

INDIRA SCHOOL OF CAREER DEVELOPMENT, INDORE FINANCIAL AND MANAGEMENT ACCOUNTING NOTES

COST CONTROL AND COST REDUCTION

Cost reduction is closely related to cost control. In fact, cost control and cost reduction are considered to be the two aspects of the same problem, viz., cost improvement. But yet, cost control differs from cost reduction in the following aspects: 1. Cost control is carried out by management with the main purpose of increasing operational efficiency. Cost re duction, on the other hand, is a special exercise carried out by management with the object of cost improvement, i.e., securing a real and permanent savings in costs. 2. Cost control aims at achieving target costs. This is accomplished by setting targets of performance and striving hard to achieve them by avoiding wastages and inefficiencies. Cost reduction, on the other hand aims at bringing about savings in the standard set by presuming the existence of concealed potential savings in the standards. It thus challenges the standards and aims at improving them through research. 3. Cost control has its applicability to those items of cost for which standards have been set. These standards relate mostly to productive operations. However, cost reduction has universal applicability. It applies to every area of the business. It does not concern itself with the standards of performance, and does not also depend upon the standards. 4. Cost control is essentially static in nature. It attempts at achieving the best possible results at the lowest cost under given conditions. Cost reduction, however, is a dynamic function. It has no visible and ultimate goal. It does not assume the existence of a given condition, which is permanent. Continuous study, analysis and research which offer scope for cost reduction are relied upon by management. 5. Cost control techniques at preventing costs from rising. Cost control is thus, a preventive function. When costs are controlled, the ultimate goal is said to have been reached, and costs are optimised. Cost reduction is a corrective function. It may operate even when there is an efficient cost accounting system. Since there is nothing like stagnant efficiency, cost reduction programme offer ample scope for reduction in the achieved costs under controlled conditions. 6. Cost control results in cost improvement. The technique is thus, a means to an end. Cost reduction is, however, the end itself. Cost reduction begins where Cost Control ends. 7. Cost control lays emphasis on the present and past beha viour of costs whereas, cost reduction emphasizes partly on the present costs and mostly on future costs.

PREPARED BY: PROF. GAURAV MOGHE

INDIRA SCHOOL OF CAREER DEVELOPMENT, INDORE FINANCIAL AND MANAGEMENT ACCOUNTING NOTES

BUDGETARY CONTROL
BUDGET The official terminology defines a budget as "A quantitative statement, for a defined period time, which may include plan ned revenues, expenses, assets, liabilities and cash flows." A budget is thus, a plan quantified in monetary terms.

BUDGETARY CONTROL The official terminology defines the term `budgetary control` as the "the establishment of budgets relating the responsibilities of executive to the requirements of a policy, and the continuous of actual with budgeted results, either to secure by individual action the objective of that policy or to provide a basis for its revision."

OBJECTIVES OF BUDGETARY CONTROL 1. To aid the planning of annual operations 2. To co-ordinate the activities of different departments. 3. To communicate plans to the various responsibility centre managers. 4. To motivate managers to strive to achieve the organizational goals. 5. To control activities 6. To evaluate the performance of managers 7. Reducing wastage and losses and increase profitability. 8. Correction of deviations from the established standards.

PREPARED BY: PROF. GAURAV MOGHE

INDIRA SCHOOL OF CAREER DEVELOPMENT, INDORE FINANCIAL AND MANAGEMENT ACCOUNTING NOTES

ADVANTAGES OF BUDGETARY CONTROL

1. Enables Management think ahead: - Forward planning and policy formula tion are indispensable to a system of budgetary control. In order, therefore, to introduce any efficient system of budgetary control, management has not only to define clearly the goals or objectives of the enterprise but also lay down the policies to be communicated to the framers of budgets. Budgetary control thus guides management in planning and formulation of policies thereby enabling them to think ahead.

2. Promotes a Spirit of cooperation: - Budgets are prepared for every major activity of an enterprise. For this purpose, each functional head is drawn into the budgeting process. Further, the process being `bottom -up' and participative, managers at the lowest level in the hierarchy are asked to initiate the budgeting process. The work of budgeting thus promotes co-operation amongst managerial personnel.

3. Brings about co-ordination of activities: - Budgeting makes every manager to examine the relationship between his own operations and those of others. In this process, differences and conflicts are ironed out. Promotes delegation and fixation of responsibility: -The process of budgeting is `bottom -up' and budgets are not imposed on line managers. There is thus delegation of authority deep down the hierarchy. Further, not merely a manager is drawn into the b udgeting process; he is also made responsible for the performance of his activities in accordance with the standards or targets laid down in his own budget.

PREPARED BY: PROF. GAURAV MOGHE

INDIRA SCHOOL OF CAREER DEVELOPMENT, INDORE FINANCIAL AND MANAGEMENT ACCOUNTING NOTES

4. Ensures effective and efficient usage of resources: - Budgeting standardizes production, equipment and processes. It also facilitates introduction of efficient production control. It ensures availability of resources in time and avoids shortages. By avoiding sales of less profitable and unprofitable products, it aims at making the best and maximum usage of the available resources. It also ensures availability of sufficient working capacity and pinpoints operational efficiency by setting targets of performance. 5. Facilitates introduction of Principle of Management by Exception: - It acts as a constant reminder to managers, of the level of performance to which they have committed themselves by accepting their part of the budget. Besides making them realistic in achieving the budgeted targets, budgetary control facilitates effective control over actual performance. Constant and periodical comparison of actual performance with that budgeted in advance may bring to light operational deficiencies. Such deviations, if any, may be corrected on the basis of application of management by exception.

6. Stabilises Business: - Budgetary control forces management to give timely and adequate attention to the effect of expected trend of general business condition. Thus, it stabilises conditions of business which are subject to seasonal a cyclical fluctuations.

7. Facilitates introduction of Standard Costing: - Budgetary control and standard costing go hand in hand. Although there may be budgetary control without standard costing, its existence makes the introduction of standard costing much easier.

8. Assists performance of managerial functions: - Budgetary control is not necessary in order to enable managers to perform their functions efficiently. The existence of a budgetary control system may be quite helpful in enabling managerial personnel to perform their functions of planning, coordination and control much better than they could have, in the absence of budgetary control.

PREPARED BY: PROF. GAURAV MOGHE

INDIRA SCHOOL OF CAREER DEVELOPMENT, INDORE FINANCIAL AND MANAGEMENT ACCOUNTING NOTES

LIMITATIONS OF BUDGETARY CONTROL

1. Budgets are based on estimates: - The usefulness of budgeting depends upon the extent to which forecasts can be re lied upon. Since forecasting cannot be considered to be an exact science, the accuracy of the data on which estimates are based determines the adequacy or otherwise of a budgetary programme. If forecasts are made on the basis of inadequate and inaccurate d ata, budgeted figures would be far removed from reality. The targets set would also be inaccurate.

2. Tendency to become rigid: - A budget programme should be dynamic. It should be capable of being adapted to changing circumstances. When budget are prepared with predetermined targets of performance, there is a tendency to consider the budget figures as something final. In such a case, the budgetary programme is bound to become rigid. If the standards set by the budget become rigid, deviations due to changed conditions beyond the control of management might not be allowed.

3. Time Consuming: - Budgeting is a time consuming process. Various studies are required during the reparation period. The business conditions may also change during the period.

4. Not a Substitute for management: - Budgets are not substitutes to the managerial personnel. They cannot replace management. "A Budget is not designed to reduce the managerial function to a formula. It is a managerial tool."

5. An expensive tool: - Budgeting necessitates employment of specialized staff. This involves expenditure which small concerns may not afford. Even in the case of large concerns, the utility of budgetary control should be viewed from the point cost. The cost of installing and operating a budgetary control system should be commensurate with the benefits derived there from.

PREPARED BY: PROF. GAURAV MOGHE

INDIRA SCHOOL OF CAREER DEVELOPMENT, INDORE FINANCIAL AND MANAGEMENT ACCOUNTING NOTES

6. Timely revision required: - Budgets are prepared on the assumptions that certain conditions will prevail. If those conditions are not prevailing, budgetary targets need to be revised. The frequent revision of targets reduces the reliability and value of budget.

7. Depends upon Top Management: - The success of budgetary control system depends on the support of top management. The management must be cooperative and should give full support for it. If at any time, there is a lack of support from top management, the system will not succeed.

PREPARED BY: PROF. GAURAV MOGHE