A complete guide to the definition, benefits and methods of cost control
A complete guide to the definition, benefits, and methods of cost control. Cost control is one of the most efficient tools businesses use to reduce production costs. In this section, essential details related to budgets and expenses are provided to the management, so they can know whether actual costs and budgeted expenses are aligned.
What is cost control?
Cost control is identifying business costs and taking steps to reduce them. This is how a company can earn more profit.
Cost control starts with creating a budget. By having a budget, the owners of any business can make a comparison between the actual cost of each project and the cost calculated in the budget. Therefore, cost control is an integral part of the cost management system.
If actual costs incurred are lower than budgeted (which rarely happens), it’s a good thing for businesses. However, in most cases, the actual cost is either close to the budgeted cost or may exceed the budgeted cost.
When the actual costs incurred are much higher than the budgeted costs, management should take serious action. For example, it is possible that you have made a deal with a new seller who offers to buy the product from you at a lower price than others. Of course, this will not be in your favor. One of the most common forms of cost control is outsourcing some of the company’s functions.
Cost control and net income
To understand cost control, it is also important to consider the organization’s net income. Because cost control is an important part of planning for net income. You can use this formula to get net income:
Sales – fixed costs – variable costs = net income for any business
Implementing cost control by reviewing fixed and variable costs to achieve net income should be one of your business goals.
Why is cost control important?
Cost control can be defined as a specific law with specific executive actions that lead to cost reduction in some company activities.
The main goal of cost control is to achieve a suitable set of strategies for more sales in any business. There are always some standards set in cost control measures that you must ensure that you consider correctly and that your organization’s performance in this regard is consistent with the standards and rules set.
Deviations that occur in company performance due to these standards can be easily analyzed and then reported to ensure that managers can take corrective actions for the company.
The cost control method focuses on the present as well as the past of the company. This method can be easily applied to cases that have certain standards.
This method seeks to achieve the lowest possible rate for additional costs, which is why the cost control function can also be defined as a “preventive function”.
Steps of efficient cost control system – A complete guide to the definition, benefits and methods of cost control
The first and most important point in starting the cost control process is planning. You should consider a comprehensive plan and be sure to keep the goals in mind in the estimates, budgets, and planned standards.
2. The role of staff in the program
If planning was the first step, communicating it to employees is the second step. If the original plans and goals are limited to articles, nothing will happen. They must be taken out of theory and put into practice.
For this purpose, you should inform your employees about your plans and you should educate them about the role of each member in this plan. In essence, you allow them to play their part easily in an effort to control costs.
As the implementation phase of the plan begins, it is time to begin monitoring and evaluating performance. Various expenses incurred will be recorded and information related to them will be collected. Recording costs for review and evaluation is the first step that may lead to a successful cost control program.
After you start recording actual costs, it’s time to make a comparison between actual costs and projected costs. If the target performance is not achieved, it is time to sit down and develop strategies to achieve those goals.
5. Decision making
After evaluating the various performances, it is up to the management whether they want to revise the goals or take specific actions to reduce the recorded deficiencies.
Most of the big companies suffer a lot of losses during their operation due to theft, poor work of employees, inefficient saving of costs, and obsolescence of some products. This waste of energy often leads to heavy material costs, which can be easily avoided if the cost control system is implemented properly.
What are the characteristics of a good cost control system?
- Accurate depiction of centers’ responsibilities
- Different cost standards
- Appropriate communication of controllable costs
- Having a definite reference
- Reduce costs
- Expense report
Two main standards in cost control
In general, there are two standards for cost control. One is external standards and the other is internal standards.
1. Foreign standards
External standards are desired when the internal performance of the organization is compared with the activities outside the organization (i.e., other companies in the same industry). Cost performance, in this case, is evaluated based on several cost ratios.
2. Internal standards
Internal standards are considered when performance in internal departments is compared. These internal cost elements of a company can include things like labor costs or other material costs.
For long term cost control activities are essential in any business. This can prevent some major problems that may occur in the future. Money earned through sales is a huge success. However, if your expenses are just as high, then no real profit will be made. Understanding and researching costs can ensure a long-term future for your business.
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