Cost control means
controlling per unit cost of production. Per unit cost is the average cost of
production which is accepted as efficiency parameter of the manager. In the
long run we know that manager is interested to get output at lowest per unit
cost of production.
SIGNIFICANCE/IMPORTANCE
OF COST CONTROL
Cost control is
highly essential in the changed economic environment because in the changed
scenario in the market there are different substitute products which have
started their operations in the existing market environment. From the
substitute effect of law of demand we know that the demand for the product is
directly dependent on the price of its substitute product. In this situation it
is very difficult to increase the per unit price of the product and therefore
in this complicated situation the only option before the management is to
reduce per unit cost of production so
that total cost of production will reduce and profit of the firm will go on
increasing.
Profit is the
difference between total revenue and total cost.
Total Revenue =
(total output) X (per unit price of the product)
Total Cost = (total
output) X (per unit cost of production)
As per unit price
of the product can’t be increased easily in the changed economic environment,
maximum weightage is to be given on controlling per unit cost of
production in order to maximize the profit of the firm which is the fundamental
objective of the producer.
DIFFERENT COST
CONTROLLING TECHNIQUES/METHODS
1.
Standard
costing
2.
Budgetary
control
1. Standard Costing
In the standard
costing cost control measures the marketing manager prepares a questionnaire
which is distributed to the right consumers in order to get their responses
through which standard expectation of the consumers can be identified which will
determine standard quality of the product also known as Standard Output. Now
the financial manager calculates the environment of total fixed factors of
production and variable factors of production in order to get standard output
and in this way total standard cost is calculated. We observe that
Per unit standard
cost = (total standard cost) X (total output)
The strategies
manager gives direction to each department so that output is obtained as
per unit standard cost. If it is observed that actual per unit cost of
production is more than standard per unit cost, the manager must take effective
steps in order to minimize this gap because the objective is to get the output
at per unit standard cost.
2. Budgetary
Control
The Budgetary
control technique is accepted another cost control measure. In this technique
the financial manager initially prepares a draft budget which indicates
the involvement of total fixed cost of production and total variable cost of
production. Now the financial manager is asked to conduct a microstudy which
will highlight some costing components having significant impact on the quality
of the product and these costing components are known as Essential Costing
Components. Similarly with help of the microstudy the manager can identify
some other costing components which havw very insignificant impact on the
quality of the product and these costing components are known as Non-Essential
Costing Components. Now the financial manager is asked to prepare a revised
budget which willonly incur the essential costing components. Therefore the
revised budget will completely eliminate the non-essential costing components.
Then the strategic manager issues direction to each department. The revised
budget must be followed strictly. With the help of revised budgettotoal cost of
production will be reduced which will ultimately reduce per unit cost of
production and therefore profit of the firm will go on increasing.
It is finally
observed that the success of standard costing depends on the expertise of the
marketing manager at the time of identification of right consumers from which
data will be collected. It is also finally observed that the success of
budgetary control technique is dependent on the expertise of the financial
manager who is responsible to conduct a microstudy in order to identify the
essential costing components and non-essential costing components.