Cost control

Cost control is the practice of identifying and reducing business expenses to increase profits,
and it starts with the budgeting process. A business owner compares actual results to the budget
expectations, and if actual costs are higher than.
What is 'Cost Control'
Cost control is the practice of identifying and reducing business expenses to increase profits, and
it starts with the budgeting process. A business owner compares actual results to the budget
expectations, and if actual costs are higher than planned, management takes action. As an
example, a company can obtain bids from other vendors that provide the same product or
service, which can lower costs.
The Advantages of Cost Control
In many cases, a company will choose to implement cost control procedures. These procedures
can take many forms but will generally place limits on how much money employees can spend,
keeping them to strict limits. In addition to reducing the amount of money the company uses on
outside expenses, these controls have a number of ancillary benefits
Lower Expenses
The chief benefit of cost controls is that they lower the company's overall expenses. By
limiting the amount of money employees can spend, the company places a cap on how much
money can go out the door. This allows the company to keep more cash on hand, or to invest
larger amounts of money in other ways, such as in capital expenses or paying down debt.
Less Abuse
In addition, by placing limits on how much money employees are allowed to spend, the
company is taking steps to limit potential abuse by employees. If an employee is given a strict
limit as to how much he can spend on a particular project, he may be less likely to spend money
on unapproved activities, as he will not be able to meet his primary tasks.
Better Records
An ancillary benefit of cost control is that it facilitates accounting and helps financial
planning by setting a limit on a company's costs. By knowing how much the company will be
spending in a particular period, managers can better plan a budget. In addition, once the money
has been spent, it will be easier for accountants and planners to determine how the money was
spent.
Atmosphere of Thrift
When a company places cost controls, it also indicates to employees that it is actively
seeking to save money. This may help encourage an atmosphere of thrift in other areas of the
company as well. In fact, in some cases, the employees may choose to bring expenses in below
their set limit as a means of helping the company meet its fiscal goals
The Disadvantages of Cost Control
Cost control constitutes a measure of financial bookkeeping that allows companies to
closely monitor the relationship between projected cost and actual cost on projects and cost and
expenditure. According to proponents of the method, it improves the decision making process for
management by displaying the cost effectiveness of certain processes and procedures. Despite its
widely touted benefits, cost control poses a handful of disadvantages to businesses, particularly
when misused or misunderstood. Most of these problems prove easily overcome.
BREAKING DOWN 'Cost Control'
Cost control is an important factor for maintaining and growing profitability. Outsourcing is used
frequently to control costs because many businesses find it cheaper to pay a third party to
perform a task than to take on the work within the company. Corporate payroll, for example, is
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often outsourced because payroll tax laws change constantly, and employee
turnover requires frequent changes to payroll records. A payroll company can
calculate the net pay and tax withholdings for each worker, which saves the
employer time and expense.
Factoring in Target Net Income
Controlling costs is one way to plan for a target net income, which is computed
using the formula: (Sales - fixed costs - variable costs = target net income).
Assume, for example, a retail shop wants to earn $10,000 in net income on
$100,000 in sales for the month. To reach the goal, management reviews both
fixed and variable costs, and attempts to reduce the expenses. Inventory is a
variable cost that can be reduced by finding other suppliers to offer more
competitive prices. It may take longer to reduce fixed costs, such as a lease
payment, because these costs are usually fixed in a contract. Reaching a target net
income is particularly important for a public company since investors purchase the
issuer’s common stock based on the expectation of earnings growth.
How Variance Analysis Works
A variance is defined as the difference between budgeted and actual results, and
managers use variance analysis to identify critical areas that need change. Each
month, a company should perform variance analysis on each revenue and expense
account. Management can address the largest dollar amount variances first, since
those accounts have the biggest impact on company results. If, for example, a
clothing manufacturer has a $50,000 unfavorable variance in the material expense
account, the firm should consider obtaining bids from other material suppliers to
lower costs and eliminate the variance moving forward. Some businesses analyze
variances and take action on the actual costs that have the largest percentage
difference from budgeted costs.

PURPOSE OF COST CONTROL

1. Manage labor costs
2. Manage Inventory
3. Make a profit

Several common cost-control tools help small companies operate efficiently.

Budgets. One of the most basic, common cost-control tools is a budget.
Checks and Balances. A variety of checks and balances also help you keep costs
under control. ...
Software Integration. ...
Internal and External Audits.
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