Lecture 4

Cost Center, Cost Unit ,

Cost Control, Cost Reduction &
Techniques of costing
 CONTENTS

1. Cost Object
2. Cost Control
3. Cost Reduction
4. Techniques of costing
 Cost Center
Cost object is anything for which
separate measurement of cost is (Broader level)
Cost required. It may be a product , a
Object service, a project , a customer , a
brand category, an activity, a Cost Unit
department or a program etc.
(Narrow level)
 Cost center is a location, a person, or an item of equipment (or a group
Cost Centre of them) in or connected with an undertaking, in relation to which costs
ascertained and used for the purpose of cost control

Classification of cost center

Service
Production cost centre
cost centre Responsibility
– centers render cost centre Profit /
Impersonal cost - centers service to
engaged in - a segment of a Investment centre
centre production cost
production business - a segment of a
- consists of a centers, for
Personal cost work, for e.g. organization for business that is
location or item example Plant
centre Machine shop, the activities of responsible for all
of equipment or Maintenance,
- consist of welding which the activities
group of Administration..
person or group shops...etc responsibility is involved in the
equipments .etc
of persons assigned to a production and
specific person. sales of products,
systems and
services.
 It is a unit of quantity of a product , service or time (or combination of
Cost Unit
these) in relation to which costs may be ascertained or expressed

Examples of
cost units
Industry / Product Cost Unit
Automobile Number of vehicles
Cement Tonne
Education Student year
Power - Electricity Kilowatt Hour
Professional Service Chargeable Hours
Transport Tonne-Kilometre, Passenger-Kilometre
 Cost Cost Cost Conversion
Allocation Apportionment Absorption Cost

When items of cost

are identifiable
directly with some Ultimately the indirect This term is defined as
When items of cost costs or overhead as the sum of direct
products or cannot be directly
departments such they are commonly wages, direct
charged to or accurately known, will have to be expenses and
costs are charged to identifiable with any
such cost centers. This distributed over the overhead costs of
cost centers, they are final products so that converting raw
process is known as prorated or distributed
cost allocation. the charge is complete. material to the
amongst the cost This process is known finished products or
E.g. Wages paid to centers on some as cost absorption, converting a material
workers of service predetermined basis. meaning thereby that from one stage of
department can be This method is known as the costs absorbed by production to another
allocated to the cost apportionment. the production during stage.
particular the period.
department.
 Cost Cost
Control Reduction
 Cost Control

Cost Control is defined as the regulation by executive

action of the costs of operating an undertaking,
particularly where such action is guided by Cost
Accounting
 Steps in Cost Control

Planning

Communication

Motivation

Appraisal and Reporting

Decision Making
 Advantages of Cost Control

Achieving the expected return on capital employed by maximizing or optimizing profit

Increase in productivity of the available resources

Reasonable price of the customers

Continued employment and job opportunity for the workers

Economic use of limited resources of production

Increased credit worthiness

Prosperity and economic stability of the industry

 Cost Reduction

Cost reduction may be defined as the real and permanent reduction in the unit costs of
goods manufactured or services rendered without impairing their suitability for the use
intended. As will be seen from the definition, the reduction in costs should be real and
permanent
Two ways of cost reduction are
1. By reducing expenditure, the volume of output remaining constant, and
2. By increasing productivity, i.e., by increasing volume of output and the level of
expenditure remains unchanged
Cost Control
(a) Cost Control represents efforts made
towards achieving target or goal.
(b) The process of Cost Control is to set up a
target, ascertain the actual performance and
compare it with the target, investigate the
variances, and take remedial measures.
(c) Cost Control assumes the existence of
standards or norms which are not challenged.
(d) Cost Control is a preventive function. Costs
are optimized before they are incurred.
(e) Cost Control lacks dynamic approach.
Cost Reduction
(a) Cost Reduction represents the achievement in
reduction of cost.
(b) Cost Reduction is not concern with maintenance of
performance according to standard.
(c) Cost Reduction assumes the existence of concealed
potential savings in standards or norms which are
therefore subjected to a constant challenge with a view
to improvement by bringing out savings.
(d) Cost Reduction is a corrective function. It operates
even when an efficient cost control system exists
(e) Cost Reduction is a continuous process of analysis by
various methods of all the factors affecting costs, efforts
and functions in an organization.
 Techniques of
Costing

Marginal Standard Budgetary

Uniform Costing
Costing Costing Control

Budgetary Control may be

Standard Costing is defined as
Ascertainment of marginal
the preparation and use of
costs and of the effect on
standard cost, their
profit of changes in volume or
comparison with actual costs
type of output by
and the measurement and
differentiating between fixed
analysis of variances to their
costs and variable costs.
causes and points of incidence
defined as the process of
continuous comparison of
actual costs and performance
with the pre-established
budgets in relation to the
responsibilities of the
executives to the specific
budgets for the achievement of
a target in accordance with the
policy of the organisation.
Uniform Costing may be
defined as the application and
use of the same costing
principles and procedures by
different Organizations under
the same management or on a
common understanding
between members of an
association
All the best