16

Cost Reduction & Cost Control

Question 1 Write short notes on value Analysis (Nov., 1994, 4 marks) Answer Value Analysis : It is one of the important tools of modern management in the area of cost reduction. It is also known by other names such as value engineering, value control and product research. Value analysis is the process of systematic analysis and evaluation of various techniques and functions with a view to improve organisational performance. It aims at reducing and controlling the cost of a product from the point of view of its value by analysing the value currently received. It investigates into the economic attributes of value analysis, believes in a planned action to improve performance and thereby, generates higher value in a product and ultimately causes reduction in its cost. The meaning of the term value may vary from person to person, time to time and place to place. However, in the context of cost reduction and control it refers to the use value. The reduction in the costs of a product and thus increasing the profitability of a concern is the main advantage of value analysis. The benefits of value analysis are being derived in many industries, e.g., engineering, building construction and the oil industry. It is being applied to components of a product, finished product and also t be methods of packaging. The various steps involved in value analysis are; (i) (ii) Identification of the problem; Collecting information about the function, design, material, labour, overhead costs, etc., of the product and finding out the availability of the competitive products in the market; and Exploring and evaluating alternatives and developing them.

(iii)

Question 2

16.2

Cost Accounting

Distinguish between Cost reduction and Cost control. (Nov., 2002, May, 2003, 2004, Nov., 2004, 4 marks)

Cost Reduction & Cost Control Answer

The points of distinction between Cost reduction and Cost control are as follows: 1. It aims at achieving a reduction in unit cost of goods manufactured or services rendered without impairing their suitability for the use intended. 2. It does not recognise any condition as permanent and believe that by waste reduction, expense reduction and increased production cost reduction objective can be achieved. It aims at achieving the predetermined cost targets and ends when the targets are achieved.

It entails target setting, ascertaining the actual performance and comparing it with the targets, investigating the variances and taking remedial measures.

3. It assumes existence of It does not challenges norms concealed potential savings or standards established for and challenges the norm. the purpose. 4. It is a corrective function. Question 3 Distinguish between Cost (November 2007, 3 Marks) Answer Distinction between Cost Control and Cost Reduction: Cost control is operated through setting standards of targets and comparing actual performance therewith, with a view to identify deviations from standards or norms and taking corrective action in order to ensure that future performance conforms to standards or norms. Cost reduction is a continuous process of critical cost examination, analysis and challenge of standards. Each aspect of business viz., products, process, procedures, methods, organization, personnel, etc. is critically examined and reviewed with a view of improving efficiency and effectiveness and reducing the costs. control and Cost reduction. It is a preventive function.

16.4

Cost Accounting

Cost control lacks the dynamic approach which planned cost reduction demands. In cost reduction, standards which are the basis of control are constantly challenged for improvement.