Cost control: It can be defined as the comparative analysis of actual costs with appropriate standards or budgets to facilitate performance

evaluation and formulation of corrective measures. Cost control is keeping expenditure within prescribed limits. The important features are: Creation of responsibility centres. Formulation of standards and budgets. Timely cost control reports. Formulation of corrective measures. A systematic and fair plan of motivation to encourage employees. Follow up to ensure that corrective measures are being effectively implemented. Cost reduction: Cost reduction may be defined as attempt to bring costs down. It implies real and permanent reduction in the unit cost of goods manufactured or services rendered without impairing their suitability for the use intended. Difference between cost control and cost reduction: Cost control Cost reduction i. It involves setting targets and i. It is not concerned with setting standards, ascertaining actual targets and standards and performance, comparing maintaining performance actual with standards, according to standards. Cost investigating the variance and reduction is the final result in the taking corrective actions. cost control process. ii. It aims at achieving ii. It aims in improving the standards. standards. iii. It follows a conservative iii. It is continuous, dynamic and approach and lacks a dynamic innovative in nature, looking approach. always to reduce costs. iv. It is a preventive function. iv. It is a corrective action. v. Costs are optimized before v. There is always assumed a scope they are incurred for reducing the incurred costs vi. It is applicable to items which under controlled conditions. have standards. vi. It is applicable for every activity vii. It contains guidelines and in business. directive of management as to vii. It adds thinking and analysis to how to do things. action at all levels of management.

Tools and techniques for cost reduction: 1. Value analysis or value engineering 2. Work study 3. Job evaluation and merit rating 4. Production planning and control 5. Organization and method study 6. Operations and method study 7. Rationalization 8. Quality control 9. Economic order quantity 10. Use of better technology 11. Mechanization and automation 12. Standardization 13. Simplification 14. Classification and codification 15. Variety reduction 16. Improvement in the design of the product 17. Market research 18. Inventory management and control. Cost reduction areas: 1. Product improvement: important factors in product improvement are: Quality of a product Unnecessary weight, material content, machine and labour operation Waste and losses to be eliminated. Proper designing of a product. 2. Production methods and layout: material control, labor control, production layout, system analysis, time and motion study. 3. Marketing areas: channels of distn, sales promotion scheme, methods of remunerating salesman, advertising methods, packaging methods, transport arrangement. 4. Administrative areas: investment planning, cash discount policy, labor welfare measures. 5. Factory organization methods: proper delegation of work, avoiding overlapping of responsibilities. 6. Utility services: power, repair, water, steam , maintenance, transport etc. 7. Finance: methods of funding capital expenditure, procurement of capital at economical cost. Cost audit: According to the Institute of Cost and Management Accountants of England, Cost Audit is defined as the verification of Cost Accounts and a check on the adherence to the Cost Accounting plan. The cost audit, therefore comprises:

The verification of the cost accounting records such as the accuracy of the cost accounts, cost reports, cost statements, cost data, costing techniques and Examining these records to ensure that they adhere to the cost accounting principle, plans, procedures and objectives.

Financial Audit: A financial audit is the critical analysis of a business's financial records and documentations. It can be done at any level, from local to governmental. A financial audit or financial profile of the company will be released by the auditor or forensic accountant after completion of the analysis. These financial analyses are usually done by certified public accounting firms and forensic accountants who provide an objective view of the true financial integrity of a company. Audits are intended to show whether a company's financial documentation matches its financial claims. It is not uncommon for a business to employee an internal auditor to monitor financial controls of a company in addition to hiring outside auditors Difference between financial audit and cost audit: Basis Financial audit a. Responsible person Auditor b. Meaning and nature Audit of financial accounts c. Aim Know whether the financial statements are true or not d. Relates Historical figures Cost audit Cost auditor Audit of cost accounts To determine the correctness of cost figures of each activity Futuristic focus

Usefulness of Cost Audit Cost audit will prove to be useful to the management, society, shareholders and the government as shown below. (1) Usefulness to the Management: (i) The management will get reliable data for its day to day operations like price fixing, control, decision making, etc. (ii) A close and continuous check on all wastages will be kept through a proper system of reporting to the management. (iii) Inefficiencies in the working of the company will be brought to the notice of the management to take corrective action. (iv) Management by exception becomes possible through allocation of responsibilities to individual managers. (v) The system of budgetary control and standard costing will be greatly facilitated. (vi) A reliable check in the valuation of closing stock and work-in-progress can be established. (vii) It helps in the detection of errors and fraud. (2) Usefulness to the Society : (i) Cost audit is often introduced for the purpose of fixation of price. The prices so fixed are based on the correct costing data and so the consumers are saved from exploitation. (ii) Price increase by the industry is not allowed without proper justification as to increase in cost of production, consumers are saved from unreasonable price hike. (iii) Cost Audit is also useful for the purpose of Cost Control; Cost reduction and proper

utilisation of scarce resources. (3) Usefulness to Shareholders : (i) Cost audit ensures that proper records are kept as to purchases and utilisation of material and expenses incurred on wages, overheads, etc. It also ensures that the unit has been run economically and efficiently. It also makes sure that the valuation of closing stocks and work-in-progress is on a fair basis. Thus, the shareholders are assured of a fair return on their investment. (4) Usefulness to the Government : (i) Where the government enters into a cost plus contract, cost audit helps the government to fix the price of the contract. (ii) Cost audit helps the fixation of selling prices of essential commodities and thus undue profiteering is checked. (iii) Cost audit enables the government to focus its attention on inefficient units. (iv) Cost audit enables the government to decide in favour of giving protection to certain industries. (v) Cost audit facilitates settlement of trade disputes brought to the government. (vi) Since cost audit ensures efficient running of the business and correct and accurate use of cost data, a healthy competition is generated among the various units in an industry. This imposes an automatic check on inflation. Limitation of cost audit: Costly Correctness of cost data is based on the correctness of the costing method. Scope of cost audit or cost audit areas: 1. Materials: cost auditor verifies the following items: a. Store keeping arrangement. b. Material pricing methods used. c. Material transfers. 2. Wages: a. Documents used in preparation of payroll b. Time recording c. Internal check system 3. Overhead: a. Classification of overheads b. Overhead budgets c. Apportionment and allocation of expenses d. Methods of absorption e. Accounting treatment of under and over absorption. 4. General: a. Methods of establishing standards, revision of standards. b. Accounting codes and instructions c. Methods of calculating standards cost variances.