Accountants and credit controllers are on the frontline of ensuring an organisation’s financial health. This involves a number of key processes, including cost accounting. It is vital in today’s economy for accountants to be familiar with both cost reduction and cost control – two similar but significantly different ways to monitor and modify organisational costs.
Cost control is a process that uses competitive analyses to control an organisation’s total cost. The aim is to maintain costs at their existing level. Cost control involves a chain of functions, ranging from budget preparation to performance evaluation. Its basis lies in identifying differences between actual and budgeted costs, finding the reasons behind these discrepancies, and then implementing actions to correct each discrepancy.
Cost reduction, on the other hand, is a process that focuses on bringing down the costs of an organisation by reducing them from their current value by a set percentage – usually ranging from 10 to 30 percent. Cost reduction is commonly implemented in response to an immediate need, and may be a permanent or short-term measure.
The basic differences between cost control and cost reduction can be summarised as follows:
|Cost control||Cost reduction|
|· Maintaining costs at their current or previously established value|
· Is preventative in nature
· Has a smaller scope than cost reduction
· Serves as a roadmap for the organisation to incur costs to a certain standard, in accordance with careful planning
|· Decreasing costs by a certain percentage of their current value|
· Is corrective in nature
· Has a larger scope than cost control
· Challenges the established standards by decreasing costs, usually with the aim of increasing profit