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Unit 10: Cost Reduction and Cost Control

wastage and unnecessary expenses without, at the same time, impairing the generation of Notes
revenue. Some commonly used synonyms for this activity are profit improvement, cost
improvement and methods improvement.

10.1 Concept of Cost Reduction

The CIMA, London defines cost reduction as, “Cost reduction is to be understood as the
achievement of real and permanent reductions in the unit cost of the products manufactured or
services rendered without imposing their suitability for the use that is intended.” From this
definition, it is clear that:
(i) The cost reduction must be a real one in the course of manufacture or services rendered in
that it must arise in the enterprises or organisation,

(ii) It should not be at the cost of essential features and quality of the products or services
rendered, and
(iii) The reduction must be a permanent one.

Note The cost reduction must be confined to genuine savings in the costs of production,
office administration, selling, distribution, research and development, brought about by
the elimination of wasteful and inessential elements from the design of the product and
from the methods and techniques carried out in connection therewith.

10.1.1 Distinction between Cost Control and Cost Reduction

The following are the main distinction between cost control and cost reduction:
(i) Cost control is a preventive action. It tries to keep costs confined to the limits set by
norms.

Cost reduction is a corrective action. It aims at permanent reduction in the cost of production
or services.
(ii) Cost control is the means to an end, namely cost reduction. Cost control is the initial step
in achieving an ultimate objective.
Cost reduction, it must be pointed out, begins where cost control ends.
(iii) Cost control emphasises the current or present and the past of costs.

Cost reduction lays stress partly on present costs and mainly on future costs.
(iv) Cost control has limited applicability. It applies to items of cost, i.e., production function.
Cost reduction has universal applicability. It is possible to reduce costs in each and every
area of production or business.
(v) Cost control lacks an element of dynamism.
Incidentally, cost reduction is a dynamic concept.

(vi) Cost control is exercised by establishing budget and initiating remedial action.
Cost reduction is accomplished by improving upon standards and the methods of
production.

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