Page 187 - DCOM206_COST_ACCOUNTING_II

Cost Accounting – II

Notes Self Assessment

Fill in the blanks:
1. Cost control is a …………………… action while cost reduction is a corrective action.
2. Cost control lacks an element of …………………….

3. Cost …………………… 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.

10.2 Scope and Areas of Cost Reduction

The scope and areas of cost reduction is so vast that every part of an organisation or industry is
involved in this problem. A cost reduction method should be systematic investigation into the
methods and techniques of production and other functions.

Did u know? Cost reduction involves an analysis of every aspect of the organisation with
the objective of ascertaining the most efficient method of performing the various functions.
The broad scope and areas to be covered by the cost reduction are as follows:

(i) Raw Materials,
(ii) Labour,
(iii) Overheads,

(iv) Marketing, and
(v) Finance.
(i) Raw Materials: In most manufacturing organisation, the raw materials form a substantial
portion of the total cost. A small percentage of cost reduction in raw material cost will lead
to considerable savings to the organisation. The important areas on which raw material
cost reduction can be attempted are as under:

(a) Purchasing: Purchasing of raw materials is important particularly to a manufacturing
organisation because it has its bearing on every vital factor concerning manufacture,
i.e., quantity, quality, cost-efficiency, quality production, prompt delivery, etc. For
efficiency buying, purchasing departments must be equipped with the list of various
sources of supply and the latest prices ruling in the market for different materials.
Ordering costs must be reduced as far as possible by purchasing in economic lot of
size quantities.
(b) Storage of Raw Materials: After receiving the raw materials from the seller, they must
be stored properly. The carrying cost must be reduced by keeping the inventory at
optimum level. Various levels of materials, viz., maximum level, minimum level
and reordering level must be fixed properly. Raw materials must be properly
classified, coded and standardised. ABC analysis of material control is highly useful
in cost reduction.
(c) Design: The raw material cost reduction should always begin at the design stage. The
quality and quantity of raw material depends upon the design of the product.
Continuous research should be undertaken in selecting the design. The effect of

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