Page 188 - DCOM206_COST_ACCOUNTING_II

Unit 10: Cost Reduction and Cost Control

introduction of any new design or improvement of existing design in relation to Notes
cost of production should be thoroughly investigated with the help of cost accountant.
(d) Production: Production can be improved upon by training the employees, replacing
the defective machines, using better quality of raw materials, providing adequate
and proper techniques and tools, reducing the wastage, scrap and defective product.

(e) Transport: External and internal transport costs must be reduced as far as possible.
Costs must be reduced by eliminating or reducing empty or idle trips, the distance
travelled by the vehicles and consumption of petrol and diesel. CPM method is
useful for this purpose.
(ii) Labour: According to the tradition theory, the direct labour is a variable cost. But, this
does not hold good today. Cost reduction is possible if the right worker having the right
attitude is employed to do the right work. Efficiency of employees of the industry or
organisation can be increased by motivating them suitable to do their best for the
organisation. By increasing the productivity, the labour cost can be reduced. It is possible
through monetary and non-monetary incentive schemes, e.g., bonus schemes, profit
sharing, good working conditions, better welfare facilities and safety measures, etc.

(iii) Overheads: Overheads can be reduced by utilising the resources to the maximum capacity.
The following are the methods which can be lie used by the management for reducing the
overhead cost:
(a) Size of Business: By the size of business, the overheads can be reduced. As some
overheads are fixed in nature, they can be reduced by increasing the scale of
production,
(b) Increasing the Production: By undertaking the production on optimum scale, the costs
can be decreased as the incidence of overheads chargeable to each unit of output
declines. The idle capacity can be reduced by proper planning and control of business
or organisation, and
(c) Extension of Market and Price: Overheads can be reduced by extending the market
area, increasing sales and charging suitable prices to attract different types of buyers
for the products.
(iv) Marketing: By careful thinking and co-operative efforts, much economy can be derived in
this area also. The areas which can be brought under the cost reduction programme include
market research, sales office, warehousing, advertisement, packing, distribution, sales
services, etc.
(v) Finance: Cost reduction may be extended even to the use of finance by better utilisation of
fixed assets and working capital.

Self Assessment

Fill in the blanks:
4. …………………… can be reduced by utilising the resources to the maximum capacity.
5. According to the traditional theory, the direct labour is a …………………… cost.
6. The raw material cost reduction should always begin at the …………………… stage.
7. …………………… can be improved upon by training the employees, replacing the defective
machines, using better quality of raw materials, providing adequate and proper techniques
and tools, reducing the wastage, scrap and defective product.

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