Page 192 - DCOM206_COST_ACCOUNTING_II

Unit 10: Cost Reduction and Cost Control

more importantly, they help to sustain the gains created through economy measures. Notes
Among the control devices found most frequently in organisations are budgetary control,
distribution cost control, standard cost control, responsibility reporting and internal
auditing.

Self Assessment

Fill in the blanks:
10. …………………… means elimination of superfluous varieties, size, dimension and grades
of raw materials and component parts.
11. …………………… in a production sense means the reduction of a line of product to fixed
types, sizes and characteristics.
12. The ……………… of the workers can be increased by motivating them in a suitable manner.
13. Plant modernisation and technological advances in the production process is often
associated with …………………… automation.
14. …………………… means the determination of the value of items proposed to be sought
with a view to examine the worth of money spent on buying the raw materials.
15. Value analysis is based upon the …………………… of raw materials in relation to their
functional value and price.

Task Take any company of your choice and discuss its cost reduction programme in
detail.



Case Study How the Internal Audit Function can Play a Key Role
in Cost Reduction Efforts

any organisations focus their cost reduction efforts around the numbers. This is
the reason why cost reduction initiatives are regarded as the sole domain of the
Mfinancial community. Cost cutting is often no more than a review of the budget,
the introduction of a saving against each line item, and then monitoring actual versus
planned spend. There is no problem with this approach if it is short-term cuts that are
wanted. It is easy to reduce costs by a small amount on each line item by delaying
expenditure into a future period. However, these are not real savings and the organisation
loses the opportunity to review underlying business practices during difficult economic
periods that have the potential to create sustainable cost savings. Once the pressure is off,
these “so called” cost savings quickly come back into the budgets and management are
none the wiser. This is the tactical response to cost cutting. It can be done and it does have
benefits but these are mainly short term in nature.

On the other hand, organisations that approach their cost reduction efforts in a strategic
manner have the opportunity to significantly strengthen their competitive position from
a cost perspective rather than just survive the current economic downturn. Activity-based
cost reduction is a strategic response to cost cutting that provides sustainable benefits.
Contd...

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