Cost Control

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The long-run prosperity of a firm depends upon its ability to earn sustained profits. Profit depends upon the difference between the selling price and the cost of production. Very often, the selling price is not within the control of a firm but many costs are under its control. The firm should therefore aim at doing whatever is done at the minimum cost. In fact, cost control is ail essential element for the successful operation of a business, Cost control by management means a search for better and more economical ways of completing each operation. In effect, cost control would mean a reduction in the percentage of costs and, in turn, an increase in the percentage of profits. Naturally, cost control is and will continue to be of perpetual concern to the industry.

Cost control has two aspects’ such as a reduction in specific expenses and a more efficient use of every rupee spent. For example, if sales can be increased with the same amount of expenditure, say, on advertising and salesmen, the cost as a percentage of sales is cut down. In practice, cost control will ultimately be achieved by looking into both these aspects and it is impossible to assess the contribution, which each has made to the overall savings. Potential savings in individual businesses will, however, vary between wide extremes depending upon the levels of efficiency already achieved before cost controls are introduced.

It is useful to bear in mind the following rules covering cost control activities:

  • It is easier to keep costs down than it is to bring costs down.
    • The amount of effort put into cost control tends to increase when business is bad and decrease when business is good.
    • There is more profit in cost control when business is. good than when  I business is bad. Therefore, one should not be slack when conditions are good.

Cost control helps a firm to improve its profitability and competitiveness. Profits may be drastically reduced despite a large and increasing sales volume in the absence of cost control. A big sales volume does not necessarily mean a big profit. On the other hand, it may create a false sense of prosperity while in reality; increasing costs are eating up profits. Profit is in danger-when good merchan­dising and cost control do not go hand in hand. Cost control may also help a firm in reducing its costs and thus reduce its prices. A reduction in prices of a firm would lead to an increase in its competitiveness. The aspect is of particular relevance to Indian conditions because of high costs, India is being priced out of the world markets.

 

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