It is imperative to control the cost when you venture into the market. Cost control management deals, particularly with the control of various costs associated with running a business.
Moreover, it happens to be a shared responsibility and requires the effort of every individual related to the company. It can have three basic aspects under its purview:
- To find out the cost centers and their variance (if any) with the industry standards.
- To find out why we are incurring more cost than our competitors.
- To deal with ways by which, we can drive our cost to the level at which our competitors are, or lower.
Steps Involved In Cost Control
There are a few steps that lead us to the corrective form of cost control and increase the profitability of a company. All steps involved play an important role in framing a company's policy to stand tall in the market. The steps include:
Establishment of Standards
The primary step that a company has to follow is setting up objectives and targets that it wants to achieve in the near future. The set targets are the initials of the planning stage and act as a reference line for appraisal of the actual performance. The targets should not be set so high that they become impossible to achieve. Making proper decisions is an important factor, which affects the achievement of targets in the long run.
The second important step that a company has to take is cost analysis. This yields the cost sheet and gives a detailed report of the costs obtained by the company at the cost centers. Cost centers are subunits of various departments in a company where costs are incurred, i.e., purchase, production, administration, sales and marketing, distribution, etc. The total cost is broken down into average price per unit.
Comparison of Cost
After determining the costs incurred in each department of the company, we compare the individual costs of the company to that of the competitors. The main aim of cost control exercise is to maximize the profits by reducing the cost incurred in production. If the competitors' costs are lower than the company's, it means that the gap has to be narrowed. The difference between a company's cost and the competitors' cost is known as cost variance.
Monitoring the Process
After the cost differences are figured, it is important to have a close look at the process through which, the company works. By monitoring the departmental cost properly, it becomes easier for a company to focus on the areas in which it is lagging behind. Moreover, the monitoring process leads to better utilization of resources. The SWOT analysis (used to assess the Strengths, Weaknesses, Opportunities, and Threats) can be of great help to the company. Through this method, the company gets a clear picture of its strengths and weaknesses. It is rather important for a company to work out on its weaknesses rather than competing with a strong competitor. Also, the company has to take corrective measures regarding the elements of cost.
Implementing the Approach
It is very important that the corrective measures that have been framed are properly implemented. The previous step helped us find the chinks in our cost armor. It is now time to fix it and come back strongly. The company should set a cost target for the year based on current results and competitors' costs and try achieving it by the end of the year. It is imperative that revision and review be done throughout the year to see if things are going according to the conceived plan.
Elements of Cost
It is quite important to know about the elements of cost when we talk about cost control management. Proper and timely review of these costs can help in good control of the cost incurred by the company on its product. Broadly speaking, there are three elements of cost:
Material are the tangible substances that go into the makeup of a product. This forms one of the most important components of cost, and the cost control process largely depends on it. It is important that a company utilizes its material in a proper manner. Wastage of material adds to the cost and must be looked after. The inventory should be properly controlled to prevent wastage. Inventory control techniques, such as ABC analysis, EOQ (economic order quantity), FSN analysis, two-bin system, etc., should be properly implemented in the company to reduce expenses over raw material.
Labor constitutes an important part of cost control management. To minimize the cost, labor can be well-trained, so that they become skillful. It is also important that the clock in and clock out times are checked on a regular basis. Another way to cut down on labor cost is to avoid overstaffing, which otherwise adds to the cost of the company. Frequent staff audits and reviews would provide better results to the company.
The expenditure apart from the material and labor in a company can be termed as expenses. These expenses have to be looked after carefully. They can be categorized into two parts: (1) Direct expenses; and (2) Indirect expenses. The distribution channel should be examined properly to prevent any excessive flow of cash into the system. The machinery repairs, hiring of machinery, rent, and electricity should be looked into properly in order to prevent excessive cash flows.
Nowadays, cost control software largely helps in computerizing the process. Cost management is crucial for any company to survive in the market and hence, these days, companies take it very seriously. Business is a constant fight for survival, self-improvement, and cost-cutting. So, a company needs to be dynamic in trying to implement the changes, if it wants to survive in the market. In most sectors today, the market is uber competitive, and the only way to not see your company being gobbled up by the competitors is to implement positive changes in yourself.