What is the theory of Cost Control and Reduction in Managerial economics?

Answer 1

Cost control implies controlling the costs at the given level. The accent is an adhering to the pre-determined standard and the emphasis is on ensuring that the cost does not exceed the said standard budget. Acceptance of the given standard as "ideal" builds up a static approach and the attention of the management is confined to the analysis of variances alone in line with the principle of "management by exception."

Cost reduction is however, a dynamic exercise, an all-out effort to reduce cost from whatever level they are. Nothing is assumed as "standard", nor anything. Is accepted as "ideal". Every element of cost is scrutinized, every operation is screened and every procedure is analyzed to identify the ways and means of reducing costs.

Cost reduction and cost control differs in approach as well, For effective cost control, cost is considered for each 'cost centre' (unit produced) separately (for which the standard/budget is predetermined in order to obviate to the possibilities of compensating effects of favorable variances against unfavorable ones. For successful cost reduction, on the other hand, the reduction in cost is considered in aggregate for the organization as a whole, the appear at the point of reduction, it may amount to a substantial amount when aggregated at corporate level. To apply this analogy to the banking industry, if each of the branches avoids "tearing off" of at least two blank vouchers per day. (and tearing of vouchers is by no means, uncommon in banks), for 300 working days, on an average the branch will save 600 vouchers i.e., 6 pads Even after making allowance for statistical fallacy, the above example, provides as essential clue to the fact that the triviality of reduction in cost at the point of reduction is no excuse for achieving cost reduction. This is the approach that must be built up at all levels to inculcate cost consciousness while embarking on cost reduction plan.

Further, cost reduction is not a 'one-time' exercise. It is an attitude of mind, a habit, a philosophy. The approach for reduced cost must originate from the conviction of the need for it. Genuine cost reduction is essentially a function of cost consciousness on the part of persons involved and a cost reduction plan imposed upon without proper understanding among the employee will die a natural death without yielding any permanent contribution.

The ideal way of creating cost consciousness is to perculte the message of cost reduction to all the levels and defining the highlighting the role and responsibility of every employee in every part of the organization. Every employee must be appraised of his importance in the entire organization and the contribution he can make in his individual capacity by virtue of the position held by him. The entire work force must be engaged with total commitment and unbiased involvement to make the cost reduction programme a way of life. The concern for involvement of employees can be shown by making available ample opportunities for expressing their views and establishing efficient machinery to receive, appraise, practice and reward suggestion received from employees. The spirit of co-operation and involvement can be further spread through house journals/magazines periodical circulars, seminars meetings at various levels, publicity plascards and advertisements etc. Involvement the plan itself since the former will create cost consciousness which will ultimately determine the success of the programme.