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Practices and techniques for construction projects cost control- a critical review

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• https://doi.org/10.1080/16874048.2024.2337060

Introduction

Methodology, literature survey & analysis, disclosure statement.

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Cost performance problems and overruns were common and considered the major cause of projects due to not gaining the expected profit margin, With an 86% likelihood of overrun in international buildings projects, and at least 30%-40% of global projects experiencing subpar cost performance and overruns. The poor performance of project costs was attributed to inadequacies of project control systems, as they were responsible for monitoring project costs. Inadequate controlling systems suggest that established controlling tools fail to execute their function. Therefore, a successful control system was crucial to reducing project failure. Thus, The question that drives this study is ‘What were the successful cost practices and techniques commonly utilized in controlling construction expenditures and conserving project anticipated profit?’. Following PRISMA protocol guidelines, the study systematically reviewed the previous literature by searching academic databases for relevant articles. The study aimed to examine successful controlling strategies and tools commonly utilized. Fifteen common techniques were identified and found that budgeting monitoring, resources monitoring, interim valuation, unit costing, and cost variance analysis were successful, provided a comprehensive outline of each method, identified the fundamental ideas underlying technique differentiation, and summarized their benefits and drawbacks. Two controlling system implementation strategies were discussed, they were corrective and proactive approaches. A project development stage-based technique selection guide was proposed. The paper also proposed a control framework that integrated proactive and corrective measures into project control to inhibit overruns. The research also examined project controlling technique selection factors that should be considered when choosing the one.

• Cost overrun
• cost performance
• profit margin
• controlling practices
• controlling techniques
• control system

construction industry was a complex and multifaceted activity that demanded a significant allocation of resources and entailed financial outlay. Project completion is viewed as a matter of importance, as success depends on its ability to achieve its objectives in terms of constructing the scope and achieving expected profitability within the specified project time frame [ Citation 1 , Citation 2 ]. Thus, the project’s success depends on completing it within budget and maintaining the expected profit margin throughout the project [ Citation 3 ]. Costs that exceed the budget, threatening the project’s success and formatted a major cause of construction project failure.

Table 1. Overruns percentage for projects in different countries.

Problems with costs overrun occur when actual expenses surpass planned expenditures and the final settlement exceeds projected amounts. This is often the result of subpar project performance, which prevents projects from generating the anticipated profit margin. It became a challenge and a special barrier for investors that solely rely on construction as a main investment activity to generate profits. Therefore, they depend on keeping project costs controllable and optimizing returns to stay profitable. The issue of uncontrollable performance of project cost impacts the prospects of investment diminished.

The poor performance of project costs was attributed to inadequacies of project control systems, as they were responsible for monitoring project costs. Inadequate controlling systems suggest that established controlling tools fail to execute their function. Therefore, a successful control system was crucial to reducing project failure. Thus, The question that drives this study is ‘What were the successful cost practices and techniques commonly utilized in controlling construction expenditures and conserving project anticipated profit?’.

The study aimed to examine common cost control methods and strategies applied in projects. It concentrated on providing a comprehensive outline of each method, identifying the fundamental ideas underlying technique differentiation, and providing a summary of the benefits and drawbacks of controlling methods. The study also categorized controlling techniques by suitability for different user roles. In addition, the exploration of various knowledge domains associated with the project’s control field was undertaken.

The database search comprised titles, subjects, and abstracts, utilizing search keywords that used the Keywords ‘construction industry’, ‘project budget’, ‘profit margin’, ‘Cost Performance’, ‘controlling procedures’, and ‘cost control strategies’. A total of 93 published publications were obtained, comprising 35 articles sourced from ScienceDirect and 58 articles sourced from ResearchGate.

The collected articles were systematically identified and filtered. From 93 scientific database engine publications, 16 were removed from the study. The analysis only included items with publication dates from 2010 to 2022 and ensuring that there was no duplication from the two websites.

The initial evaluation of the abstracts of the papers involved a filtering process, wherein 9 out of the 77 reviewed papers were eliminated. This exclusion was based on discrepancies between the article titles and the abstracts, as well as a lack of direct relevance to the subject matter of the study.

After applying identification and screening procedures to the articles obtained, these articles were filtered by selecting papers available via open access. Which resulted in 55 full research articles for the study.

All relevant scholarly articles were thoroughly examined and assessed in their entirety. Three exclusion criteria were employed, the alignment between the article body and the study core, The deviation of article outcomes from the research objective and provided sufficient literature and analysis in the article body. The selection process resulted in a reduction of the research papers to 50.

Figure 1. Literature review diagram based on PRISMA.

Figure 2. Impact of apply controlling practices on project costs (adapted from Migilinskas, D. & Ustinovichius, L. 2006).

Project cost controlling defined simply as maintaining project completion within the budgetary limits through constant monitoring of the performance and putting the required procedures into place to manage expenses efficiently and maintain costs at a sustainable level [ Citation 14 , Citation 15 ]. The process of controlling involves tracking expenses during all project stages to discover the potential for improvement [ Citation 16 ], It entails the practice of managing project expenses using optimal procedures to avoid exceeding the budget [ Citation 17 ].

Controlling a project is a sequential procedure that involves multiple processes organized into three levels: defining performance standards, Evaluating actual results in relation to these objectives, and then adopting the appropriate measures [ Citation 18 ], The process involves developing, controlling, and systematically adjusting the budget to account for any deviations [ Citation 19 ]. As the budget is the translation of a resource and activities plan into an organizational form by allocating project resources in the form of distributing expenditures across the whole project duration [ Citation 20 ].

The previously shown figure indicates that there was a considerable possibility of influencing the project’s cost during the design stage, which includes choosing the materials, specifications, and techniques. However, the construction stage was considered the most influential in project’s final settlement due to resource consumption and protracted implementation period. thus necessitating careful monitoring of the allocated budget.

Cost control practices in construction

Table 2. summary of analyzed research concerning cost control..

These dimensions encompass the concepts and processes of controlling systems, controlling model development, Implementation of project cost controlling practices and techniques, and assessment of controlling techniques’ impact and efficacy on the performance of projects cost.

The first dimension investigated cost control concepts and processes [ Citation 4 , Citation 5 , Citation 14 , Citation 18 , Citation 20–25 ] provide an overview of the fundamental requirements for a successful cost control process and systems. The findings explained the concept, process and procedures. Furthermore, a study by [ Citation 20 ] developed a change framework to assist in allowing and adjusting to changes in the control systems. Another study [ Citation 21 ] concluded that the biggest obstacle to cost control systems in construction projects is the difficulty of making decisions because of the inaccurate reports and lack of follow-up data in the project. Jawad et al. (2022) state that the lack of a consistent reporting system and data collecting and analysis procedures hinders construction project controlling systems and timeframes. Therefore, these difficulties must be addressed to improve project control [ Citation 25 ].

Limited studies went through a discussion of the second dimension of cost controlling, which suggested alternatives to traditional controlling systems by developing a comprehensive controlling model that integrates all controlling procedures in the project, enabling the user to follow up on the performance of project costs and optimize the expenditures [ Citation 26 , Citation 27 , Citation 29 ], The proposed controlling models define the controlling procedure to optimize the efficiency of the process and guide the process tracking and variation correction versus the budget. additionally, can allow the identification of inefficiencies that may hinder from achieving the controlling system objective, For example, Olawale et al., (2010), suggested a model to direct the tasks and procedures involved in cost control. The model provides a list of measures for managing the control process [ Citation 22 ]. Mennatallah et al. (2017) analyzed control systems applied to residential projects and designed a model simulation for cost controlling to calculate the probability of overruns occurrence in the project [ Citation 27 ]. With the development of information and communications technology principles, many models have been developed based on this concept to track and monitor project cost performance, Igwe U. et al. (2020) highlighted the principle of the automated resource and its use in controlling project expenditures. It offers a model used to control costs on-site for record, tracking project expenditure within small and medium-sized contracting firms, and then analyzing the cost and issuing reports for project cost states [ Citation 28 ].

Controlling Practices employed by contractors in construction projects were one of the axial dimensions of the project control domain, Previous literature explored the controlling Practices that were presently employed in construction projects, investigated if the current strategies that suitable for controlling and the potential enhancements to it. The reviewed studies concluded that the integration of predictive principles in project cost management might yield advantageous outcomes in terms of project performance control. Where, it works to provide a forecast into prospective developments about unpredictable alterations in the workflow, rising challenges, abrupt deviations, or those that materialize beyond the purview of the project’s scope. Also, they outlined guidelines for enhancing controlling strategies for construction organizations, aligned with defined project goals for resolving cost control application deficiencies at project various phases [ Citation 2 , Citation 3 , Citation 15 , Citation 33 , Citation 35 , Citation 37 , Citation 41 ]. Furthermore, results from the examination of employed practices revealed that employment control procedures within a comprehensive well-defined control framework, lead to the effective functioning of the control system for building Contractors [ Citation 2 ]. The inability to reap the benefits of the controlling process can also be attributed to the use of antiquated concepts and ignorance of the outputs of the techniques employed [ Citation 37 ].

The research dimension domain that is most relevant to the discussion topic was the controlling techniques that commonly utilized in construction projects. Many studies investigated the traditional techniques frequently used in construction projects [ Citation 16 , Citation 17 , Citation 30 , Citation 31 , Citation 38 , Citation 39 ], The reviewed studies found that there were many techniques currently used in the construction industry including budgeting monitoring, resources monitoring, interim valuation, unit costing, and cost variance analysis. The conclusion of the reviewed researches argues that the utilization of an appropriate cost control method enhances the effectiveness of project cost control [ Citation 31 ], As successful application of controlling techniques is contingent upon a comprehensive understanding of the purpose and nature of the applied properly controlling approaches inside the project processes [ Citation 34 ]. Ineffective cost control in building projects was caused by inadequate management of the cost control methodology, not by the techniques employed [ Citation 40 ], where the ability of contractors to apply management techniques and their understanding of controlling techniques were correlated with their cost performance [ Citation 32 ]. Other researchers reviewed recent methods utilized in controlling the cost of projects, Results presented the latest utilized techniques in controlling projects and a list of recommended techniques to manage the cost of projects effectively set that include earned value analysis, value engineering, cost benefit analysis, and cash flow forecasting [ Citation 13 , Citation 19 , Citation 36 ]. Recently, Building information modeling has been utilized as a principle to enhance controlling costs for projects. This involved integrating project work progress by quantifying bills of quantities (BOQs) and assigning costs to each item on the model. The result is consolidated reports that provide insights into the project’s cost, time, and technical aspects [ Citation 43–46 ].

The final dimension of the cost-controlling topic involved assessing of controlling techniques’ impact and efficacy on the performance of project costs. This included reviewing the controlling strategies that contractors had used to improve the efficiency of the project [ Citation 1 , Citation 12 , Citation 30 , Citation 47–54 ]. The literature review concluded that emphasizes the significance of including a proficient control system within the project management. According to a study by Malkanth et al. (2017), using controlling approaches had an impact on reducing project budget overruns. The study’s outcomes were to determine the influence of several cost-control strategies on project budget conservation [ Citation 1 ]. Also, Oluwadare, O. J. (2019) investigated the impact of applying the Earned value analysis and other techniques on the cost performance of the projects and created a system to evaluate the performance measures of project costs as a means of improving project management [ Citation 30 ]. In addition, Raut et al.(2014) assessed applied controlling systems for building projects, and suggested a new approach for controlling systems depended on managing and monitoring the cost of material for projects [ Citation 49 ]. The obstacles to the application of efficient control practices were lack of information, poor coordination between contractor team, and the notable absence of awareness regarding controlling techniques and practices [ Citation 12 ].

Figure 3. Number of papers according to what they cover.

Figure 4. Monitoring and controlling process through project phases.

The principal objective of employing a cost control process in a project is to maintain a profit margin while managing the project’s budget during execution [ Citation 15 , Citation 17 , Citation 20 , Citation 21 , Citation 30 , Citation 32 , Citation 33 , Citation 36 ], This is achieved by using different control practices and techniques to manage the project costs during various stages, Enables the user with the ability to monitor and forecast their present and future project revenues and financial commitments [ Citation 1–3 , Citation 12 , Citation 15 , Citation 16 , Citation 40 ].

The study concluded through an analysis of the literature, There was a distinction difference between the terms ‘practices’ and ‘techniques’ in the context of project control costs and the contractors that apply the controlling system. Confusion between the two may result in missed cost performance optimization opportunities. If project management did not determine the underlying strategy from the employed control practice that specific to this project or fails to understand the full spectrum of cost control practices, they may rely on using different techniques to perform the function without considering the broader context for the utilized practices or inadequate which techniques are best suited to specific situations. This narrow application can limit their ability to address cost-related issues comprehensively. Consequently, corrective actions may be delayed, and cost performance can suffer.

Table 3. Differences between practice and technique.

Most studies on cost controlling concentrated on the traditional concepts used when deviations occur in project performance, Intend to enhance cost performance based on developing project performance standards [ Citation 1 , Citation 12–14 , Citation 16 , Citation 17 , Citation 27 , Citation 30–33 , Citation 38 , Citation 39 , Citation 47–49 ], Therefore, the studies often neglect the importance of proactive projects controlling, Where no proactive steps were taken to prevent the emergence of expected problems. The traditional control practice primarily relies on corrective measures, which is carried out after cost overruns have already occurred. The approach is considered incapable of detecting unforeseen situations, emerging challenges, or events that may arise beyond the boundaries of the project plans, which could influence the project. However, there is a growing body of research [ Citation 2 , Citation 3 , Citation 15 , Citation 18–21 , Citation 26 , Citation 28 , Citation 30 , Citation 33 , Citation 36 , Citation 37 , Citation 40 , Citation 41 ] that discussed incorporating the principle of prediction in controlling the project costs that can be beneficial for controlling projects performance. Where, it works to give future forecasting over the unforeseeable changes in the workflow, emerging problems, sudden deviations, or those that develop outside the scope of the project’s work.

Table 4. Identifying of controlling practices.

Table 5. cost control techniques analyzed from literature review., table 6. cost controlling techniques advantages and disadvantages., cash flow forecasting.

Monitor project budget against actual and projected data. The level of compliance between the two graphs indicates the performed progress done compared to the planned progress.

Earned value analysis (EVA)

A method that allows measuring the actual progress and performance against planned progress and forecast time and cost at completion.

Cost value reconciliation

Method for monitoring and measuring expenditure against planned budgets and forecasts profit margin progression till project completion.

Financial and costing reporting

Financial and Cost reports provide progress information and comparisons made with the budget.

Record Keeping

Data of executed activities carried out from previous similar projects to enable early prediction of deviations from baselines.

Resources Monitoring (Labor, Material, Equipment)

Material, manpower, plant, and equipment costs were monitored, and wastage and consumption were calculated and compared to the baseline to avoid resource overruns.

A method of calculating and reviewing the cost of construction using standardized unit prices, such as databases and historical data performed based on the quantity and quality required for the work activities.

Interim valuation against progress percentage

Evaluation and measuring of work progress by quantifying the work volume in the monthly interim valuation against work volume in accordance with the contractual process BOQs and calculating the percentage progress of work done that indicates project progress.

Variance analysis

The method analyzes the differences between planned cost and actual cost by comparing actual unit costs with the rate of work element in the tender.

Budgeting Monitoring

Monitoring and comparing cost plan against actual cost during the project duration. Using contract price during construction activities for managing construction cost.

Activity based cost

Separates the anticipated expenditures for each activity into its direct and overhead costs in order to determine the actual consumption by each.

Site meeting

Assess the advancement of the progress, evaluate the alignment with budgetary allocations, and inform all stakeholders about the work accomplished.

An estimated spending plan to complete the project, It provides a framework for controlling project costs, by defining acceptable spending levels spread on execution timeframe.

Value engineering

A methodical analysis of the functions of various components and materials without loss of performance or functionality. It is represented by the ratio of function to cost. The primary aim that basic functions be preserved and not be reduced as a consequence of pursuing value improvements investigating alternatives within the budget without sacrificing function.

Cost benefit analysis

A method to quantify the alternatives and choices used to identify decisions associated with an alternative to determine whether beneficial. It appraised the projected decision costs with the predicted benefits.

Figure 5. Citation frequency for cost control Techniques.

Several studies have indicated that the successful implementation of a controlling process is contingent upon a comprehensive understanding of the outcomes, methodologies, and purpose of the use of controlling techniques within project processes [ Citation 17 , Citation 32 , Citation 34 , Citation 37 , Citation 40 ]. The lack of compatibility between the applied control techniques and the role they play within the project’s strategy leads to the failure to achieve the anticipated benefits of implementing controlling techniques in the project [ Citation 2 , Citation 31 , Citation 37 , Citation 40 , Citation 48 ]. Moreover, studies conducted by researchers [ Citation 2 , Citation 31 , Citation 48 ] revealed that the utilized control techniques play their role in controlling project costs efficiently contingent successful application of the methods used according to the approach they rely on to monitor project costs [ Citation 17 , Citation 32 , Citation 34 , Citation 37 , Citation 40 ].

Table 7. Classification of controlling techniques.

The results highlight that project control practices should possess the ability to expect and address emerging or unforeseen issues that deviate from project performance standards before escalating, which is one of the vital attributes of any control process and identification of prospective issues. The study argues that combining proactive and corrective practices in project control represents an effective approach as corrective control can provide improvement in monitoring project performance and expenditure control, Whereas Proactive control can be used to develop corrective actions, prioritize tasks, and make decisions about the project.

The paper suggests a cost control framework (See Figure 7) that integrates the concept of forecasting into the control project controlling processes. The objective is to implement a comprehensive approach that combines proactive and corrective measures to mitigate and avoid cost overruns, rather than merely relying on corrective measures when deviations in the performance of project indicators were identified. The developed framework aims to improve control by systematically applying a set of procedures to reduce or eliminate deviations in project cost performance. The framework comprises a set of processes formulated of nine procedures conducted sequentially to assess, identify, and evaluate project expenditure against the projected baseline, forecast potential deviations in the project key performance, and adopt corrective or preventive steps. These procedures serve as a guide for construction project control strategy. The project management can regulate, track, assess, adjust, and manage the project’s costs through the processes outlined below.

Setting performance indicators involves identifying and establishing specific metrics or measures used to evaluate the progress of the project. These indicators serve as benchmarks against which the project’s performance, providing insights into its efficiency and overall success.

The process involves accurately quantifying the actual performance of a project, utilizing certain performance indicators and standards that were established beforehand for project performance to quantify and track project costs accurately.

Convert the variance between the actual metrics of cost performance and standards benchmarks into measurable metrics or values, This involves comparing the actual data with the target or benchmark values set for each indicator.

The verification process helps identify any gaps or deviations that require attention and validate the accuracy and reliability of the performance variance measurements.

The process known as retrospective performance deviation estimation, It is done after the event has taken place. It involves estimating based on the collected data and the calculated deviation value. It helps determine the performance deviation from the planned standards.

Formulate theories on the underlying factors, validate these hypotheses using empirical evidence, and ultimately determine the fundamental cause(s) of the issue. The identified cause(s) will then form the basis for the solutions in the improvement phase.

Predicting future project performance trends entails examining past data to discern patterns, trends, and correlations among various performance indicators. Seeking consistent patterns or signs that could impact the project’s future performance. Statistical approaches, data visualization, or other analytical tools can be employed to do this analysis.

The process involves setting limits on possible solutions, identifying intervention or improvement strategies that developed based on the previous analysis, formulating implementing of action steps.

Figure 6. Proposed cost control framework.

The research argues that the success of implementing controlling systems in projects to achieve the most functional and efficient performance in controlling projects contingent upon their operation within a well-defined framework of suitable controlling practice strategies for the project attributes. Appropriate selection of control strategies and tools for managing project costs is key to construction project control system success. Failure to determine appropriate strategies and techniques for project attributes during different project stages may prevent the utilized techniques from fully assuming their function in project control.

Table 8. Utilized techniques for project controlling during different project stages (Project phases were adapted from RIBA plan of work).

Selecting controlling techniques primarily driven by the need to address specific cost management objectives adapt to different functional contexts for the organizations. However, construction projects, which considered the primary goal of construction organizations, differ in terms of complexity, size, setting, and other factors despite the identical activities in the projects. Therefore, Organizations should select the most appropriate techniques based on their specific needs and goals taking into consideration the unique requirements of each project in the context of changing circumstances to achieve control over project performance and expenditure.

Table 9. Differentiate elements of cost-controlling techniques.

Cost performance issues and overruns were widespread in building projects and the main reason for failure due to losses of profit margins. According to earlier studies and international economic bulletins, up to 86% of international building projects face cost overruns, and 30% to 40% encounter inferior cost performance and overruns globally. The poor performance of project costs can be attributed to the inadequacies within the cost control system, as they were responsible for monitoring and carrying out corrective measures. The inadequacies of controlling systems suggest that the implemented controlling tools fall short of performing their functional role. Therefore, the application of a successful control system is a pivotal element in mitigating the risk of project failure.

The in-depth analysis of previous scholarly pertaining to controlling practices for projects resulted in the discernment of two distinct strategies for implementing project control systems. These strategies were predicated on the concept of detecting the deviations that arise during the implementation of a project. These approaches encompassed both corrective and predictive approaches for project control. Furthermore, The study has identified and examined a detailed outline for fifteen commonly utilized cost control techniques in building projects, clarifying that the differentiation between the utilized techniques depended on the methodology employed to monitor the process and the characteristics that determine the process inputs and outputs. Also, the study presented an outline of the advantages and disadvantages associated with these techniques. Additionally, the study found that the successful cost techniques commonly utilized in construction were budgeting monitoring, resources monitoring, interim valuation, unit costing, and cost variance analysis.

The paper revealed, that there was a clear confusion among contractors who use control systems in projects between both the terms ‘practices’ and ‘techniques’ in the context of controlling the costs of project. A definition for both and clarification of the main differences between them was provided, with a comparison made between them in terms of their nature and purpose. Furthermore, The research highlighted the relationship between project phases and the application of appropriate control strategies and procedures that lead to efficient project management throughout the project lifecycle. Proposes a guide that presents a framework for selecting appropriate techniques based on the project’s development stage to accomplish the adequate control at this stage.

The paper proposed a control framework that integrated proactive and corrective measures in the project controlling system to prohibit cost overruns, The framework improves the control of project costs by systematically applying a group of sequential procedures that incorporate forecasting of performance deviations rather than correcting project performance indicators. The research also examined the determinants of selecting appropriate techniques to control project performance, taking into account the unique needs of each project and the need to adapt to the functional role of cost management in construction organizations. The study found that Control techniques vary by operational methodologies and functional characteristics, the study indicated that integration, application environment, objectives, and concept distinguish various methodologies that should be addressed before choosing one for a project.

The results were expected to recap a vital knowledge gap by redirecting the focus of management on the prioritization of controlling practices and techniques and the mechanism of decisions making. The study recommended going through further research on Incorporating the principle of forecasting into the control practices for inhibiting projects overruns proactively.

No potential conflict of interest was reported by the author(s).

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Cost Control vs. Cost Reduction

What's the difference.

Cost control and cost reduction are two important concepts in financial management. Cost control refers to the process of monitoring and managing expenses to ensure they stay within budgeted limits. It involves implementing measures to track and analyze costs, identifying areas of overspending, and taking corrective actions to bring them back in line. On the other hand, cost reduction focuses on finding ways to decrease expenses and improve efficiency in order to achieve long-term savings. It involves strategies such as renegotiating contracts, streamlining processes, and eliminating waste. While cost control aims to maintain costs at a manageable level, cost reduction aims to actively reduce expenses to increase profitability. Both concepts are crucial for businesses to achieve financial stability and maximize their bottom line.

Further Detail

Introduction.

In today's competitive business environment, organizations are constantly seeking ways to improve their financial performance. Two common strategies employed by companies to achieve this are cost control and cost reduction. While both approaches aim to manage expenses, they differ in their focus and implementation. In this article, we will explore the attributes of cost control and cost reduction, highlighting their similarities and differences.

Cost Control

Cost control refers to the process of managing and monitoring expenses to ensure they align with the predetermined budget. It involves setting targets, establishing benchmarks, and implementing measures to track and control costs. The primary objective of cost control is to maintain spending within the defined limits while ensuring that the quality and efficiency of operations are not compromised.

One attribute of cost control is its proactive nature. By setting budgets and monitoring expenses regularly, organizations can identify potential cost overruns early on and take corrective actions. This allows for better financial planning and helps prevent financial crises or unexpected expenses.

Another attribute of cost control is its focus on continuous improvement. By regularly reviewing and analyzing expenses, organizations can identify areas where costs can be reduced or eliminated. This approach encourages a culture of efficiency and cost-consciousness throughout the organization, leading to long-term financial stability.

Cost control also emphasizes the importance of collaboration and communication within the organization. It requires the involvement of various stakeholders, including managers, employees, and finance teams, to ensure that cost control measures are effectively implemented. This collaborative approach fosters a sense of shared responsibility and accountability, leading to better cost management outcomes.

Furthermore, cost control recognizes the significance of investing in technology and systems that facilitate expense tracking and reporting. By leveraging automation and data analytics tools, organizations can gain real-time insights into their spending patterns, identify cost-saving opportunities, and make informed decisions to optimize their resources.

Cost Reduction

Cost reduction, on the other hand, focuses on actively reducing expenses to achieve immediate savings. It involves identifying and eliminating unnecessary costs, streamlining processes, and renegotiating contracts with suppliers to obtain better pricing terms. The primary objective of cost reduction is to lower overall expenses without compromising the quality of products or services.

One attribute of cost reduction is its short-term impact. By implementing cost-cutting measures, organizations can quickly reduce their expenses and improve their financial position. This can be particularly beneficial during periods of economic downturn or when facing financial constraints.

Another attribute of cost reduction is its emphasis on efficiency and productivity. By identifying and eliminating wasteful practices, organizations can streamline their operations and improve their overall performance. This can lead to increased competitiveness and profitability in the long run.

Cost reduction also requires a thorough analysis of the organization's cost structure and expenditure. By conducting detailed cost audits, organizations can identify areas where expenses can be reduced without negatively impacting the quality of products or services. This analytical approach ensures that cost reduction efforts are targeted and effective.

Furthermore, cost reduction often involves exploring alternative sourcing options and supplier relationships. By renegotiating contracts or seeking competitive bids, organizations can secure better pricing terms and reduce their procurement costs. This strategic approach to cost reduction can result in significant savings and improved profitability.

Similarities and Differences

While cost control and cost reduction share the common goal of managing expenses, they differ in their focus and time horizon. Cost control is a proactive and continuous process that aims to maintain spending within budgeted limits and improve long-term financial stability. In contrast, cost reduction is a more reactive approach that focuses on immediate savings and short-term financial improvements.

Both cost control and cost reduction require collaboration and involvement from various stakeholders within the organization. They recognize the importance of engaging managers, employees, and finance teams to implement cost-saving measures effectively. However, cost control places a greater emphasis on fostering a culture of efficiency and cost-consciousness throughout the organization, while cost reduction often involves more targeted and specific initiatives.

Another similarity between cost control and cost reduction is their reliance on data and analysis. Both approaches require organizations to regularly review and analyze their expenses to identify areas for improvement. However, cost control places a greater emphasis on leveraging technology and systems to facilitate expense tracking and reporting, while cost reduction focuses more on detailed cost audits and supplier negotiations.

It is important to note that cost control and cost reduction are not mutually exclusive strategies. In fact, they can complement each other when implemented together. By combining proactive cost control measures with targeted cost reduction initiatives, organizations can achieve a balanced approach to managing expenses, ensuring both short-term savings and long-term financial stability.

Cost control and cost reduction are two strategies employed by organizations to manage expenses and improve financial performance. While they share the common goal of managing costs, they differ in their focus, time horizon, and implementation. Cost control emphasizes proactive expense management, continuous improvement, collaboration, and technology adoption. On the other hand, cost reduction focuses on immediate savings, efficiency, detailed analysis, and strategic sourcing. By understanding the attributes of both approaches, organizations can develop a comprehensive cost management strategy that aligns with their specific goals and objectives.

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• DOI: 10.3968/9686
• Corpus ID: 56284235

Effect of Cost Control and Cost Reduction Techniques in Organizational Performance

• Lawal Babatunde Akeem
• Published 14 March 2017
• Business, Economics
• International Business Management

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• Key Differences

Know the Differences & Comparisons

Difference Between Cost Control and Cost Reduction

While cost control, regulates the action to keep the cost elements within the set limits, cost reduction refers to the actual permanent reduction in the unit cost. At this juncture, it would be desirable to know the difference between cost control and cost reduction, so read out the article.

Content: Cost Control Vs Cost Reduction

Comparison chart.

Definition of Cost Control

Cost Control is a process which focuses on controlling the total cost through competitive analysis. It is a practice which works to maintain the actual cost in agreement with the established norms. It ensures that the cost incurred on an operation should not go beyond the pre-determined cost.

Cost Control involves a chain of functions, which starts from preparation of the budget in relation to the operation, thereafter evaluating the actual performance, next is to compute the variances between the actual cost & the budgeted cost and further, to find out the reasons for the same, finally to implement the necessary actions for correcting discrepancies.

The major techniques used in cost control are standard costing and budgetary control. It is a continuous process as it helps in analysing the causes for variances which control wastage of material, any embezzlement and so on.

Definition of Cost Reduction

Cost Reduction is a process, aims at lowering the unit cost of a product manufactured or service rendered without affecting its quality by using new and improved methods and techniques. It ascertains substitute ways to reduce the cost of a unit. It ensures savings in per unit cost and maximisation of profits of the organisation.

Cost Reduction aims at cutting off the unnecessary expenses which occur during the production, storing, selling and distribution of the product. To identify cost reduction, the following are the major elements:

• Savings in per unit cost.
• No compromise with the quality of the product.
• Savings are non-volatile in nature.

Tools of cost reduction are Quality operation and research, Improvement in product design, Job Evaluation & merit rating, variety reduction, etc.

Key Differences Between Cost Control and Cost Reduction

The following are the major differences between Cost Control and Cost Reduction:

• The activity of maintaining cost as per the established norms is known as cost control. The activity of decreasing per unit cost by applying new methods of production in such a way that it does not affect the quality of the product is known as cost reduction.
• Cost Control focuses on decreasing the total cost while cost reduction focuses on decreasing per unit cost of a product.
• Cost Control is temporary in nature. Unlike Cost Reduction which is permanent.
• The process of cost control is completed when the specified target is achieved. Conversely, the process of cost reduction has no visible end as it is a continuous process that targets for eliminating wasteful expenses.
• Cost Control does not guarantee quality maintenance. However, 100% quality maintenance is assured in case of cost reduction.
• Cost Control is a preventive function as it ascertains the cost before its occurrence. Cost Reduction is a corrective action.

Video: Cost Control Vs Cost Reduction

The two techniques cost control and cost reduction are used by many manufacturing concerns to diminish the cost of production. Cost Reduction has a larger scope than cost control as cost reduction is applicable for all the industries, but cost control is applicable only to the industries where pre- optimisation of the cost which is not yet incurred is possible. Cost Control works as a road map for the organisation to incur costs as per the set standard. On the other hand, cost reduction challenges the established standards by decreasing the costs and increasing the profit.

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June 10, 2016 at 1:52 am

Thankuuuuuuuuuu

January 25, 2017 at 5:29 am

Thanks, It was very helpful.

February 26, 2017 at 6:51 pm

Nice website It has given detail difference between any two things/matters loved it

Katoto says

November 12, 2021 at 10:04 am

August 16, 2018 at 4:07 pm

Nice, But can you please explain that cost control and cost reduction are two side of a coin

Sumon Sheikh says

July 19, 2019 at 10:45 am

Nice website. Thank you for publishing the articles we need.

ADEREMI OGUNSESAN says

November 7, 2019 at 4:36 pm

Well researched. Thank you

Dhanasekaran says

December 11, 2020 at 2:35 pm

it was useful for all those working in the accounts field.

Oliver says

April 12, 2023 at 5:28 pm

Nice post. Waiting for your next article.

July 31, 2023 at 6:09 pm

great 👌😊 thanks

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What Is Cost Control?

Understanding cost controls.

• Variance Analysis at Work
• Cost Control FAQs
• Business Essentials

Cost Control: How Businesses Use It to Increase Profits

Cost control is the practice of identifying and reducing business expenses to increase profits, and it starts with the budgeting process. A business owner compares the company's actual financial results with the budgeted expectations, and if actual costs are higher than planned, management has the information it needs to take action.

As an example, a company can obtain bids from different vendors that provide the same product or service, which can lower costs. Cost control is an important factor in maintaining and growing profitability.

Corporate payroll , for example, is often outsourced, because payroll tax laws change constantly, and employee turnover requires frequent changes to payroll records. A payroll company can calculate the net pay and tax withholdings for each worker, which saves the employer time and expense.

Key Takeaways

• Cost control is the practice of identifying and reducing business expenses to increase profits, and it starts with the budgeting process.
• Cost control is an important factor in maintaining and growing profitability.
• Outsourcing is a common method to control costs because many businesses find it cheaper to pay a third party to perform a task than to take on the work within the company.

Investopedia / Jiaqi Zhou

Controlling costs is one way to plan for a target net income, which is computed using the following formula:

Sales - fixed costs - variable costs = target net income

Assume, for example, that a retail clothing shop wants to earn $10,000 in net income from $100,000 in sales for the month. To reach the goal, management reviews both fixed and variable costs and attempts to reduce the expenses. Inventory is a variable cost that can be reduced by finding other suppliers that may offer more competitive prices.

It may take longer to reduce fixed costs, such as a lease payment, because these costs are usually fixed in a contract. Reaching a target net income is particularly important for a public company , since investors purchase the issuer’s common stock based on the expectation of earnings growth over time.

Outsourcing is used frequently to control costs because many businesses find it cheaper to pay a third party to perform a task than to take on the work within the company.

Cost Control and Variance Analysis at Work

A variance is defined as the difference between budgeted and actual results. Managers use variance analysis as a tool to identify critical areas that may need change. Every month, a company should perform variance analysis on each revenue and expense account. Management can address the largest dollar amount variances first, since those accounts are most likely to have the biggest impact on company results.

If, for example, a toy manufacturer has a $50,000 unfavorable variance in the material expense account, the firm should consider obtaining bids from other material suppliers to lower costs and eliminate the variance moving forward. Some businesses analyze variances and take action on the actual costs that have the largest percentage difference from budgeted costs.

Why Is Cost Control Important for Businesses?

In a competitive marketplace, the low-cost producers are the ones that can earn the highest profits. Reducing costs is therefore a key objective for most businesses since it increases both efficiency and profitability.

What Types of Costs do Businesses Incur?

In general, business costs can be categorized as fixed vs. variable and direct vs. indirect.

• Fixed costs are those that do not change, such as rent or insurance payments.
• Variable costs will change with productivity such as wage labor or energy usage.
• Direct costs are those involved with production or operations, such as costs of raw materials.
• Indirect costs include things like overhead , which are not directly related to the business's core operations.

How Can Households Implement Cost Controls?

Cost controls are often associated with increasing the operating efficiency of a business; however, individuals and households can also benefit from such strategies to increase savings and cash flows. Establishing and sticking to a budget is one key strategy. Shopping around and comparing competitors' prices is another way to keep prices down. Look to shop when items are on sale and consider second-hand goods if possible.

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Ultimate Guide to Understanding Cost Control

Cost control that produces cost savings is an essential tool in financial management to reduce business and project expenses through cost accounting, budgetary control, financial statement analysis, and project management tools.  

Cost control and vendor management often go hand-in-hand, since optimizing how you interact with vendors can produce significant cost savings for your business. And expense management automation helps your company achieve savings through cost control. 

What is Cost Control? 

Cost control is the process of identifying, eliminating or reducing unnecessary business expenses in order to increase profits. Cost control starts with the budgeting process and looks at vendor selection and negotiation, leveraging early payment and volume discounts, using spend management systems, and improving manufacturing or construction efficiency and product quality.

Cost Control as a Part of Cost Management

The goal of cost control is to give your company a powerful framework that’s designed to improve visibility and keep you in control of your costs.

Cost control reduces costs and expenses by managing budget vs. actual variances by cost center, profit center, department, or project and taking corrective action. Cost control is one step in the cost management process. 

Cost management is a broader term, encompassing estimating methods to forecast resources required and perform cost estimation, budgeting, cash flow forecasting , funding the budget, controlling costs, and performing a post-project evaluation for future cost-saving opportunities. The cost accounting function in a business contributes to the cost management process. 

Steps of Cost Management

Steps of cost management include:

• Resource planning
• Cost estimating
• Cost budgeting
• Cost control
• Post-project cost evaluation

Cost Management in Project Management Cost 

Project management cost needs monitoring and attention during the project activities phase before completion. Specialized project management software and metrics should be used to estimate cost baseline by task, control, and reduce project costs in a cost control system. Post-project analysis can make future projects more efficient through a learning curve. 

Cost Estimation Techniques to Consider

Estimation as an important step in managing costs. Let’s dig deeper by talking about some exact techniques for making accurate estimates, especially since budgeting for complex workflows can be a challenge.

Factor Estimation

Projects are almost never fully “figured out” when they begin. The scope might not be fully defined, and certain features may still need some work. It would be a waste of time to form a detailed budgetary analysis now since it would likely change quickly.

The factor estimation method is the fastest way to get a general overview of what to expect. The industrial sector is familiar with one convenient trick known as the sixth-tenths rule, where the expected cost goes up by six-tenths as the size of the manufacturing facility increases.

Parametric Estimation

Past financial data is an invaluable tool for accurately predicting new expenses. Parametric methods involve analyzing previous contract prices and values and finding out the relationships between materials and labor in previous works.

For instance, you might notice that the thickness of the sheets of metal used in an engineering project consistently correlates to higher costs. Think about ways you can use that information the next time a similar project begins.

Quantitative Factor

As the workload progresses, you will slowly gain more insight and have a clearer picture in your mind of how it will finish. The quantitative factor estimation builds on the “factor estimation” step from earlier by attaching empirical data you gain during project execution to figure out more precise estimations.

Resource-Based Estimation

The resource-based technique is an option if time is considered a sensitive asset. Here, the team will estimate and manage the amount of time it takes to complete a certain portion of the work and schedule it to a calendar. Keeping the duration of the workload under control can be just as important as keeping monetary costs low.

It may seem obvious, but simply extrapolating the entire cost by using a smaller unit of cost as a benchmark is an effective method. For instance, a short pipe might cost $15 and require an hour of installation time. If you’re using 20 of these pipes, you can expect the cost to be around $300 and 20 hours of work.

While not always accurate (installation time may be shorter the more units you install at a time, for example), unit-rate will always be a tool on the table of any cost engineer.

Control Methods 

Control methods used for expense and cost management include target net income, variance analysis, and earned value management. Control methods also include using specialized cost management software for the business and project management to improve cost budgeting and cost performance. 

Target Net Income 

Target net income is the expected amount of business profits after taxes for an accounting period. Target net income is used to determine an appropriate level of expenses and costs in a budget to produce the desired income level for a business or project.    

Target net income can be used in the breakeven analysis formula to determine the number of units required to meet the target net income instead of using a zero breakeven amount. The difference between sales and variable costs (sales – variable costs) is called the contribution margin. 

The formula for target net income is:

Target net income = sales – variable costs – fixed costs 

Target net income = (units x sales price) – (units x variable cost) – fixed costs

You can use these formulas by supplying the target net income amount to solve for either units or sales dollars required to reach the target net income. Or you can solve for target net income if you have forecasted the other variables. 

Variance Analysis 

Variance analysis compares budget and actual amounts for accounting categories for a time period or project. Unfavorable variances occur when actual costs exceed budget amounts. Favorable variances represent actual costs below budget, indicating better actual results than expected. 

Cost accounting systems with standard costs (often used by manufacturing companies) are useful for variance analysis of actual costs vs. standard costs for labor, materials, and overhead. 

Each month and at year-end or project closing, financial analysts drill down to the data source of significant unfavorable variances to identify causes and correct overspending through future cost or expense reductions. 

Earned Value Management 

Earned value management (EVM) controls projects as they progress, including the schedule and actual costs vs planned costs. The planned project costs expected for the percentage of completion of the project to date are compared to actual costs incurred on the project to date to establish project controls and evaluate project performance.  

Earned value management provides an opportunity to use cost control on a project while it’s in progress by monitoring whether cost overruns occur. When managers reduce project expenses in response to EVM metrics, project management results will improve. If cost variances are excessive and cancellation is feasible, a business may decide to terminate an unprofitable project before completion. 

Examples of Cost Control 

Examples of types of cost control include:

• Renegotiating contracts with more favorable terms
• Getting more competitive bids from different vendors
• Improving product quality to reduce rework and scrap
• Reducing the number of items carried in inventory
• Reducing employee expenses with better expense management  
• Accounts payable outsourcing
• Increasing efficiency with automation software 
• Taking early payment discounts on accounts payable

How can your business improve cost control? 

Download our white paper, “The Holy Grail of Accounts Payable” to learn how your business can better control its accounts payable-related costs. 

Use AP automation software with self-service supplier onboarding, efficient invoice processing, supplier payments tracking, global payments, and verification processes for simpler global regulatory and tax compliance and reduced fraud risk and errors.

Common Challenges of Cost Control

Even experienced companies occasionally have missteps during cost control operations . It’s worth going over a few pitfalls and challenges to the process as well. They include:

• Mistaking cost analysis with accounting: Accounting deals mainly with just counting up the costs among other tasks, whereas cost control goes deep into a project and plans out the funding.
• Consistently analyzing budget and predictions: Calculating the budget and predicting cost control is often performed by separate employees, resulting in inconsistent analyses that could compromise the reliability of the results.
• Aligning data from multiple sources: Relevant financial data can come from a variety of subcontractors and content management systems. It takes a degree of organization and skill to ensure all this data is usable.
• Aligning time and money: In the same vein, there’s a discrepancy between project schedulers who schedule the workload according to activities and tasks and cost analysts who use transactions and fiscal periods. Making these two sources comparable is another challenge of cost control.
• Accommodating project changes: As a project goes along, the scope, features, or goals may change over time. How does cost control, which relies on predicting future expenses, work around this challenge?
• Controlling the cost of cost control itself: It can be time-consuming and error-prone to perform cost control, from the data collection to the analysis to executing the corrective actions. What results is another form of cost to consider.

Regardless of the setbacks, a well thought-out cost control system can set an organization up for success. Standardizing the process and giving the company flexibility is the best way to deal with complicated or changing projects.

Investing in technology is one of the best steps to take to boost the chances of project success and minimize risks.

Cost Control Software 

Cost control software, which often includes dashboards for spend management and spend analysis , is available as a management system for different business applications.

Core ERP and Accounting Software

ERP (enterprise resource planning) and accounting systems have built-in actual vs. budget comparisons for detailed financial statements by account, with drill-down to underlying data. These budget variance features are essential for cost control. 

Standard vs. actual costing can be implemented in feature-rich ERP systems for manufacturing companies. Standard costing variances include labor hours, labor pricing, material purchase price, material usage, and overhead spending and overhead usage variances due to changes in production volume or machine hours.

Financial Forecasting and Budgeting Software

Fully-featured business forecasting and budgeting software may be offered as an ERP software module or a stand-alone software product. Advanced financial forecasting and budgeting software will generate a more accurate sales forecast and cost budget for cost control variance analysis. 

Smart Shop Floor Modules

Cost control software includes specialized features within ERP systems for a smart shop floor application using IoT sensors (Internet of Things), machine learning, and artificial intelligence software. 

These applications initiate real-time alert notifications when manufacturing processes deviate from standards to trigger exceptions. Generally, the sooner the alert is issued, the less scrap and rework costs a manufacturer experiences. 

AP Automation Software

Accounts payable automation software integrates with ERP and accounting systems to streamline and reduce the payables and global mass payments workload by up to 80%, reducing future labor costs for new hires. 

AP automation software provides: 

• Self-service supplier onboarding and tax reporting via a portal
• Electronic invoice capture with OCR or uploading
• Matching invoices with purchase orders and receiving reports
• Global regulatory compliance
• Duplicate payments and fraud prevention screening 
• Automated approval routing
• Global mass payments using multiple payment methods and currencies
• Invoice payment status notifications to vendors in real-time
• Automated payments reconciliation

Expense Management and Tail Spend Software 

Expense management software streamlines employee expense reporting and payment. Travel-management software that may be included in expense management software helps companies track and control travel-related spending. Specialized tail spend software can be used to control employee-initiated routine spending on low-cost items outside the procurement department. 

Project Management Software

Project management software includes project costing, estimating the project schedule, resource estimation, resource costing and budgeting, Gannt charts, and variance analysis. The software should help you perform a post-project evaluation of actual expenditures resulting in total cost vs. budget and benchmarks with similar projects and competitors. 

Earned value management, cost management steps, and target net income for a project may be incorporated into project management software. 

What Are the Benefits of Cost Control?

The benefits of cost control include company savings through the implementation of a proper budget, eliminating maverick spend as part of spend management, and enhanced productivity.

How Do You Control Costs?

Companies control costs by examining current processes and resources to determine actual budgets, exploring where costs can be cut, and monitoring cost variance.

What is the Difference Between Cost Control and Cost Management?

The difference between cost control and cost management is that cost control is the process of analyzing and adjusting spending activity to control spending and costs, while cost management involves the tracking and understanding of financial activities so that potential changes can later be made.

The Importance of Cost Control

Cost control has importance because it lets businesses reduce costs and expenses during the year through analysis and monitoring variances at each budget control level. Managers are accountable for results. Companies that control costs well through optimization practices and cost control tools have a competitive advantage. 

Cost control in project management is essential for an activity in which cost overruns could easily occur.  

Costs can be reduced through cost control strategies, measures, and systems. Cost control will improve business performance data metrics and increase profits, cash flows, and return on investments (ROI) . Engagement by team members improves as their ability to make meaningful contributions to results increases.  

Investor stakeholders may be attracted to the stock of publicly-traded companies with effective expense control and corporate governance. Lenders will have an increased likelihood of approving debt and loan financing. Successful companies attract the best talent.

Predictability of costs and results increases. Vendor management improves with better procurement and vendor invoice payments with early payment discounts. Project success increases with project budget control. With strategic cost control and action steps, businesses reduce the need for unexpected financing and improve liquidity. To learn more about cost control, download our eBook,“ The Ultimate Accounts Payable Survival Guide .”

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• Cost Control and Cost Reduction

Most of the enterprise is want to maximize the profit, which is possible by decreasing the production cost. For this purpose, management uses two efficient tools, i.e. cost control and cost reduction. Cost Control is a technique which makes available the necessary information to the management that actual costs are aligned with the budgeted costs or not. Cost Reduction is a technique which we used to save the unit cost of the product without compromising its quality .

Cost control and Cost reduction

Definition of cost control.

Cost Control is a process in which we focus on controlling the total cost through competitive analysis. It is a practice which works to align the actual cost in agreement with the established norms .

It ensures that the cost incurred on production should not go beyond the pre-determined cost. Cost Control involves a chain of various activities, which starts with the preparation of the budget in relation to production .

Thereafter we evaluate the actual performance . After that we compute the variances between the actual cost & the budgeted cost and further, we find out the reasons for the same. Finally, we implement the necessary actions for correcting discrepancies.

The major techniques which used in cost control are standard costing and budgetary control . It is a continuous process which helps in analyzing the causes for variances. For example- control wastage of material, any embezzlement and so on.

It involves:

• Determination of standards;
• Ascertaining actual results comparing the standards;
• An analysis of the variances;
• Establishing the action that may be taken.

Browse more Topics under Fundamentals Of Cost Accounting

• Origin and Evolution of Cost Accounting
• Meaning of Cost, costing and cost accounting
• Importance of Cost Accounting
• Financial Account vs Cost Account
• Meaning of Management Accounting
• Scope and Functions of Cost Accounting
• Objectives of Cost Accounting
• Advantages of Cost Accounting
• Costing – an aid to management
• Characteristics of an Ideal Costing System
• Classification of Cost
• Methods of Costing
• Techniques of Costing
• Cost Unit and Cost Centre
• Elements of Cost
• The format of the Cost Sheet

Characteristics of a Good Cost Control System

According to backer and Jacobson, effective cost control should have the following characteristics :

(a) Delineation of centers responsibility, i.e., deciding responsibility centers;

(b) The delegation of prescribed authority;

(c) Various cost standards;

(d) The relevance of controllable cost ;

(e) Cost reporting; and

(f) Cost reduction

Understand  Meaning of Cost, Costing and Cost Accounting here  in detail

Definition of Cost Reduction

Cost Reduction is a process, which aims to lower the unit cost of a product manufactured or service rendered without affecting its quality. It can be done by using new and improved methods and techniques. It ascertains substitute ways to reduce the production cost of a unit .

Thus, cost reduction ensures savings in per unit cost and maximization of profits of the enterprise. Cost Reduction aims at cutting off the unnecessary expenses which occur during the production Process, storage, selling and distribution of the product. To identify cost reduction we should focus on the following major elements:

• Savings in per unit production cost.
• The quality of the product should not be affected.
• Savings should be non-volatile in nature.

Tools of cost reduction focus on Quality operation and research, Improvement in product design, Job Evaluation & merit rating, variety reduction, etc.

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Difference Between Cost Control and Cost Reduction

The following are the main differences between Cost Control and Cost Reduction:

• Cost Control focuses on decreasing the total cost of production while cost reduction focuses on decreasing per unit cost of a product.
• Cost Control is a temporary process in nature. Unlike Cost Reduction which is a permanent process.
• The process of cost control will be completed when the specified target is achieved. Conversely, the process of cost reduction is a continuous process. It has no visible end. It targets for eliminating wasteful expenses.
• Cost Control does not guarantee quality maintenance of products. However, cost reduction assured 100% quality maintenance.
• Cost Control is a preventive function because it ascertains the cost before its occurrence. Cost Reduction is a corrective function.

Solved Example for You

What is the area of cost reduction process?

Areas of Cost Reduction are:

• Design of the product to be produced – Standardization and simplification of the product, this is the most important activity for controlling and reducing cost. once a design of the product is approved and arrangements for production made, choices available in the firm will be limited.
• Factory layout organization and production methods, and
• Marketing – points of selling and distribution, transport, channels of distribution, etc.

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Fundamentals of Cost Accounting

• Meaning and Definition of Management Accounting
• Format of Cost Sheet
• Cost Centre and Cost Unit
• Classification of Costs

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Effect of Cost Control and Cost Reduction Techniques in Organizational Performance

2017, International Business Management CSCanada

In any organization, the major objective is to maximize profit, but the main constraints facing them are the rise in cost of operation. Due to this, the cost of production increases and could lead to certain cost control and cost reduction which make it complex for many organizations to operate as well organized cost limit of knowledge. The study aims to critically examine and evaluate the application of cost control and cost reduction in organizational performance and also to review the budget as an effective tool of cost control and cost reduction. A descriptive survey research was adopted. A total number of 50 questionnaires were administered and used for the study. The analysis of data collected was undertaken by applying appropriate statistical tools. Regression analysis was used to test the hypothesis with the use of SPSS. Based on the findings, it was evident that cost control has a positive impact on organizational performance and also the style of management has a positive impact on organizational performance.

Related Papers

Usman Abdullah O

Small and Medium scale enterprises (SMEs) play a vital role in economic and social development of developing countries. However, their existence is often threatened by the poor accounting practices they are characterized with. SMEs are often failing to leverage adequately the potential of management accounting for helping them achieve their financial objectives, including profitability and liquidity. This research examined Management Accounting Practices in three sectors of SMEs within Ilorin metropolis, Kwara State, Nigeria. Seventy seven (77) copies of the questionnaire were administered and 64 copies were retrieved. Descriptive and inferential statistics were used. The result shows that more of traditional accounting method were being used and little of contemporary method which mean that the use of costing, budgeting and performance evaluation are more prevalent. The results also show that a significant number of respondents have adopted one or more measures both financial and non-financial but the reliance on financial measures is greater than non-financial measures. The main non-financial measures frequently used by respondents are survey of customer satisfaction, on-time delivery and employee turnover. The study also found out that three out of the five contingent factors (size, qualified internal accountant and owner/manager participation) affecting the extent of use of MAPs do not have significant relationship with MAPs. While technology has significant relationship with MAPs and also, MAPs also indicated strong large positive relationship with organizational performance.

isiaka habib omeiza

Atumofe Onyinye

This study deals with budgetary control as an effective tool for cost control in manufacturing Companies in Nigeria. The study examined the impact of budgetary control on cost control, profitability of manufacturing companies, the reasons for deviations and how these variances are reported as a means of control in budgeting and also examined whether the manufacturing companies can reduce cost as well as maintain the quality of their products and services. The survey method was used and the companies encompass staff members of Cadbury Nigeria PLC, Friesland Foods Wamco Nigeria PLC and Nestle Nigeria PLC. The study employs the use of questionnaire instrument for the purpose of data collection and the data collected were tested with chi-square statistics through a Statistical Package for Social Sciences. It was discovered that budgetary control contributes to the profitability of manufacturing companies and it was also discovered that there are deviations from planned budget. It was also discovered that manufacturing companies can reduce cost and maintain high quality products. The study recommended that realistic forecasts should be made and that there should be sound planning with effective and efficient formulation of policies and strategies Introduction Budgeting is one of the ways of controlling cost in manufacturing organisations. Cost control is a systematic review of the resources a company uses to achieve its primary objective of profitability; therefore, it can also be referred to as cost management. For cost to remain within reasons, it is desirable to compare expenses against industry benchmark which is a good indicator of competitive standing. Arnold (1987) believes in performance measurement through the comparison of various indices. However, it is a clear fact that enterprises are in business to make profit. The worth of the firm at the end of the year is determined through the financial statement prepared by the management. Such financial statements show a combined summary of the effect of social constraints, management policy decisions and risk return trade-offs characteristics of the firm (Ogunjimi: 1980). One of the benefits of cost control is the ability of a company to keep cash flow at necessary levels of operations, that is, with cost control, excessive amount of cash are not too tied up in inventory, it prevents over supply of stock or over staffed departments and this keeps cash available for other purposes including navigating economic waves, expansion needs or repairs and maintenance of equipment. Many manufacturing companies use outside assessments to analyse their efficiency including the result of cost control effort, this does not only bring new viewpoints to the process, but also provide important internal review. Sometimes it is difficult to be objective when you deal with management of a business on a day to day basis, but professional analysts can bring a broader scope to operations resulting in improved cost control strategies. Budget requires coordination throughout the organisation. Each department or unit within the organisation is responsible to prepare its part of the budget, which is then coordinated with the overall company budget. Budget assigns responsibility to the management in each unit. Budgeting is an integral part of planning process. Successful companies plan for their futures through the discipline of preparing an annual business plan, stipulating their financial and quantitative goals and strategies. Cost control is a continuous process that begins with the annual budget. As the fiscal year progresses, management compares actual result to those projected in the budget and incorporates into the new plan the lessons learnt from the evaluation of current operations. Through the standard costing and budgeting process of cost control, management establishes overall objectives, defines responsibility centres and defines specific objectives for each responsibility centres and design procedures and standards for reporting and evaluation. For cost control to be effective, management has to construct budget because it lays out a road map to guide management's effort in accessing the effect of cost control techniques on revenue expected. It also states the number of assumptions about the relationship and interaction among the economy, market dynamism, the ability of its sales force and its capacity to provide the proper quantity and quality of products demanded. The need for the efficiency and effectiveness in the allocation of the resources of an organisation gave rise to the need to make a budget. A budget can be defined as a qualitative statement prepared and approved prior to the period of time of the policy to be pursued for the purpose of achieving a given objective.

venkat asha

European Accounting Review

Teun Wolters

ojo damilola

The prevailing uncertainties in Africa business environment today, most managers and stakeholders must poised to compete favourably under these rapidly changing conditions. In order to survive under these environmental complexities and vagueness, managers and stakeholders of the hospitality industry need a sharp tools, proven management techniques to forecast the major changes which are likely to affect the business while they choose future directions and dimensions of resources needed to attain selected goals. This research was work conducted with special reference to Budgeting, Budgetary Control and Performance Evaluation system of Allterrain Services Group with the view to ascertain the role that the budget plays in the company and how the key actors of the budget engage its uses in their daily operational activities. Budget as a profit planning device sets standard of performance of managers, while budgetary control is a tool implored by management to keep track of actual performance to ensure budgeted standards are met. In the course of this research work 44 workers at various managerial levels were taken as sample population. A well designed questionnaire was used to obtained data through personal interview and administration of the questionnaires, both qualitative and quantitative methods were used in analysing the data collected, secondary data source was also used. The analysis of the findings conclusively indicates that most of the key actors do not work with the budget due to lack of proper induction and proper role profile of the office they occupied.

Samson Adeniyi Aladejare

The funding of education sector in both developed and developing economies across the globe is to ensure the welfare of citizens. In most developed countries, the education sector feeds the industries with trained personnel while the goods and services produced by the industries lead to the growth and development of their economies, consequently improving the welfare of their citizens. The objective of this study is to investigate empirically whether the funding of the Nigerian education sector over the years has any significant impact on the welfare of Nigerians. The study adopted the Ordinary Least Square technique using data obtained from World Bank and Central Bank of Nigeria Statistical Bulletin of relevant years covering a period of 36 years (1977 - 2012) and using appropriate explanatory and criterion variables as proxies. Major findings include: strong positive correlation between expenditure on education sector and welfare of Nigerians which is not significantly affected by inflation rate; unidirectional granger causality running from recurrent expenditure to GDP per capita; significant impact of expenditure on education sector on welfare of Nigerians with recurrent expenditure having the significant impact, not capital expenditure; amongst others. Policy implications include: the need for government policies towards: increasing expenditure in the education sector (especially capital expenditure); monitoring and supervision of expenditure to ensure higher levels of accountability and high quality service delivery; periodic review and update of accounting and finance procedure, records and reporting in this sector in conformity with IPSAS standards with the view to enhancing the welfare of Nigerians.

Sofyan Hadi

WEST AFRICAN JOURNAL OF BUSINESS AND MANAGEMENT SCIENCES

Kenneth E N O C H Okpala , Prof. Akinyomi O . John

One of the problems of large organizations is the complexity of management which affects planning, and control by the central management, accountability of resources used and determination of the contributions of individual unit to the overall objective. This study investigated the responsibility centres performance evaluation and cost and management accounting. A questionnaire based study research design was used and five (5) Nigerian conglomerates with 4,952 management staff were the study population. The sample consists of 696 representing 15% of 4,640 from four organizations randomly selected based on accessibility and adequacy of information. One way ANOVA and Karl Pearson Product Moment Correlation Coefficient techniques were used for data analysis and hypotheses confirmation. The relationship between the independent variable and sub-variables of the dependent are statistically significant (CRC and IRC p = .000 < .05; RRC p = .004 < .05, and PRC p = .003 < .05) while the responsibility centres performance evaluation and cost and management accounting is significant at p = .000 < .05. The study recommended that the use of cost and management accounting in evaluating responsibility should be supported by top management to determine the responsibility centre viability in the conglomerates.

Ruzita Jusoh

Despite that there is no agreed theoretical framework for strategic management accounting (SMA), the academics generally agree that SMA is external and long-term focused, assists managers in the strategic decision-making process. This exploratory study investigates the mediating effect of SMA on the relationship between Porter’s (1980) competitive strategy and firm performance. The contingency model incorporates the two dimensions of SMA, i.e. the usage of SMA techniques and the changing role of accountant in the strategic decision-making process. The results of partial least squares appear to support SMA usage mediates partially the relationship between product differentiation strategy and firm performance. There is also a positive relationship between business strategy and strategic role of accountant. However, it is unable to find support on the positive association between strategic role of accountant and firm performance.

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How to Cut Costs More Strategically

by Vinay Couto and Paul Leinwand

Summary .   

When companies cut costs, they often make across-the-board cuts that are unconnected to their strategy, and fail to make the cuts sustainable.   Most organizations also wait to act until they have a problem – at which point they don’t have the time to make the right trade offs for the long term. In order to cut costs effectively, companies must connect costs to their strategy. To do this, management teams must figure out which costs fuel their distinct advantage, and which don’t. For example, former CEO of Frito-Lay, Roger Enrico, had to make a major investment in product quality to stay competitive. He resolved to start by cutting 40% in general and administrative costs, which freed up money to invest in assets such as direct store delivery, product and manufacturing innovation, and consumer marketing. To manage cost the right way, connect costs and strategy; think of costs in terms of capabilities; use a “zero-based” budgeting approach; make your cut sustainable; and be proactive.

We’ve all been through it — the looming cost project. And for many of us, it’s not a fond memory.

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• Cost Control and Reduction

What is Cost Control and Reduction?

Cost control and cost reduction are the two very efficient tools used to reduce the cost of production and maximise profit. In simple words, Cost control is a technique used to provide the management with all the necessary information regarding the actual costs and also align them properly with the budgeted costs. On the other hand, the term cost reduction is used to save the unit cost of the product, without causing any compromise to its quality. The companies use a wide variety of techniques of cost control and cost reduction in order to carry out the process effectively.

                                                     (Image will be Uploaded Soon)

Cost Control

The definition of cost control states that it is a process which focuses on trying to control the total cost through competitive analysis. Such practices help in aligning the original cost in agreement with the established costs.

Through this process, firms can ensure their production costs do not soar higher than the predetermined expenses. The cost control process involves several stages, which begins with the budget preparation related to production. Next, the actual performance is evaluated, followed by the calculation variances between the original cost and the budgeted cost. The next task is to investigate the reasons for the same, and the final stage involves implementing necessary actions to mend the discrepancies.

Standard costing and budgetary control are two techniques used in the cost control process. The process is a continuous one and helps to analyse the causes for the variances. It involves:

Determining the standards

Comparing the standards and looking at the results

Analysing the variances

Establishing the action needed to be taken by the firm

Cost Reduction

The definition of cost reduction states it to be a process which aims to reduce the unit cost of a product or service manufactured by the firm without harming its quality. A number of modern and improved techniques can be used for this purpose which serves as an insight to the alternative methods to lower the production costs of every unit.

Cost reduction has a significant role in reducing the per unit costs of products and are thus essential for firms to maximise their profits. This process helps in pointing out and reducing the unnecessary expenses during the production process, storage, selling or distribution of the products. The cost reduction process emphasises the following:

Savings in every unit cost of production

The product quality should not be compromised 

Non-volatile nature of the savings

The primary tools involved in cost reduction involve quality operation and research, better designs in products, reducing variety and evaluating jobs amongst others.

(Image will be Uploaded Soon)

Difference Between Cost Control and Cost Reduction

The importance of cost control and cost reduction are massive in businesses, but they have a few differences. The key difference between cost control and reduction include:

Cost control is a process which focuses on reducing the total cost of production. However, cost reduction aims at reducing the per unit cost of a product.

Cost control is a quick process by nature, while cost reduction is a more permanent process.

The cost control process ends when the required target is met. On the other hand, the cost reduction process is a continuous process which does not end after a certain time. It is primarily focused on eliminating unnecessary costs.

Cost control does not provide any promises regarding maintaining the quality of the products, but cost reduction does not affect the quality of the product even slightly.

The cost control process is more of a function to prevent the cost before their occurrence while the cost reduction process is more of a function used to resurrect the expenses.

Thus cost control and reduction are an essential part of any organisation willing to boost their profits.

Did You Know?

The meaning of cost of control is to identify and reduce the expenses in business to maximise profit. It is a useful factor in maintaining and growing the earnings of the company. The budgeting process helps massively in this regard as the actual results of the company are compared with the budget. If the actual costs are more than what planned, then the company needs to take action.

Solved Examples

1. Cost Measure is What Kind of Control?

None of the above

Ans: (b) Preventive

2. Which Type of Control Process Does Not Affect the Quality of the Products?

Cost control

Cost reduction

Cost-cutting

Ans:  (b) Cost reduction 

Importance of Cost Control and Cost Reduction in Commerce

Cost control mainly focuses on bringing down the total cost of production whereas cost reduction focuses on decreasing the per unit cost of a particular product. Cost Control is thus temporary but Cost Reduction is permanent in nature.  In Commerce, students will learn how cost control gets completed once all the business targets are achieved. It is an important chapter that will pave the way for other related chapters later on. Getting the very fundamentals right at this stage will then assist the students in understanding all the challenging concepts later on. It is one of the most important chapters of Commerce and must be prepared for in a proper manner.

How to Prepare for a Commerce Test on Cost Control and Cost Reduction

Students can go through Cost Control and Cost Reduction – Explanation, Difference and Solved Examples on Vedantu

This page has all the information that they need to be aware of

Read everything on the page and then make notes on certain topics using your own words

Go through the solved examples properly

Assess what you’ve learnt by writing each of the concepts down in your own words

Revise from this page before all tests

FAQs on Cost Control and Reduction

1. How do students revise Cost Control before their commerce exams?

Students can revise Cost Control from Cost Control and Cost Reduction – Explanation, Difference and Solved Examples on Vedantu. They can read up this page and get to know why it's important. Cost Control is a tactic that’s employed by companies to control the total cost through competitive analysis. The material provided here is pertinent and in keeping with the Commerce syllabus and so the students can be rest assured that they are on the right track when it comes to this topic.

2. Is Cost Control the same as Cost Reduction in Commerce?

Both are similar but not the same things.  Cost Control is used to align the actual costs with the budgeted costs whereas Cost Reduction is used to preserve the unit cost of a product without compromising on its quality.

The distinction between both becomes clearer as students refer to Cost Control and Cost Reduction – Explanation, Difference and Solved Examples on Vedantu’s e-learning platform. Both have been explained rationally and in a lucid language. Going through the page will assist the students in learning the differences between both.

3. Is it important for students to go through the topic of Cost Control and Cost Reduction in Commerce?

Yes, it's vital for students to go through Cost Control and Cost Reduction as these concepts of Commerce are very important. These are the basics that one needs to know so as to know the other concepts. Without a grasp over these, they will not be able to understand anything else that’s in their Commerce syllabus. They can also read from Cost Control and Cost Reduction – Explanation, Difference and Solved Examples on Vedantu as this page has explained both the concepts in a very interesting manner. The students can go through the matter and will then not feel like skipping anything.

4. Where can students learn about Cost Reduction online?

Students can learn about the same online if they refer to Vedantu. Vedantu is India’s trustworthy online tutoring portal that provides free of cost study material to millions of potential students all over the world. The material can be downloaded and accessed later on as well when students do not have access to the internet. All they need to do is log in with their credentials.  Vedantu has Cost Control and Cost Reduction – Explanation, Difference and Solved Examples on its platform so that students of Commerce get to know in depth about Cost Reduction.

5. What are the areas related to the process of Cost Reduction?

To define cost reduction, one refers to reducing the unit cost of a product or service without harming its quality. The areas of cost reduction process include:

The most important area of the cost reduction process is the design of the products that are being produced. The easiest way of reducing costs is by making the product simpler and making it more standard. When such a design of the production gets the nod of approval, the production process undergoes certain arrangements. Thus reduce costs meaning that firms have limited choices available to them.

The organisation of the factory layouts where the products are being made and the methods are undertaken.

Marketing is another area where the costs of selling, distribution, distribution channels or transportation can be reduced.

6. What is Cost-cutting?

The cost-cutting definition refers to the processes implemented by various firms to cut their expenses and boost their profit margins. Such steps are taken by companies when they face an economic downturn or during periods of the financial crisis.

It is important for the company to have a cost-cutting strategy in place to carry out the process effectively. Most classify the costs into good, bad and best costs and the aim is to maximise the best costs and eliminate bad costs. This is a process which is more concerned with optimising the costs rather than cutting them off altogether.

However, they have their fair share of risks as overcutting costs could lead to an increase in demand at a position, thus incurring more costs.

7. How will students know about the type of questions that come from Cost Reduction in their Commerce exams?

Students can read from Cost Control and Cost Reduction – Explanation, Difference and Solved Examples and then get an idea about the kinds of questions that will be asked in theri Commerce exams. They can read this page thoroughly and then understand how each is different and how each is implemented in the businesses that run. If they are well-versed with the content that’s on the page, they will be able to answer every question that comes and secure higher marks in their examinations.

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Difference Between Cost Control and Cost Reduction

Cost control and cost reduction are both important aspects of financial management, but they differ in their objectives, scope, and methods. Cost control aims to stabilize and regulate costs, whereas cost reduction aims to achieve tangible reductions in expenses to improve financial performance.

What is Cost Control?

Cost control refers to the process of managing and regulating expenses incurred by an organization in order to ensure they align with budgetary constraints and financial goals. It involves monitoring, evaluating, and influencing various aspects of operations to minimize unnecessary spending while maintaining quality and efficiency. Effective cost control is essential for ensuring the financial health and sustainability of an organization, as it helps to prevent budget overruns, maintain profitability, and allocate resources efficiently.

Key components of cost control include:

• Budgeting: Establishing financial plans and allocating resources according to anticipated expenses and revenue projections.
• Monitoring: Regularly tracking expenses and comparing them against budgeted targets to identify discrepancies and areas of overspending.
• Analysis: Investigating the causes of cost variations and identifying opportunities for improvement.
• Implementation: Taking corrective actions and implementing strategies to mitigate overspending or inefficiencies identified during analysis.
• Continuous Improvement: Iteratively refining processes and strategies to optimize cost management practices and enhance overall financial performance.

What is Cost Reduction?

Cost reduction is the process of identifying, analyzing, and implementing measures to decrease the expenses incurred by an organization without compromising the quality of its products or services. Unlike cost control, which focuses on managing expenses within budgetary constraints, cost reduction specifically targets lowering overall expenditure.

Key characteristics of cost reduction initiatives include:

• Strategic Alignment: Cost reduction efforts should be aligned with the overall strategic objectives and goals of the organization. They should support the company’s mission, vision, and long-term growth plans.
• Continuous Improvement: Cost reduction is an ongoing process that requires regular evaluation, analysis, and adjustment. Organizations should continually seek opportunities for improvement and innovation to drive efficiency and effectiveness.
• Cross-Functional Collaboration: Successful cost reduction initiatives often involve collaboration across different departments and functions within the organization. This interdisciplinary approach ensures that cost-saving measures are implemented effectively and efficiently.

Difference between Cost Control and Cost Reduction

Cost Control and Cost Reduction – FAQs

How does inflation impact cost control and cost reduction strategies.

The introduction of inflation might complicate the cost control measures efficacy carrying the prices of goods and services along with it, which potentially can lead to budgeting overruns. While minimizing the prices, it is essential to find a method that will help to compensate for the inflation and maybe replace suppliers or even produce more products to reduce expenses.

Are there industry-specific best practices for cost control and cost reduction?

Yes, they can experience significantly different cost drivers and hurdles influenced by their sector. The procedures of spending minimization and optimization may differ depending on numerous factors that can include dynamic market features, regulations and technological progress. Organizations should always try to align their particularized schemes to the attached challenges in the sector for proper implementation.

What role does technology play in enhancing cost control and cost reduction efforts?

Technology can have a big impact on increasing cost control and cost reduction through process automation, resource allocation optimization, and the provision of timely data for intelligent management decisions. For instance, technology components such as ERP systems, data analytics and automation tools can be used to identify both possible cost savings and improved operations.

How do environmental sustainability initiatives align with cost control and cost reduction goals?

Concerns about environmental sustainability can be linked to cost control and cost-cutting goals by being energy conservation and waste reduction of consumption time and ultimately expenses. Implementing sustainable processes reduces the costs of operation as well as reflects positively on the company’s integrity and brand name.

What are the ethical considerations associated with cost reduction strategies, particularly concerning employee welfare and job security?

Cost reduction strategies can estimate employees to be fired, wage freezes or benefits to employees, leading to the rise of ethical questions such as fairness, joblessness and employee well-being. Organizations should find a way to know the boundary between cost reduction and ethical factors as the chief goal of the firm should, however, be that such cost reduction measures should be applied equally and transparently.

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