Cost control plays a vital role in growing and maintaining profitability. It is a process that involves identifying and reducing business-related expenses with the aim of increasing profitability. It is a process that starts with the budgeting process. With cost control, a business owner can compare the actual financial results with the budgeted expectations and make an informed decision.
Necessary action has to be taken when the actual cost is higher than what was budgeted for. This article discusses all the essential aspects of cost control, its applications, challenges, and importance.
What Is Cost Control?
It is a process that involves expenditure reduction with the goal of increasing profitability. Cost control has a positive impact on the long-term profit levels of a business. Cost control works in four main steps, they include:
- Creating a baseline: You should establish a standard line against which to compare the actual costs. A baseline can be based on the best attainable cost performance, an improvement on the previous results, or historical results. Experts recommend improving on the historical result option, since it is a more achievable target.
- Calculating variance: This is the third step when executing cost control. You need to calculate the variance between the baseline and the actual results of the budget. In case of any unfavorable variances, the emphasis is shifted to that specific area. It means that the actual costs are higher than expected. If the variance is normal or favorable, then the product is more likely to be profitable.
- Investigating variances: Do thorough research on the actual cost information and find the reason for unprofitable variances.
- Implement changes: Basing on information from the analysis, advise the company on the best way to increase profitability.
Uses of Cost Control
Discussed below are the various uses of cost control.
Providing Comparability
Due to the provided baseline, cost control influences every other factor of operation. It makes factors like comparison, measurement, and evaluation more accurate and effective.
Provides the Baseline
Given that standards are obtained from a study on cost operations, they become the baseline for evaluating actual costs. You can easily ascertain the efficiency or inefficiency of an item by comparing standard and actual costs.
Basis for Budgeting
In most cases, budgets are prepared based on the standard costs. Therefore, a combination of standard costs and budgeting provides a reliable cost control measure. From this, managers are more cost-conscious.
It is an Economic Tool
Cost control plays a vital role in cost reduction. It does so by regulating the inefficiency in operations and eliminating any unwanted paperwork. Cost control helps suggest the standard cost accurately.
Challenges of Cost Control
Cost control can be a challenging process to implement. Discussed below are some of the most common challenges faced when implementing cost control.
Controlling Changes
Perhaps, one of the most challenging aspects of cost control management is controlling changes. Even after setting a budget for a project, a variation will inevitably come into play. All the business rules must be dully followed depending on the type of project or contract the company is working with.
Insufficient Resources for Controls
There is a high demand for better planning, cost reporting, and scenario analysis. In a sophisticated set-up, where acquisitions and mergers may be involved, there is a collaboration between different companies on a single project.
This puts significant pressure on the scarce resources of an organization. Consequently, there are limited resources to provide reliable, accurate, and detailed reporting.
Accuracy of Reports
For a more accurate cost control report, data must be collected and analyzed extensively. Once this is complete, there is a need to ensure that the final report is understandable and accurate.
In some cases, creating an objective report is very challenging. This is mostly due to limited resources and a lack of proper information. The result is an unreliable baseline that can doesn’t accurately reflect the standard cost.
Managing Customer Relationship
Every project has clients or customers. Even when there is only one project owner, there are customers involved; these are funding authorities, stakeholders, tech suppliers, and others.
A client will demand cost control measures that your company is not accustomed to. This makes it very challenging for a company to provide the services. Consequently, the available resources are limited and will not fully satisfy the needs of the client.
Time and Efforts Involved in Reporting
Apart from the challenges of looking for information from various sources, a lot of time and effort are invested in preparing the information for reporting purposes. Organizations have different sources of data. It is more challenging when compiling this information for reporting purposes. This is because a scheduling and cost control system outputs different codes of data that can contain errors.
The Role of Accounting in Cost Control
Accounting plays a crucial role in the planning and execution of cost control. Discussed below are some of the ways it does so.
Data Collection
The key to a successful accounting system is timely information and accuracy. Therefore, detailed cost data is essential in cost control management. An organization’s leadership must understand how money has been spent in the past and how it is now. Consequently, companies invest heavily in error-free and sophisticated accounting systems to have a better understanding of their finances.
Data Analysis
As much as the primary function of accounting lies in the control function, its analysis is pivotal to cost control management. It interprets and adjusts data, allowing changes in company-specific conditions. The same applies to industry-specific requirements.
Budget and Control Administration
Accountants play an essential role in securing and designing support for the basic components of a procedure. Besides, they distribute forms for the collection and booking of detailed data. This makes the cost control process a success.
Consolidation and Review
As much as operating managers are mainly tasked with planning, accounting coordinates and compiles these elements. Accountants analyze the proposed budget and determine its profitability and feasibility. They then advice the management on the best decision to make.
Conclusion
Most companies are investing in reliable cost control measures to increase profitability. Having known its importance and applications, it is prudent to implement effective cost control management for the success of your company.
