Cost accounting

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Meekha (Querist)
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30 May 2009 Can any one please give me a comparison between cost reduction and cost control? With examples? and also between perpetual inventory system and continuous stock taking?

Prashant

Prashant (Expert)
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10 June 2009 As to your question of definitions, I use the following definitions in my practice:

Cost reduction: An organized and intentional one-time (cost reduction project) or continuous (cost reduction process) initiative taken with the goal to reduce business costs from a current level to a desired lower level. Cost reduction may be targeted to one specific cost (account), a selection of costs (accounts) or organization-wide.

Cost control: A organized and intentional effort to limit the growth of costs within specific accounts. The management practice of putting lock limits on accounts is, in my opinion, an example of cost control. Mandating the reduction of consumption of a supply or utility is an example of cost control.

Some people don't differentiate between cost control and cost reduction but I tend to consider cost control to be a reactive measure to stem cost growth to stay within budget (e.g. overspending in an account) rather than a proactive effort to actually reduce costs from baseline.

In reality some people do not differentiate between cost reduction and cost control. I think that is why you are having a problem with finding examples. But, that said, I think the best approach is to look at the definitions of the two words - reduction and control. Those words have different meanings.

I can't guarantee that every business professor will accept my definitions but, as a cost reduction consultant with over 30 years in business, the opinion is based on hands-on experience. Please read "Instant Profits: Making Your Business Pay" for the practical aspects of cost reduction and cost control in real business

Cost Control:
Controlling how much is spent on a certain item or project. Anything above a certain amount needs approval of a higher authority.

E.g. You are allowed to hire anybody up to a salary of $X.

Cost Reduction:
Reducing the existing costs of items or services or salaries.

E.g. You must reduce everybody's salary by 5%

Implementation:
Cost control is implemented by informing relevant parties of their spending allocation and approved level, and requiring approval on all expenditures. Those who go over their allocation are disciplined.

Cost reduction is implemented as a one-time directive.

PERPETUAL INVENTORY SYSTEM

A method of controlling physical stock level by ensuring the amount of stock level of every item could be accounted at all times. This normally involves detailed recording of all receipts, issues and running balances for each item of stock.

Due to the detailed recording of all in and out, management does not need to do a physical stocktaking/count. The stock level can be ascertained at any moment of time.

To ensure that the aforesaid stock level is accurate, physical stocktaking needs to be conducted.

Basically, there are two types of physical stocktaking:

CONTINUOUS STOCKTAKING

As the word continuous means the continual physical count of the quantity of the stock .

This is done at a FEW TIMES a year. The physical quantities counted are then compared to the stock recorded under the perpetual inventory system.

Stock discrepancies between physically counted and recorded might be due to:

Pilferage and falsification of documents;
Natural wastage like evaporation or breaking in bulk;
Warehouse’s errors both physical and clerical;
Clerical errors in the books recorded under the perpetual inventory system

PERIODIC STOCKTAKING

Unlike continuous stocktaking, the stocks are physically counted only at the end of the accounting year.

ADVANTAGES OF CONTINUOUS PHYSICAL STOCKTAKING COMPARED TO PERIODIC STOCKTAKING

Though the greatest disadvantage is the time and manpower factor as it involves more frequent stocktaking, there are many advantages of continuous over periodic stocktaking:

It improves the quality of the physical stocktaking as there are more frequent physical counting;
It allows stock discrepancies to be more fully investigated;
Maintain a higher work standards as the warehouse personnel know that they need to count the stock more frequently;
Unauthorized changes in procedures are detected and
Production hold-ups, a common issue in periodic stocktaking is eliminated.