The document discusses various techniques for cost management, including cost control and cost reduction. It defines cost control as regulating costs through executive action guided by cost accounting, while cost reduction aims to permanently lower unit costs without compromising quality. Key areas covered for cost reduction are product design, target costing, value analysis, value engineering, and value chain analysis. Product design offers the greatest potential for reducing costs if considered early in development. Target costing sets target costs by subtracting desired profits from market prices. Value analysis examines components and costs to find more economical ways to achieve functions, while value engineering improves value through examining and modifying functions.

1. Cost Management
MR. KISHORE S
ASSISTANT PROFESSOR
DEPT. OF COMMERCE AND MANAGEMENT
SURANA COLLEGE, PEENYA

2. Unit 1
COST CONTROL AND COST REDUCTION

3. Contents
• Meaning of cost control and cost reduction,
areas covered by cost control and cost
reduction – product design, target costing,
value analysis, value engineering, value
chain analysis, Business Process Re-
Engineering (theory only).

4. Introduction to Cost Management

5. Techniques of
Cost
Management
Cost Control and Cost Reduction
Marginal Costing
Standard Costing
Budgetary Control
Uniform Costing

6. • 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.
• According to CIMA, Landon, “Cost
control is the regulation by executive
action of the cost of operating an
undertaking particularly where
action is guided by cost accounting”.

7. • Cost reduction is a planned positive
approach to reduce expenditure. It is a
corrective function by continuous process
of analysis of costs, functions, etc. for
further economy in application of factors
of production.
• According to CIMA Landon, “Cost
reduction refers to the achievement of real
and permanent reduction in the unit cost
of goods manufactured or services
rendered without impairing their
suitability for use intended”.

9. Cost Control
involves the
following facts
of the
Management
Planning
Communication
Motivation
Appraisal and reporting
Decision making

10. Areas covered by cost reduction
Product design Organisation Production
Administration Marketing Finance

11. PRODUCT DESIGN
• Product design is essentially the efficient
and effective generation and development of
ideas through a process that leads to new
products.
• The design of the product provides
the greatest scope for cost reduction.
Product design being the first step in
production, if cost reduction can be made at
design stage, then it is likely that the
benefits can be availed to the maximum.

12. Target Costing

13. • Target costing is a technique of cost
management which originated in Japan in
1970’s. Target costing is an approach to
determine a product's life-cycle cost which
should be sufficient to develop specified
functionality and quality, while ensuring its
desired profit. It involves setting a target
cost by subtracting a desired profit margin from
a competitive market price.

14. Features of
Target Costing
System
i. It is an integral part of the product design
and introduction of new products
ii. Target selling price is determined using
different forecasting techniques for any
given product.
iii. It is integral to setting the target selling
price for the establishment of target
production volumes, given the relationship
between price and volume.
iv. It determines cost reduction targets

15. Value analysis

16. Value analysis is an approach to improving the value of a product
or process by understanding its constituent components and their
associated costs. It then seeks to find improvements to the
components by either reducing their cost or increasing the value
of the functions.
According to CIMA “Value analysis is systematic inter-disciplinary
examination of factors affecting the cost of a product or service,
in order to devise means of achieving the specified purpose most
economically at the required standard of quality and reliability”.

17. Process of Value
Analysis
Step 7 Implementation and follow-up
Step 6 Recommendation
Step 5 Selecting of the least cost alternative
Step 4 Considering Alternatives
Step 3 Analysing the information and evaluating the product
Step 2 Obtaining and recording information
Step 1 Selecting a product or service for study

18. Value
engineering
• Value engineering (VE) is a systematic
method to improve the value of goods or
products and services by using an
examination of function. Value can be
increased by either improving the function
or reducing the cost.

19. Process of Value engineering
GATHERING
INFORMATION
ALTERNATIVE
GENERATION
EVALUATION PRESENTATION

20. Value chain analysis
• Value chain analysis which helps to identify
a firm’s core competencies and distinguish
those activities that drive competitive
advantage. The cost structure of an
organization can be subdivided into
separate processes or functions assuming
that the cost drivers for each of these
activities behave differently.

22. Business
process Re-
Engineering
• Business process reengineering (BPR) is the
analysis and redesign of workflows within
and between enterprises in order to
optimize end-to-end processes and
automate non-value- added tasks.
• Hammer and champy suggested seven re-
engineering principles to streamline the
work process and thereby achieve
significant levels of improvement in quality,
time management, speed and profitability

23. 1. Organize around outcomes, not tasks
2. Identify all the processes in an organization
and prioritize them in order of redesign
urgency.
3. Integrate information processing work into
the real work that produces the
information.
4. Treat geographically dispersed resources
as though they were centralized.
5. Link parallel activities in the workflow
instead of just integrating their results.
6. Put the decision point where the work is
performed and build control into the
process.
7. Capture information once and at the
source.

24. Thank you