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16Cost Reduction & Cost Control
Question 1
Write short notes on value Analysis(Nov., 1994, 4 marks)
Answer
Value Analysis : It is one of the important tools of
modernmanagement in the area of cost reduction. It is also known by
othernames such as value engineering, value control and product
research.Value analysis is the process of systematic analysis and
evaluation ofvarious techniques and functions with a view to
improve organisationalperformance. It aims at reducing and
controlling the cost of a productfrom the point of view of its
value by analysing the value currentlyreceived. It investigates
into the economic attributes of value analysis,
believes in a planned action to improve performance and
thereby,generates higher value in a product and ultimately causes
reduction inits cost.
The meaning of the term value may vary from person to
person,time to time and place to place. However, in the context of
costreduction and control it refers to the use value.
The reduction in the costs of a product and thus increasing
theprofitability of a concern is the main advantage of value
analysis.
The benefits of value analysis are being derived in many
industries,e.g., engineering, building construction and the oil
industry. It is beingapplied to components of a product, finished
product and also t bemethods of packaging.
The various steps involved in value analysis are;
(i) Identification of the problem;
(ii) Collecting information about the function, design,
material,labour, overhead costs, etc., of the product and finding
out theavailability of the competitive products in the market;
and
(iii) Exploring and evaluating alternatives and developing
them.
Question 2
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Cost Accounting
Distinguish between Cost reduction and Cost control.
(Nov., 2002, May, 2003, 2004, Nov., 2004, 4 marks)
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Cost Reduction & Cost Control
Answer
The points of distinction between Cost reduction and Costcontrol
are as follows:
1. It aims at achieving areduction in unit cost of
goodsmanufactured or servicesrendered without impairingtheir
suitability for the useintended.
It aims at achieving the pre-determined cost targets andends
when the targets areachieved.
2. It does not recognise any
condition as permanent andbelieve that by wastereduction,
expense reductionand increased production costreduction objective
can beachieved.
It entails target setting,
ascertaining the actualperformance and comparingit with the
targets,investigating the variancesand taking remedialmeasures.
3. It assumes existence of concealed potential savingsand
challenges the norm.
It does not challenges normsor standards established forthe
purpose.
4. It is a corrective function. It is a preventive function.
Question 3
Distinguish between Cost control and Cost reduction.(November
2007, 3 Marks)
Answer
Distinction between Cost Control and Cost Reduction:
Cost control is operated through setting standards of targetsand
comparing actual performance therewith, with a view toidentify
deviations from standards or norms and takingcorrective action in
order to ensure that future performance
conforms to standards or norms.Cost reduction is a continuous
process of critical costexamination, analysis and challenge of
standards. Each aspectof business viz., products, process,
procedures, methods,organization, personnel, etc. is critically
examined and reviewedwith a view of improving efficiency and
effectiveness andreducing the costs.
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Cost Accounting
Cost control lacks the dynamic approach which planned
costreduction demands. In cost reduction, standards which are
thebasis of control are constantly challenged for improvement.
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