Cost control, Why cost control is necessary for a business?

Summary

In this educational video, the focus is on cost control, its definition, and its significance for businesses. Cost control involves managing and reducing business expenses to boost profits, starting with the budgeting process. It's crucial for increasing efficiency in material, machinery, and labor use, and for staying competitive by reducing costs and potentially lowering product prices. The video also touches on cost accounting and encourages viewers to explore more through provided resources.

Takeaways

• 🔍 Cost control is the process of identifying and reducing business expenses to increase profits.
• 📊 It begins with budgeting, where actual financial results are compared with budgeted expectations.
• 💼 Management must take action if actual costs exceed planned costs, such as by seeking bids from different vendors.
• 📈 Cost control is crucial for maintaining and growing profitability.
• 💡 The formula for target net income is: Sales - Fixed Costs - Variable Costs = Target Net Income.
• 🔄 Inventory, a variable cost, can be reduced by finding suppliers with competitive prices.
• 🌐 Outsourcing is a method to control costs, as it can be cheaper than performing tasks in-house.
• 💹 Cost control is essential for a business's profit-making capacity and efficiency.
• 🛠️ It leads to increased efficiency in the use of materials, machinery, and labor.
• 🏢 Cost control provides a basis for cost reduction, which is necessary for competition and market share growth.
• 🔗 For more information on cost accounting, refer to the previous video and the provided PDF.

Q & A

What is cost control?

Cost control is the practice of identifying and reducing business expenses to increase profits. It involves comparing actual financial results with budgeted expectations and taking action if actual costs exceed planned ones.

How does cost control start?

Cost control begins with the budgeting process. A business owner compares the company's actual financial results with the budgeted expectations to ensure that costs are in line with the financial plan.

Why is it important to compare actual costs with budgeted expectations?

Comparing actual costs with budgeted expectations helps identify discrepancies and inefficiencies. This allows management to take corrective action to reduce costs and improve profitability.

Can you give an example of how a company can reduce costs?

A company can reduce costs by obtaining bids from different vendors that provide the same product or service, which can lead to more competitive pricing and lower overall costs.

What is the formula for calculating target net income?

The formula for calculating target net income is: Sales minus Fixed Costs minus Variable Costs equals Target Net Income.

How does cost control help in achieving a target net income?

Cost control helps in achieving a target net income by allowing management to review and reduce both fixed and variable costs, which in turn increases the net income.

What is one way to reduce variable costs like inventory?

One way to reduce variable costs like inventory is by finding other suppliers that may offer more competitive prices, thus lowering the overall cost of inventory.

Why is outsourcing considered a method for cost control?

Outsourcing is considered a method for cost control because it can be cheaper for a business to pay a third party to perform a task rather than taking on the work within the company, reducing internal costs.

Why is cost control necessary for a business?

Cost control is necessary for a business because it guides the profit-making capacity, increases efficiency in the use of materials, machinery, and labor, and provides a basis for cost reduction, which is essential for competition and market share.

How does cost control help a business in competition?

Cost control helps a business in competition by allowing it to reduce the selling price of a product, making it more attractive to consumers and potentially increasing market share.

What is the role of cost control in maintaining profitability?

Cost control plays a critical role in maintaining profitability by ensuring that expenses are kept in check, which allows the business to maximize its net income and sustain growth.