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

Educationleaves

12 Mar 202102:29

Summary

TLDRIn 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.

Outlines

00:00

💼 Introduction to Cost Control

The video begins by introducing the topic of cost control, explaining it as the process of identifying and reducing business expenses to enhance profitability. It emphasizes the importance of starting with budgeting, where a business owner compares actual financial results with budgeted expectations. If there is a discrepancy with actual costs exceeding the budget, management intervention is required. The video provides examples such as obtaining bids from different vendors to lower costs and mentions that controlling costs is crucial for planning target net income, which is calculated as sales minus fixed costs minus variable costs. It also touches on methods like reducing inventory costs by finding competitive suppliers and using outsourcing as a strategy to control costs.

Mindmap

Keywords

💡Cost Control

Cost control refers to the process of managing and reducing business expenses to enhance profitability. It is a strategic approach that involves monitoring and adjusting costs to meet financial goals. In the video, cost control is essential as it directly impacts a business's profit-making capacity. For instance, the script mentions that by comparing actual financial results with budgeted expectations, businesses can identify areas where costs exceed projections and take corrective actions.

💡Budgeting Process

The budgeting process is a systematic approach to planning and forecasting a company's financial position over a specific period. It involves setting financial goals and allocating resources to achieve those goals. In the context of the video, the budgeting process is the starting point for cost control, as it allows business owners to compare actual costs against planned expenses, thereby identifying discrepancies that may require attention.

💡Actual Financial Results

Actual financial results represent the real financial performance of a business, including revenues, expenses, and profits, as they have occurred. These results are crucial for cost control because they provide the factual data against which budgeted expectations are compared. The video script uses this term to illustrate the need for businesses to compare their financial performance against their budgets to identify areas for cost reduction.

💡Vendors

Vendors are external suppliers or providers of goods and services to a business. In the video, the concept of obtaining bids from different vendors is mentioned as a strategy for cost control. By comparing offers, businesses can potentially lower their costs by choosing the vendor that provides the best value for money, thus contributing to the overall cost reduction effort.

💡Profitability

Profitability is a measure of a company's ability to generate income (profit) relative to the revenue, costs, and investments required to run the business. The video emphasizes that cost control is a key factor in maintaining and growing profitability. By reducing unnecessary expenses, businesses can increase their net income, which is a direct indicator of their financial health and success.

💡Target Net Income

Target net income is the desired or planned net profit a business aims to achieve over a specific period. It is calculated by subtracting fixed and variable costs from sales revenue. In the video, the formula for target net income is presented as a tool for businesses to plan and control costs effectively. By setting a target net income, businesses can make informed decisions about cost reduction and resource allocation.

💡Variable Costs

Variable costs are expenses that change in proportion to the level of production or sales activity. They are contrasted with fixed costs, which remain constant regardless of production levels. In the video, variable costs like inventory are discussed as areas where businesses can potentially reduce expenses by finding more competitive suppliers, thus contributing to overall cost control.

💡Outsourcing

Outsourcing is the practice of contracting out a business process or function to a third-party service provider. It is often done to reduce costs or to access specialized expertise. The video script mentions outsourcing as a common method for cost control, suggesting that many businesses find it more cost-effective to pay an external party to perform certain tasks rather than doing them in-house.

💡Cost Reduction

Cost reduction is the process of minimizing expenses to improve a company's financial performance. It is a critical aspect of cost control, as it directly contributes to increasing profitability. The video script highlights the importance of cost reduction for businesses to remain competitive, especially in terms of being able to lower the selling price of products to capture market share.

💡Competition

Competition refers to the rivalry among businesses striving for the same target market. In the context of the video, competition is mentioned as a driving factor for cost control. Businesses need to manage their costs effectively to remain competitive, as it allows them to offer lower prices and better value to customers, which is essential for market survival and growth.

💡Cost Accounting

Cost accounting is the process of identifying, analyzing, and recording all costs associated with the production of goods or services. It is a specialized branch of accounting that helps businesses understand the cost implications of their operations. The video script refers to a previous discussion on cost accounting, indicating its relevance to the broader topic of cost control by providing a framework for understanding and managing costs within a business.

Highlights

Cost control is the practice of identifying and reducing business expenses to increase profits.

It begins with the budgeting process where actual financial results are compared with budgeted expectations.

Management takes action if actual costs exceed planned budgets.

Obtaining bids from different vendors can be a strategy to lower costs.

Cost control is crucial for maintaining and growing profitability.

Target net income is calculated using the formula: Sales - Fixed Cost - Variable Cost.

Management reviews both fixed and variable costs to reduce expenses.

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 internal work.

Profit-making capacity is influenced by the efficiency of cost control.

Cost control increases efficiency in the use of materials, machinery, and labor.

It provides a basis for cost reduction, which is necessary for competition and market share.

Cost reduction can help lower the selling price of a product to capture the market.

Previous video discussed cost accounting, which can be accessed for further information.

The PDF for the transcript can be found through the link in the description.

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