Loading the player...

What is 'Cost Control'

Cost control is the practice of identifying and reducing business expenses to increase profits, and it starts with the budgeting process. A business owner compares actual results to the budget expectations, and if actual costs are higher than planned, management takes action. As an example, a company can obtain bids from other vendors that provide the same product or service, which can lower costs.

BREAKING DOWN 'Cost Control'

Cost control is an important factor for maintaining and growing profitability. Outsourcing is used frequently to control costs because many businesses find it cheaper to pay a third party to perform a task than to take on the work within the company. Corporate payroll, for example, is often outsourced because payroll tax laws change constantly, and employee turnover requires frequent changes to payroll records. A payroll company can calculate the net pay and tax withholdings for each worker, which saves the employer time and expense.

Factoring in Target Net Income

Controlling costs is one way to plan for a target net income, which is computed using the formula: (Sales - fixed costs - variable costs = target net income). Assume, for example, a retail shop wants to earn $10,000 in net income on $100,000 in sales for the month. To reach the goal, management reviews both fixed and variable costs, and attempts to reduce the expenses. Inventory is a variable cost that can be reduced by finding other suppliers to offer more competitive prices. It may take longer to reduce fixed costs, such as a lease payment, because these costs are usually fixed in a contract. Reaching a target net income is particularly important for a public company since investors purchase the issuer’s common stock based on the expectation of earnings growth.

How Variance Analysis Works

A variance is defined as the difference between budgeted and actual results, and managers use variance analysis to identify critical areas that need change. Each month, a company should perform variance analysis on each revenue and expense account. Management can address the largest dollar amount variances first, since those accounts have the biggest impact on company results. If, for example, a clothing manufacturer has a $50,000 unfavorable variance in the material expense account, the firm should consider obtaining bids from other material suppliers to lower costs and eliminate the variance moving forward. Some businesses analyze variances and take action on the actual costs that have the largest percentage difference from budgeted costs.

RELATED TERMS
  1. Budget Variance

    A periodic measure used by governments, corporations or individuals ...
  2. Unfavorable Variance

    An accounting term that describes instances where actual costs ...
  3. Variance

    The spread between numbers in a data set, measuring Variance ...
  4. Variable Overhead Spending Variance

    The difference between actual variable overhead based on costs ...
  5. Sales Price Variance

    The difference between the amount of money a business expects ...
  6. Variable Overhead Efficiency Variance

    The difference between actual variable overhead based on the ...
Related Articles
  1. Investing

    Explaining Variance

    Variance is a measurement of the spread between numbers in a data set.
  2. Investing

    Explaining Cost Control

    For a business, cost control entails managing and reducing expenses.
  3. Personal Finance

    How Budgeting Works For Companies

    Learn how to break down and understand a corporate budget.
  4. Investing

    Calculating Portfolio Variance

    Portfolio variance is a measure of a portfolio’s volatility, and is a function of two variables.
  5. Investing

    What Are The Different Types Of Costs In Cost Accounting?

    Cost accounting measures several different types of costs associated with a company’s production processes.
  6. Trading

    Exploring The Exponentially Weighted Moving Average

    Learn how to calculate a metric that improves on simple variance.
  7. Investing

    Using Historical Volatility To Gauge Future Risk

    Use these calculations to uncover the risk involved in your investments.
  8. Investing

    What are Fixed Costs?

    Fixed costs are business expenses that do not change as the level of production goes up or down. They are one of two types of business expense, the other being variable costs. Variable costs ...
  9. Investing

    Understanding Cost of Revenue

    The cost of revenue is the total costs a business incurs to manufacture and deliver a product or service.
  10. Small Business

    Six Steps To A Better Business Budget

    This easy but essential process helps owners ensure that their businesses can stay afloat.
RELATED FAQS
  1. What is price variance in cost accounting?

    Understand what price variance is in relation to cost accounting. Learn the most common way price variance arises and how ... Read Answer >>
  2. How is an unfavorable variance discovered?

    Learn how unfavorable variance is discovered through defining budget numbers, such as standard rates for labor and materials, ... Read Answer >>
  3. What does an unfavorable variance indicate to management?

    Learn what an unfavorable variance indicates to management, such as problems with meeting expense and revenue targets or ... Read Answer >>
  4. Is variance good or bad for stock investors?

    Learn how high variance stocks are good for some investors and how diversified portfolios can reduce variance without compromising ... Read Answer >>
  5. What is the difference between standard deviation and variance?

    Understand the difference between standard deviation and variance; learn how each is calculated and how these concepts are ... Read Answer >>
  6. How much variance should an investor have in an indexed fund?

    Learn more about the significance of variance in index funds, its value as a measure of volatility and other common analytical ... Read Answer >>
Hot Definitions
  1. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  2. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  3. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  4. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  5. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
  6. Job Market

    A market in which employers search for employees and employees search for jobs. The job market is not a physical place as ...
Trading Center