The Disadvantages of Cost Control & Cost Reduction

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The less your business spends on producing its products and services, the more you'll have left over at the end of the day in profit. Cost control is an accounting strategy that tracks expenditures as they correlate with revenue for specific items, such as the amount you spend relative to the amount you earn for each of the products you produce. When done well, cost control offers the advantage of providing insights that will help make your business more efficient and profitable. When done poorly, the disadvantages of cost control mostly center around inaccurate assumptions that provide inaccurate information down the line.

Disadvantages of Cost Control Accounting

Imagine you own a restaurant. If you practice cost control accounting, your bookkeeper will monitor the ingredients purchases that go into your different menu items. This gives a broad overview of how much different recipes cost. The problems is, the details can get murky in practice, especially when your bookkeeper isn't on the floor watching how the different items are made – did you use a pinch of salt or a tablespoon? How many herbs did you add? Without this first-hand knowledge, it's difficult to account for costs accurately.

Also, the revenue generated by some menu items may not accurately reflect their value in the context of your overall costs. If you provide free bread and butter at the beginning of each meal, for example, these extras won't bring in any direct income. But they may make your customers more likely to patronize your establishment rather than a neighbor who doesn't provide free bread and butter. Also, if your customers fill up on bread and butter, you may spend less on ingredients for more costly menu items. It's virtually impossible to run this analysis through cost control accounting, however.

Disadvantages of Cost Control Allocation

If your business uses cost control accounting, you'll need to allocate the cost of overhead items such as rent and utilities. There often isn't any clean and precise way to do so, however. Some of your products will take less time to produce than others and will, therefore, use a smaller portion of your rent expense. However, there also tends to be hours when your shop isn't being used at all, such as overnight, and it's difficult to figure these idle hours into the equation.

Disadvantages of Cost Reduction

As you track the costs associated with the different items you produce, you will naturally make cost reduction adjustments based on the information you gather. You may opt for cheaper materials if you find that your materials cost is out of proportion to your price. However, you may end up creating an inferior product as a result of this cost-cutting measure, and the resulting decrease in sales will cut into your profit even further. When implementing cost-reduction strategies, keep an eye on the big picture. It costs less to keep less staff on the floor, but if your customers have to wait too long for service they're likely to take their business elsewhere.