COST REDUCTION

🛑COST REDUCTION 🛑


“Cost reduction is to be understood as the achievement of real and permanent reduction in the unit cost of goods manufactured or services rendered without impair­ing their suitability for the use intended or diminution in the quality of the product.”

🛑COST REDUCTION

“Cost reduction is to be understood as the achievement of real and permanent reduction in the unit cost of goods manufactured or services rendered without impair­ing their suitability for the use intended or diminution in the quality of the product.”


The definition given above brings to light the following characteristics of cost reduction:

1. The reduction must be a real one in the course of manufacture or services rendered. Real cost reduction comes through greater productivity. Greater productivity may be through (1) obtaining a large quantity of production from the same facilities; (2) using materials of lower price and of different quality without, however, sacrificing the quality of the finished product, i.e., reducing cost through the process of substitution; (3) simplifying the process of manufacture without sacrificing the quality of the finished product; (4) changing features of the product suitably without sacrificing the quality of the product etc.

2. The reduction must be a permanent one. It is short-lived if it comes through reduction in the prices of inputs, such as materials, labour etc. The reduction should be through improvements in methods of production from research work.

3. The reduction should not be at the cost of essential characteristics, such as quality of the products or services rendered.

Thus, cost reduction must be a genuine one and should aim at the elimination of wasteful elements in methods of doing things. It should not be at the cost of quality. Cost reduction is a continuous process of critically examining various elements of cost and each aspect of the business (i.e. procedures, methods, products, management including market and finance etc.) is critically examined with a view to improving the efficiency for reducing costs.

Every plan of cost reduction proceeds with this assumption that there is always scope for cost reduction. A continuous research is made into various areas for finding out the best possible methods of performance for ensuring minimum possible costs.

The reduction in costs should be real and permanent. Reduction due to wind falls, changes in government policy like a reduction in taxes (or duties or due to temporary) and measures taken for tiding over financial difficulties do not strictly come under the purview of cost reduction.

Tools and Techniques of Cost Reduction:

The various techniques and tools used for achieving cost reduction are practically the same which have been suggested for cost control.

Some of these are:

(i) Budgetary control,

(ii) Standard costing,

(iii) Standardisation of products and tools and equipment’s

(iv) Simplification and variety reduction,

(v) Improvement in design,

(vi) Material control,

(vii) Labour control

(viii) Overhead control,

(ix) Production planning and control,

(x) Automation,

(xi) Operation research,

(xii) Market research,

(xiii) Planning and control of finance,

(xiv) Value analysis,

(xv) Quality measurement and research,

(xvi) Cost benefit analysis.

(xvii) Contribution Analysis

(xviii) PERT

(xix) Job Evaluation and Merit Rating.

Advantages of Cost Reduction:

Cost reduction causes a definite increase in margins. The saving in cost may also be passed to consumers in the form of lower prices or more quantity in the same price. This will create more demand for the products, economies of large scale production, more employment through industrialisation and all-round improvement in the standard of living. Government may also stand to gain by way of higher tax revenues.

Increased competitive strength to the industry stimulates more exports. Thus, profit is increased by reducing the costs, it can be utilised for expansion of the organisation which will create more employment and overall industrial prosperity.

Cost reduction is essential of a product has to withstand its global market. Brand loyalty is fading away fast. Nowadays consumers have become price and quality conscious. Hence cost reduction is the key for global competitiveness.

There are many advantages of cost reduction.

Some of these are:

1. Cost reduction increases profit:

It provides a basis for more dividends to the shareholders, more bonus to the staff and more retention of profit for expansion of the business which will create more employment and overall industrial prospects.

2. Cost reduction will provide more money for labour welfare schemes and thus improve men- management relationship.

3. Cost reduction will help in making goods available to the consumers at cheaper rates. This will create more demand for the products, economies of large scale production, more employment through industrialisation and all-round improvement in the standard of living.

4. Cost reduction will be helpful in meeting competition effectively.

5. Higher profit will provide more revenue to the government by way of taxation.

6. As a result of reduction in cost, export price may be lowered which may increase total exports.

7. Cost reduction is obtained by increasing productivity. Therefore, a developing country, like India, which suffers from shortage of resources can develop faster if it makes the best use of resources by increasing productivity.

8. Cost reduction lays emphasis on a continuous search for improvement which will improve the image of the firm for long-term benefits.


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