Cost reduction is a challenge to the standards. The aim of cost reduction is to see whether there is any possibility in bringing about a saving in the cost incurred — materials, labour, overheads etc.
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Costs may come down if prices of inputs, such as materials come down. But usually, in such cases, sooner or later the price of the finished product also has to be reduced and, therefore, such cost reduction does not benefit a manufacturer much.
“Cost reduction is to be understood as the achievement of real and permanent reduction in the unit cost of goods manufactured or services without impairing their suitability for the use intended.” — Institute of Cost & Management Accountants, U.K.
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Thus, cost reduction aims at the elimination of wasteful elements in methods of doing things but not at the cost of quality.
Characteristics of Cost Reduction:
The characteristics of cost reduction include:
(i) The cost is a permanent one. The reduction should be through improvements in methods of production from research. It would be short lived if it comes through reduction in the prices of inputs, such as material, labour etc.
(ii) The reduction in cost is real one in the course of manufacture or service rendered. Real cost reduction comes through greater productivity.
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(iii) The reduction should not be at the cost of essential characteristics, such as quality of the products or services rendered.
Advantages of Cost Reduction:
There are many advantages of cost reduction. Some of these are:
1. Cost reduction will help in making goods available to the consumers at cheaper rates.
2. 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.
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3. As a result of reduction in cost, export price may be lowered which may increase total export.
4. Cost reduction is obtained by increasing productivity, so as 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.
5. Higher profit will provide more revenue to the government by way of taxation.
6. Cost reduction will provide more money for labour welfare scheme and thus improve men-management relationship.
According to G. Kantharaj, “In the particular context of a developing economy, it becomes predominantly important to emphasize on cost reduction in agriculture, industry, public administration, etc. Cost reduction cannot be ushered in by a magic wand. Cost reduction is every body’s concern.
…the moto of every industry and every organization should be to produce more goods and to render efficient services. Spiraling up of prices and inflationary trends seen to have reached a point of no. return in the country. The situation cannot be salvaged unless every responsible individual wages a war vehemently to curtail the wastages and delays in his own justification.
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:
1. Simplification and variety reduction.
2. Budgetary control.
3. Standard costing.
4. Overheads control.
5. Planning & control of finance.
6. Automation.
7. Market research.
8. Operations research.
9. Value analysis.
10. Standardizations of products and tools & equipments.
11. Improvement in design.
12. Simplification and variety reduction.
13. Labour control.
14. Materials control.