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What is Cost Reduction?
Cost reduction is a planned step to reduce expenditure. It is an ongoing steps of analyzing of functions, cost etc for further economy in application of factors of production.
Without impairing its quality a permanent and real reduction of cost per unit is achieved under cost reduction. The plan which has been made for cost reduction is always made with the assumption that there is always some scope of cost reduction. Various research are being carried out in a continuous basis to find out the best possible way for minimizing the cost. Reduction due to changes in government policies or changes due to any wind falls does not came under the preview of cost reduction.
Characteristics of Cost Reduction
• During the process of manufacture or service rendered the reduction achieved should be real one. With the help of greater productivity a real reduction can be achieved. Greater productivity can be achieved through production of larger quantity under the same facilities, With different quality of material and lower price of raw material, without sacrificing the quality of product simplify the process, without sacrificing the quality of product just change the features of the product suitability.
• During the process of manufacture or service rendered the reduction achieved should be permanent one. It can be achieved with the improvement in the method of production.
• Reduction of cost should be achieved without hampering the quality of product.
The two ways which may effect in the reduction in cost per unit of production
• Quantity of output remain constant and only reduction in expenditure.
• By maintaining the level of expenditure unchanged increase the production quantity.
Cost Reduction Tools and Technique
The various tools and technique which are generally used for cost reduction is
• Standard Costing & Budgetary Control
• Improvement in design & Automation
• Labour control & Material Control
• Overhead control
• Simplification and variety reduction
• Market research and operation research
• Cost benefit analysis and contribution analysis
• Merit rating and job evaluation
Advantages of Cost Reduction
• Increase profit: – With increase in profit dividend can be distributed more to the shareholders, reserve can be made for various future project, bonus or increment can be provided to the employees.
• Men-management relationship: – As it provide more money for labour welfare schemes which ultimately help in men-management relationship.
• Cheaper Rates: – Due to cost reduction goods can be sold at cheaper rates which ultimately increase the demand, more employment through industrialization which overall improve the standard of living.
• Meeting Competition: – It can help in achieving the market competition.
• Government Revenue:- More profit means more taxes which ultimately increase the government revenue.
• Exports Increases: – With reduction in sales prices export can be increase.
• Improvement in research technology: – Cost reduction helps in improvement in research also.
Side-Effects of Cost Reduction
• Due to reduction in cost quality may be hampered.
• Without the full support and co-operation from employee it’s hard to achieve the cost reduction.
• Individual objective and organizational objective can be conflict.
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