Significance of cost reduction today, and techniques of cost control

Cost reduction and cost control

Cost control keeps actual costs within predetermined standards or budgets: targets are set, actual costs are measured, deviations are found and corrected. Cost reduction starts from a different question: are the standards themselves right? It looks for better methods, design, materials or organisation that bring down what each unit costs to make or deliver, and it counts a saving only if the saving is genuine and lasting and the product still serves the buyer's purpose as well as before. A one-off cut, or one bought with poorer quality, does not qualify. Control preserves an existing level of cost; reduction lowers it. Both are needed: control prevents costs from rising above what has been planned, while reduction keeps lowering the plan itself. Reduction gains are then built into new standards.

Significance of cost reduction in the present economy

1. Intense competition. Open markets, online price comparison and global competitors leave little room to raise prices; profits now depend on lowering costs.
2. Inflation in input costs. Rising prices of raw materials, energy, wages and transport squeeze margins unless costs are reduced elsewhere.
3. Price-sensitive customers. Where buyers compare prices closely, as in mass consumer goods, a firm with lower costs can price competitively and still earn a profit.
4. Survival in downturns. Lower costs lower the break-even point, so the firm can survive a fall in demand.
5. Export competitiveness. Lower unit costs help firms compete in international markets.
6. Funds for growth. Savings provide internal finance for expansion, research and modernisation.
7. Benefit to society. Cost reduction means lower prices, better use of scarce resources and less waste: part of sustainable business.
8. Investor expectations. Shareholders judge managements on margins and returns, which depend on cost efficiency.

Techniques used for cost control

1. Budgetary control: budgets for every function, comparison of actual with budget, and action on variances.
2. Standard costing and variance analysis: standards for material, labour and overheads; analysis of variances by cause and responsibility.
3. Responsibility accounting: costs reported by the manager who controls them.
4. Inventory control: economic order quantity, reorder levels, ABC analysis and just-in-time purchasing.
5. Marginal costing and break-even analysis: understanding how costs behave with volume.
6. Value analysis and value engineering: removing costs that add no value to the product.
7. Quality control and waste reduction: reducing scrap, rework and defects.
8. Labour productivity measures: time and motion study, incentive schemes, control of idle time and overtime.

Conclusion

In today's competitive, inflation-prone economy, cost reduction is essential for survival and growth, and it rests on an effective system of cost control. Cost reduction is a continuous effort rather than a one-time cut, and it must never be achieved by lowering the quality customers expect.