Cost Reduction

1
Cost Reduction

• Cost Reduction not to be confused with cost
  control.
• Cost control is keeping costs within an
  acceptable level.
• Cost reduction assumes the current level of costs
  are too high. It is a planned and positive
  approach.

2
Cost Reduction

• The reduction in unit cost of goods or services
  without impairing suitability for the use
  intended.
• CIMA Official Terminology

3
Planning for Cost Reduction

• Crash Programmes to cut spending levels
• Current projects abandoned
• Capital expenditure deferred
• Employee positions made redundant
• Further recruitment stopped.
• Considered as possible knee jerk or panic
  reactions.

4
Planning for Cost Reduction

• Planned Programmes
• Continual assessment of
• Product range
• Production methods
• Services
• Internal administration etc.

5
Major Difficulties with Programmes

• Resistance by employees due to lack of
  communication.
• Limited to one area with the result that costs
  reduced in one cost centre may reappear in
  another cost centre.
• Often introduced as rushed, desperate measures
  instead of carefully organised well thought
  programmes.

6
Techniques of Cost Reduction

• Improved materials usage
• Labour productivity
• Improving the efficiency of equipment usage
• Reducing finance costs
• Reducing overheads

7
Control over Capital Expenditure

• Capital Expenditure
• Proper control over the spending limits of
  managers
• Impact of decisions based on long term cost and
  return.
• Particularly when compared to staff recruitment.