A number of fields come under the scope of cost reduction. They are discussed below.
Manufacturing of any product starts with the design of product. At the time of improvement in design of old product as well as at the time of designing new product, some investment is recommended to find a useful design that may reduce the cost of the product in following terms:
Design of product should encourage to find out possibility of cheaper raw material as a substitute, maximum production, less quantity etc.
Design of product may reduce time of operation, cost of after-sale service, minimum tolerance, etc.
Employees should be encouraged for cost reduction scheme. There should be no scope for doubts and frictions; there should be no communication gap between any department or any level of management; and there must be proper delegation of responsibilities with defined area of functions of an organization.
Factory Layout and Equipment
There should be a proper study about unused utilization of material, manpower and machines, maximum utilization of all above may reduce cost of any product effectively.
An organization should make efforts to reduce the cost of administrative expenses, as there is ample scope to do so. A company may evaluate and reduce the cost of following expenses, but not the cost of efficiency:
● Telephone expenses
● Travelling expenses
● Salary by reducing staff
● Reduction in cost of stationery
● Postage and Telegrams
Following areas can be covered under the cost reduction program:
● Sales Promotion
● Distribution Expenses
● Research & Development Program
Any cost accountant should keep the following points in mind while focusing on cost reduction for the Marketing segment:
● Check the distribution system of an organization about the overall efficiency of the system and how economically that system is working.
● Find out the efficiency of the sales promotion system
● Find out if the costs can reduced from the sales and distribution system of an organization and whether the research and development system of market is sufficient.
● A cost accountant should also do an ABC analysis of customers in which customers may be divided into three categories. For example:
|ABC ANALYSIS OF CUSTOMERS|
|Category||Number of Dispatches||Volume of Sale Covered|
|Customer…A||About 10%||60% to 80%|
|Customer…B||About 20%||20% to 30%|
|Customer…C||About 70%||5% to 10%|
After performing this analysis, the organization can focus on the customers who are covering most of the sales volume. According to it, the cost reduction program may be run successfully in the area of category B and C.