Page 189 - DCOM206_COST_ACCOUNTING_II

Cost Accounting – II

Notes 10.3 Advantages of Cost Reduction

Following are the main advantages of cost reduction:
(i) Advantages to the Concern,

(ii) Advantages to the Industry, and
(iii) Advantages to the Nation.
Let’s discuss them one by one:
(i) Advantages to the Concern:
(a) Cost reduction improves the competitive capabilities of the organisation. The extent
to which the costs are reduced becomes an index of efficiency attained by the industries
or organisations,
(b) Cost reduction enables improving the profits. This leads to distributing more
dividends to the shareholders, paying better remuneration and bonus to the
managerial staff, and
(c) Improvement in the financial position provides the opportunities to invest the
funds in research which eventually helps in providing the customers with improved
quality products.
(ii) Advantages to the Industry:
(a) Reduced unit cost is an indicator of productivity and efficiency, and

(b) Cost reduction benefits not only to the concern but to entire industry or organisation.
If a department is running efficiency, other departments in the industry will have to
follow and adopt the efficient practices.
(iii) Advantages to the Nation:
(a) Higher revenue may result in more spending on national building activities,
(b) Higher profit will ensure more revenue to the government through taxes,

(c) In international markets, cost reduction and concomitant reduction in prices of
exports help in retaining the markets and gaining new buyers, and
(d) Cost reduction also helps in combating inflation.

Self Assessment

Fill in the blanks:
8. Reduced …………………… cost is an indicator of productivity and efficiency.
9. The extent to which the costs are …………………… becomes an index of efficiency attained
by the industries or organisations.

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