Page 194 - DCOM206_COST_ACCOUNTING_II
P. 194
Unit 10: Cost Reduction and Cost Control
For example, travel expenditure may be under review and the finance manager might Notes
request a saving of 20% in the following year’s budget. One approach would simply be to
cut the number of trips by an average of 20%, and the target would be achieved with no
difficulty. Except during the following year, when the pressure is off, the costs will creep
back into the system and the benefits of the saving will be short lived.
An alternative approach, in addition to the above action (which is a very good starting
point), would be to review and redesign the underlying activities that drive travel
expenditure in order to change the way the organisation operates. This would have the
effect of sustaining the saving over a much longer term and ultimately gain the organisation
competitive advantage. “Organisations that approach their cost reduction efforts in a
strategic manner have the opportunity to significantly strengthen their competitive
position.” The following questions in relation to travel expenses should also be asked:
1. What is the breakdown of the travel expense? (In order to understand the makeup of
the cost and where to focus improvement efforts)
2. What activities are performed that result in these costs being incurred?
3. Why do these activities need to be performed and do they add value to the business?
And how can the benefit t or value of the activity be determined?
4. What are the interdependencies and risks of changing these activities?
5. Is there a better way to achieve the same or even a better result, e.g., scenario or
option planning?
6. What should the targeted cost be, taking into account potential improvements?
7. What needs to be done to redesign the approach to travel to enhance the process and
reduce the cost?
8. What controls or performance measures need to be introduced to ensure sustainable
success?
9. How will the performance of the activities be reported to ensure that the costs don’t
creep back into the system?
Source: http://performance.ey.com/wp-content/uploads/downloads/2011/09/Performance-4_1-v15-
Article-1.pdf
10.5 Summary
Cost reduction refers to activities necessary for ensuring that the objectives are fulfilled.
Cost reduction is a systematic effort to improve profit margins by eliminating all forms of
wastage and unnecessary expenses without, at the same time, impairing the generation of
revenue.
Cost reduction must be a real one in the course of manufacture or services rendered in that
it must arise in the enterprises or organisation.
Cost control has limited applicability. It applies to items of cost, i.e., production function.
The scope and areas of cost reduction is so vast that every part of an organisation or
industry is involved in this problem.
A cost reduction method should be systematic investigation into the methods and
techniques of production and other functions. It involves an analysis of every aspect of the
organisation with the objective of ascertaining the most efficient method of performing
the various functions.
LOVELY PROFESSIONAL UNIVERSITY 189