Areas covered by cost control and cost reduction

Some of the areas where a cost control is essential in a Business are:

(I) Labour

(ii) Materials

(iii) Sales

(iv) Overheads

(v) Energy

• Costs have been rising faster than ever before. The business executives have overlooked the more crucial role of providing management with effective information for expense control and reduction. Most businesses have poor resource management and control.
• (i) Labor expenses have increased in three ways: higher basic pay, shorter working hours, and decreased production.
• Reducing labor costs is a tough topic. The presence of trade unions and minimum wage regulations makes it impossible to cut pay rates. Wage reduction policies are counterproductive for management. To inspire workers, salary rates should be changed upward. Labor expenses might be reduced only if the rate of production per worker increased faster than the pay rate. This is achieved by increasing labor productivity.
• Productivity plans designed to pay for higher production are self-defeating unless the net outcome is a lower unit cost.
• Productivity must be understood as one or more of the following:
• (i) Increase production at the same cost. (ii) Reduce production costs.
• Productivity should result in decreased unit costs. In other words, it reduces costs. This entails discovering better methods to do things such that productivity rises as the number of hours worked grows. This is the only method to combat growing labor expenses.
• (ii) Material: Inefficient use of materials leads to increasing expenses. Wastage caused by inadequate management and design has grown to the point that waste recovery is now a significant business. Waste must be reduced in order to keep expenditures under control.
• Commodity markets influence the prices paid for materials. There are many strategies to reduce material costs. If supplies are purchased appropriately, the company might get a variety of savings. When it comes to the materials utilized by a company, there are many considerations to make.
• First, identify the sources of accessible content.
• Second, a cheaper equivalent for the substance now utilized by the company must be identified.
• Third, the cost of freight must be assessed.
• Fourth, an appropriate product design to limit material utilization is required.
• Fifth, alternate processes of manufacturing must be investigated.
• Because material costs account for a significant portion of overall production costs, controlling and reducing material costs is critical in these situations. R&D activities, inventory management, enhanced production planning, removal of slow moving stocks, improved flow of components and supplies, and so on may all help to control and reduce these costs.
• (iii) Sales: Sales need cost monitoring. Sales control entails ensuring that the organization does not overspend to attain its sales targets. To sell, a company employs a sales team and invests in advertising, among other things. The crucial ratio to monitor is marketing spend to sales.
• The expense-to-sales ratio includes five components: (i) sales force to sales, (ii) advertising to sales, and (iii) sales promotion to sales.
• (iv) Marketing research to sales (v) Sales management to sales.
• Management must keep track of these marketing expenditure ratios. Sales costs may be reduced by rearranging market segments based on demand. It should rearrange the sales force according on the capabilities of each team member. Consumer preferences must be identified and conveyed to management so that goods may be tailored to meet their demands.
• (iv) Overheads: These are fixed expenses. Fixed costs are those that are constant at a certain capacity and do not change with production. These expenses will remain even if no production is created. Proper capacity, equipment, and maintenance may reduce overhead costs.
• Fixed costs include plant, equipment, and building expenses, among other things. These costs include permanent expenses like rent, depreciation, property taxes, and staff pay that cannot be lowered during low demand periods. Careful design is essential for the overall arrangement of the plants. Overhead expenses may be decreased via good planning and execution.
• (v) Energy: Faulty designs lead to excessive consumption of electricity and materials. Lighting expenditures may be decreased by using high-quality electronic energy-saving light bulbs. The rise in oil costs has highlighted the very high levels of waste. The issue of energy conservation is gaining traction since rising costs need action.
• The savings from reduced energy use may now cover the expenditures. However, there has always been utility in minimizing energy use. Changing views about what has traditionally been cheap and abundant is tough, but it is necessary if profit pressures are to be decreased.
• It is said that in India, there is no economy in the use of fuel, energy, or electricity. Fuel waste in the Indian sector is as high as 25%. All of these sources of growing expenses must be addressed if business and trade are to exist intact. They can only be addressed if regular monitoring of resource utilization is implemented. Only a well-thought-out and ongoing cost-cutting initiative can provide the essential long-term advantages.
• Cost Reduction Program
• The following are the fundamentals of a cost-cutting program:
• The cost reduction program should be tailored to the needs of the firm.
• A cost-cutting program is an ongoing activity that cannot be viewed as a one-time or short-term event. The success of any cost-cutting initiative may depend only on constant improvement of efforts.
• The cost-cutting scheme should be serious and sustainable.
• Top management employees, for example, should be the initiators of cost-cutting programs. The success of this program is dependent on the cooperation of all workers and departments within a business.
• Employees should be rewarded for participating in the cost-cutting initiative and contributing creative ideas to the program.
• Fields covered by the Cost Reduction Program
• Cost reduction applies to a wide range of disciplines. They are addressed below.
• Design
• Product design is the first step in the manufacturing process. When improving the design of an existing product or developing a new product, some investment is suggested to identify a functional design that may minimize the cost of the product in the following terms:
• To reduce material costs, product design should consider alternative raw materials, maximize manufacturing, and minimize quantities.
• Product design may minimize labor costs, after-sales service costs, and tolerances.
• Organization
• Employees should be encouraged to participate in a cost-cutting initiative. There should be no room for uncertainty or friction; there should be no communication gap between any department or level of management; and there should be adequate delegation of tasks within an organization’s specified areas of activities.
• Factory Layout and Equipment
• There should be a thorough investigation into the underused usage of material, personnel, and machinery; optimum utilization of all three may significantly cut the cost of any product.
• Administration
• An company should make steps to cut administrative costs, since there is abundant opportunity to do so. A corporation may assess and minimize the costs of the following items, but not the cost of efficiency:
• Telephone expenditures.
• Travel expenditures.
• Reducing worker salaries and stationery costs.
• Postage and Telegraphs
• Marketing
• The cost reduction program may address the following areas:
• Advertisement
• Warehouse Sale Promotion
• Distribution expenses
• Research and Development Program
• Any cost accountant should keep the following considerations in mind while working on cost reduction for the marketing segment:
• Examine an organization’s distribution system to determine its overall efficiency and cost-effectiveness.
• Determine the effectiveness of the sales marketing system.
• Determine if expenses may be lowered from an organization’s sales and distribution system, and whether the market’s research and development system is adequate.
• A cost accountant should also do an ABC analysis on clients, which may be separated into three groups. For example:

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.

Financial Management

Attention should be given to the following areas:

• If there is any over-investment.
• How much economical is the cost of capital received?
• If the organization is getting maximum returns for the capital employed.
• If there is any over-investment, that should be sold and similarly, unutilized fixed assets should be eliminated. Slow-moving or non-moving inventories should be removed and should transfer this surplus to the working capital to re-invest it in a cycle of more profitable area of business.

Personal Management

Cost reduction programs can be run using staff welfare measures and improving labor relation. Introduction of incentive schemes for labor and giving them better working conditions is very important to run an efficient cost reduction program.

Material Control

Cost reduction program should be run by purchasing economical and more useful material. Economic Order Quantity (EOQ) technique should be used. Inventory should be kept low. Proper check on inward material, control over warehouse and proper issuance of material, and effective material yield should be done.

Production

Using effective control over material, labor, and machine a better cost reduction program may be run.