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Cost Reduction Technique: Cut Costs and Maximise Profits

In this Quality HUB India course, you’ll learn practical techniques to identify wasted money in your company, detailed tips for analyzing the effectiveness of your biggest costs, understand why you should increase your prices or reduce your quality, learn which of your customers are actually costing you money, and dealing with common problems of management and motivation.

After this course your company will be lean, have highly profitable customers, and every part of the supply chain will contribute more effectively. In fact – you’ll most likely be dealing with the most profit you’ve ever known! We look at lots of real-life cost reduction examples. Whether you’re a small family business or a huge multinational this course will build essential skills for your long-term growth and short-term effectiveness.

In our opinion Cost Reduction is one of the most powerful and underestimated leadership and project management areas. Most companies focus entirely on selling and forget that there are crores of rupees left on the factory floor through inefficiencies and misunderstandings. Rest assured – you need not make your employees or customers unhappy using these techniques… in fact most likely both will end up better off.

What is Cost Control and Reduction?

The two most effective strategies used to minimize costs and increase profits are cost control and cost reduction. Simply said, cost control is a strategy used to give management all the information they need about real costs and to appropriately align them with projected expenditures. On the other side, the phrase “cost reduction” refers to lowering the price per unit of a product without sacrificing its quality. To efficiently complete the process, the businesses employ a wide range of cost control and cost reduction approaches.

Cost Control

Cost control is a procedure that focuses on attempting to manage the overall cost through competitive analysis, according to the definition. Such procedures aid in bringing the initial cost into line with the fixed costs.

By using this procedure, businesses may guarantee that their production costs won’t exceed the budgeted amounts. There are various steps in the cost control process, which starts with creating the production-related budget. The evaluation of the actual performance is done next, and then the differences between the original cost and the budgeted cost are calculated. Investigating the causes of the disparities comes next, and then the required steps must be taken to correct them.

Two methods utilized in the cost management process are standard costing and budgetary control. The procedure is ongoing and aids in the analysis of the reasons for the variations.

  • Determining the standards
  • Comparing the standards and looking at the results
  • Analysing the variances
  • Establishing the action needed to be taken by the firm

Cost Reduction

Cost reduction is defined as a procedure that seeks to lower the per-unit cost of a good or service produced by the company without compromising the product’s quality. This can be accomplished using a variety of contemporary and enhanced procedures, which provides a window into other strategies for reducing unit production costs.

Cost reduction is crucial for businesses to maximize profits since it plays a vital role in lowering the cost of goods per unit. This procedure aids in identifying and eliminating wasteful costs associated with the manufacture, storage, sale, or distribution of the goods. The following is stressed during the cost reduction process:

  • Savings in every unit cost of production
  • The product quality should not be compromised 
  • Non-volatile nature of the savings

The main methods for cutting costs include better product designs, less variety, quality operations and research, as well as job evaluation.

Difference Between Cost Control and Cost Reduction

Businesses place a great deal of emphasis on cost control and reduction, but there are some variations between the two. The following are some important distinctions between cost control and reduction:

  • The goal of cost control is to lower the entire cost of production. However, cost reduction tries to lower a product’s cost per unit..
  • Cost reduction is a more long-term process than cost containment, which is swift by nature.
  • When the needed objective is reached, the cost control process is complete. On the other hand, the process of cost reduction is ongoing and does not come to a stop after a specific amount of time. It is mostly concerned with cutting wasteful expenses.
  • Cost reduction has no discernible impact on the product’s quality, but cost control makes no guarantees about preserving that quality.
  • The cost reduction method mostly serves to revive expenses, but the cost control approach primarily serves to prevent costs before they exist.

Therefore, if an organization wants to increase its revenues, cost control and reduction are crucial components.

Did You Know?

The goal of cost control is to maximize profit by identifying and reducing costs. It contributes to preserving and increasing the company’s earnings. The budgeting process, which compares the company’s actual performance to the budget, is quite helpful in this regard. The business must take action if the real costs are higher than anticipated.

Solved Examples

1. Cost Measure is What Kind of Control?

  1. Corrective
  2. Preventive
  3. Both
  4. None of the above

Ans: (b) Preventive

2. Which Type of Control Process Does Not Affect the Quality of the Products?

  1. Cost control
  2. Cost reduction
  3. Cost-cutting
  4. None of the above

Ans:  (b) Cost reduction 

Importance of Cost Control and Cost Reduction in Commerce

Cost control primarily focuses on lowering the total cost of manufacturing, whereas cost reduction focuses on lowering the price per unit of a certain product. Cost Control is a temporary measure while Cost Reduction is permanent. Commerce majors will comprehend how cost containment is completed once all business objectives are achieved. It is an important chapter that will pave the way for later chapters on related subjects. Providing the children with the bare necessities today will aid them in later comprehension of all the complex concerns. One of the most important chapters in Commerce requires careful preparation.

How to Prepare for a Commerce Test on Cost Control and Cost Reduction

  • Students can go through Cost Control and Cost Reduction – Explanation, Difference and Solved Examples in QHI course
  • They can get all the information they need on this website.
  • After reading the entire page, take notes in your own words on specific subjects.
  • Review the examples that have been solved carefully.
  • By putting each of the principles down in your own words, you may evaluate what you’ve learned.
  • Use this page as a reference before all experiments.

You can also explore our paid services:

Cost Reduction Technique: Cut Costs and Maximise Profits

Quality HUB India offered Six Sigma Online Courses:

Hindi Version:

  1. Lean Six Sigma Yellow Belt
  2. Lean Six Sigma Green Belt
  3. Lean Six Sigma Black Belt

English Version:

  1. Six Sigma MINI Course – Free 
  2. Lean Six Sigma Yellow Belt
  3. Lean Six Sigma Green Belt
  4. Lean Six Sigma Black Belt

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Author

Neha Viswakarma

Director Quality HUB India

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