Cost Reduction

Cost reduction may be defined as an achievement of real and permanent reduction in the unit cost of goods produced or services rendered without impairing their quality or functional suitability.

The above definition brings out the following as the essential features of cost reduction:

(i) Reduction should be real: Cost reduction involves genuine savings in cost of production or providing services. This can be achieved either through research or eliminating wasteful expenditure. Cost reduction obtained as a result of lower material prices, price agreements, reduction in Government duties or taxes or windfall is not be taken as real and hence it cannot be termed as cost reduction.

(ii) Reduction should be permanent: Cost reduction involves permanent reduction in the costs. Temporary reduction in cost is not taken as cost reduction.

(iii) Quality or utility to be maintained: Cost reduction should not affect the quality or utility of the goods or services. In other words, goods or services should continue to be suitable for the intended use even after cost reduction.

Special features

1. Unit cost is required to be reduced by reducing expenditure with respect to a given volume of output.

2. Unit cost is attempted to be reduced by increasing production, i.e. production per unit of output (e.g. material, labour hour, per employee). It implies enhancement in the rate of yield or output, expenditure remaining the same.

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