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Cost Reduction Programme

Cost reduction programme aims at improvement of human efforts at all levels of the organisation which help in reducing costs. It may be a short-term or a long-term programme. A short-term programme is undertaken for sorting out immediate problems; e.g. a problem involving controlling wastages and inefficiencies in a certain department which are likely to push up the cost and reduce the profit margin. Long-term cost reduction programme involves major reduction in costs and may also require capital expenditure. It involves setting up of the target return on capital employed and developing a scheme for its achievement through various cost reduction measures.

The following are the essential requisites for successful implementation of a cost reduction programme:

(i) There should be a separate cost reduction cell responsible for proper planning and implementation of the cost reduction programme.

(ii) There should be an efficient system of management reporting at all levels of management.

(iii) The programme should have support from the top management. It is a continuous process and, therefore, should not be allowed to degenerate into a routine affair.

(iv) There should be an operation and research procedure.

(v) There should be close cooperation amongst different executives concerned with the programme. Each departmental head should be given a list of areas where he is expected to effect economies in cost. Moreover, he should also be encouraged to put forward his own suggestions for improvement.

(vi) There should be regular follow-up to the plan and continuous appraisal of the programme performed with the actual cost reduction performance.

(vii) The plan should not be confined only to reducing costs but should also examine whether expenditure is really required or not. In other words, there should be efforts to eliminate uneconomic and unnecessary activities.