Cost reduction involves identifying and eliminating unnecessary costs to improve business profitability. It can be achieved through cost savings, avoidance, containment, and value enhancement. Key areas for cost reduction include product design, organizational rationalization, factory layout, production planning, marketing costs, personnel costs, and financial costs. Techniques include organization and method studies, work study, simplification, standardization, value analysis, automation, production control, design, material control, and quality control. The goal is to continuously and innovatively look for alternative measures to reduce costs across all business activities.

1. Sensitivity: LNT Construction Internal Use

2. Sensitivity: LNT Construction Internal Use
Cost Reduction
The process of identifying and eliminating unnecessary
costs to improve the profitability of a business is known
as cost reduction.
COST = Cost of Material + Labour + Overhead +
General & Administrative Expenses + Sales Expense

3. Sensitivity: LNT Construction Internal Use
Cost Reduction Strategies
 Cost Savings
 Cost Avoidance
 Cost Containment
 Value Enhancement

4. Sensitivity: LNT Construction Internal Use
Cost Savings
 A cost reduction that can be specifically identified and will be made to a
budget or program, resulting from implementing a specific alternative in
lieu of continuing the present system.
 The result of a planned or deliberate action taken by Purchasing
 Savings are a quantifiable monetary benefit
 There must be a direct activity reduction for a savings to occur; thus,
benefits are considered as savings only if the estimate identifies
benefits that start accruing during the budget/activity’s fiscal year

5. Sensitivity: LNT Construction Internal Use
Cost Avoidance
 Financial or economic benefits that result from an initiative but do not
permit a monetary reduction to a funded activity or budget
 Is a quantifiable monetary benefit
 Usually addresses the reduction or elimination of a future cost
 Does not lower the cost of materials purchased when measured against
historical results, but it does minimize or avoid entirely the negative
impact on net income that a price increase would have.

6. Sensitivity: LNT Construction Internal Use
Cost Containment
 The process of maintaining organizational costs within a specified
budget; restraining within a specified budget; restraining expenditures
to meet organizational or project financial targets.
 Measures taken to reduce expenditure or the rate of growth of
expenditure, or the unit cost of goods/materials/supplies/services.
 When an organization keeps costs low, or within a limit that has been
planned.

7. Sensitivity: LNT Construction Internal Use
Value Enhancement
 Value which affects the whole-life costs or whole-life income and its
required functionality.
Value
 For any service or offering to have financial value, the organization must
have been willing to pay for it out of pocket or must have already been
paying for it in a way that can be measured on the organization’s income
statement. This definition is a requirement for any discussion of
legitimate cost avoidances

8. Sensitivity: LNT Construction Internal Use
Value Enhancement
Value
 For example, in practicing sustainable environmental management, we
may reduce the environmental impact; while at the same time achieve
cost reduction and create environmental friendly conservation added
value.

9. Sensitivity: LNT Construction Internal Use
7 Scope And Areas for
Cost Reduction
(a) Product Design
A well conceived cost reduction programme starts with the design of the product. All
possibilities of cost reduction should be investigated by the management while introducing new
designs of the products or while seeking improvements of the existing designs. Value analysis can be
a very useful technique in this attempt. Cost reduction through the designing of the product will result
in future economies at all points, i.e. production, sales, marketing and finance.

10. Sensitivity: LNT Construction Internal Use
7 Scope And Areas for
Cost Reduction
(b) Rationalization of Organization
Cost reduction may be brought about by an improvement in the organization structure of the
firm. Rationalization of organization requires a clear-cut definition of each function and responsibility,
avoidance of overlapping in authority and responsibility, promoting co- operation and close
relationship between the various executives working at different levels in the organization,
establishing good and efficient communication system, encouraging the employees for cost
reduction suggestions and promoting the feeling of involvement among them.

11. Sensitivity: LNT Construction Internal Use
7 Scope And Areas for
Cost Reduction
(c) Factory Layout and Plant and Equipment
Factory layout and the plant layout also affect the cost of production to a large extent. The
management should examine its factory and plant layout carefully and explore the possibilities of
cost reduction by eliminating wasteful and irrelevant system and ensuring maximum utilization of
existing facilities.

12. Sensitivity: LNT Construction Internal Use
7 Scope And Areas for
Cost Reduction
(d) Production Plan, Programme and Method
An efficient system of production control ensures proper production planning, initiates efficient
production procedures and develops economical production programmes. It avoids wastage of time, money
and monetary, non-monetary resources, brings about economy in various types of costs.
(e) Marketing Costs
An efficient cost reduction programme must cover marketing field also. It should aim at economizing
in selling, advertising, distribution, marketing research, sales- research costs etc. The marketing manager
must explore the possibilities of reduction in costs in selling and distribution expenses without impairing the
efficiency of the marketing function.

13. Sensitivity: LNT Construction Internal Use
7 Scope And Areas for
Cost Reduction
(f) Personnel Costs
Various economies may be sought for by the management in the area of personnel
management too. It may be possible to cut down the labour costs by introducing training and
development programmes, work simplification, improving machine loading improving the morale and
productivity of employees, introducing various welfare measures, incentive wage payment and
proving better working conditions.
(g) Financial Costs
Finance is also an important and sensitive area for effecting cost reduction. Cost reduction
may be effected by improved system of fixed capital budgeting, avoiding over-investment in various
current assets, obtaining capital at reasonable interest rate by lowering down the cost of capital,
leading to ultimately maximization of return on capital employed in the business.

14. Sensitivity: LNT Construction Internal Use
Features of Cost reduction
 Cost reduction is not concerned with setting targets and standards.
 Cost reduction aims at improving the standards.
 It is continuous, dynamic and innovative in nature, looking always for
measures and alternative to reduce costs.
 It is a corrective function.
 This is applicable to every activity of the business.
 It adds thinking and analysis to action at all levels of management.

15. Sensitivity: LNT Construction Internal Use
Techniques of cost reduction
 Organization and method studies
 Work study
 Simplification in procedure
 standardization
 Value analysis
 Automation
 Production control
 Design
 Material control
 Quality control

16. Sensitivity: LNT Construction Internal Use