PADMASHREE DR.D.Y.

PATIL UNIVERSITY
(DEPARTMENT OF BUSINESS
MANAGEMENT)

COST ACCOUNTING
Report

On

COST REDUCTION METHOD FOLLOWED

SUBMITTED TO:-
PROF. SHWETA
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GROUP MEMBERS:

1. Digvijay Tendulkar 108

2. Rupal Upadhayay 045
3. Priyanka Gharat 107
4. Kavita Tiwari 105
5. Anisha Subramaniam 104
6. Poonam suryawanshi 122
7. Prerna Lodha 042
8. Shalaka Mohite 044
9. Sarvesh Damle 113
10. Avinash Repale 116
11. Abhishek Singh Yadav 031

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INDEX:

• INTRODUCTION
• SCOPE OF COST REDUCTION
• ADVANTAGE OF COST REDUCTION
• COST REDUCTION V/S COST CONTROL
• STEPS IN REDUCING COST AND INCREASING
PROFITS
• COST REDUCTION TECHNIQUES
• EXAMPLES OF COMPANIES USING COST
REDUCTION TECHNIQUES
• BIBLIOGRAPHY

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 Almost every organization in the world today is looking at
ways to reduce costs. Some companies can do this fairly
simply by closing factories or giving top-down targets to all
relevant departments (costs to be reduced by 20%). Other
companies feel that they require a more fundamental approach
and restructure the way that they do their business. Sometimes
this includes a strategic review of which products and services
should be offered to the market, other times the markets
served are seen as stable. In the second case there is usually a
need to fundamentally re-assess how the products / services
are brought to market in order to radically decrease the costs
and/or to improve service levels.

What is Cost Reduction?

“Cost reduction is to be understood as the achievement of real
and permanent
reductions in the unit cost of the goods manufactured or
services rendered without impassing their suitability for the
use that is intended”- ICWA London.

Cost reduction is not simply attempting to slash any and all

expenses immethodically. The owner-manager must
understand the nature of expenses and how expenses inter-

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relate with sales, inventories, cost of goods sold, gross profits,
and net profits.

Cost reduction does not mean only the reduction of specific

expenses. You can achieve greater profits through more
efficient use of the expense dollar. Some of the ways you do
this are by increasing the average sale per customer, by
effectively using display space and thereby increasing sales
volume per square foot, by getting a larger return for your
advertising and sales promotion dollar, and by improving your
internal methods and procedures.

SCOPE OF COST REDUCTION:

Cost reduction is attainable in almost all areas of business

activities. There is perhaps no situation which cannot be
improved. It covers a wide range like new layout, product
design, production methods, materials and machines in
factories as well as in offices, innovation in marketing etc. it
may also extend to specified activities like purchasing,
handling, packaging, shipping, warehousing, marketing, use
of administrative facilities and even the utilization of financial
resources.

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Excessive cost may result in every organization from:-

1. Lack of information about raw material, processes,

products, components etc.

2. Lack of utilization of ideas generated form performance

and economic analysis

3. Honest but wrong beliefs that certain things are impossible

for achievement

4. Temporary circumstances like features developed under

pressure or modification made to meet certain circumstances

5. Habits and attitudes of confining to one conventional

method

It is not necessary for the management to proceed in any

specific sequence in considering the various aspects of cost
reduction and it may be necessary to start the campaign in
more than one direction at the same time.

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ADVANTAGES OF COST REDUCTION:

 In so far as Individual capacity is concerned, cost

reduction helps in profit improvement.
 It enhances the share value, improves investment
opportunities and facilitates the collection of capital.
 The society will be benefited by the reduced prices
which may be possible by savings from cost reduction
programs.
 Workers and staff of the industry may also be
benefitted through increased wages and improved staff
welfare amenities.
 The country also stands to gain immensely by the
cost reduction programs.

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COST REDUCTION vs. COST CONTROL:

COST REDUCTION COST CONTROL

This process finds out the This process undertakes the

substitute by finding new competitive analysis of
ways or methods actual results with
established norms

Under this process Under this process the

necessary steps are taken variances are appraised and
for further modification in necessary course of action
the method. will be taken to revise
norms, standards etc

It challenges the standards It starts from established

forth – with and attempts to cost standards and attempts
reduce cost on a continuous to keep the costs of
basis . operation of a process in
line with those standards.

The emphasis is partly on The main stress is on the

the present costs and present and past behavior
largely on future costs. of costs.

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It is universally applicable.
It should be applied to
every area of business. It
does not depend on
standards, through target
amounts may be set.
Cost reduction is a
corrective function. It
operates even when
efficient cost control system
exists
It has limited applicability
to those items of costs for
which standards have
already been set. The items
for which standards are set
mainly relate to productive
operations
Cost control is a preventive
function. Costs are
optimized before they are
incurred.
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Following are major areas of COST REDUCTION:

1. Raw material procurement:

a) Bulk buying
b) Opportunity buying
c) Make or buy
d) Annual Rate contracts

2. Logistics- Inbound and Outbound:

a) Route mapping
b) Loadability

3. Warehouse and Stores:

a) Low inventory
b) Space management
c) EOQ

4. Manufacturing Process (Production):

a) manufacturing
b) Automation

5. Energy, fuel & Water

a) Motors
b) lighting
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c) compressors
d) fuels
e) recycle
f) Waste water management

6. Information Management Enterprise Resource

management

7. Human Resources Out-sourcing

The following are 10 steps a manufacturing business can use

to become more sustainable and green while reducing your
costs and increasing your profits:
1. Adopt a Sustainable Business Strategy
Your strategy should begin by creating a green supply chain
management that fits sustainability into your core business
strategy. Sustainability is development that meets the needs of
the present without compromising the ability of future
generations to meet their own needs. It represents the means
by which your business can achieve reduced costs and
increased profits. Commit to building your business green
from the inside out by redefining your goals so that they
incorporate sustainable thinking into every aspect of your
supply chain, from purchasing to production. If you commit to
an informed sustainability strategy, it can be a catalyst for
innovation in your business.

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2. Implement a System Evaluation

You need to review every aspect of your supply chain. Look

for areas where significant environmental costs occur. Use
teams of people that include members from different divisions
to identify these problem areas and determine what you can
do to yield significant cost-saving while reducing
environmental impacts. After calculating the benefits, you
should begin implementing procedures that will correct the
problem areas within your overall system.

3. Review Your Purchasing Procedures

Purchasing is the point where materials come into the
manufacturing process. Becoming greener means using
suppliers with a higher environmental performance. This
includes environmentally friendly raw materials that are
natural, organic, and biodegradable. One practice being
adopted by businesses is to put all purchasing under one
department. Advantages include buying in larger quantities at
a lower price, storing materials in a central location, and
distributing materials as needed, cutting waste due to
materials not being used in a timely manner.

4. Make Your Manufacturing Methods More Efficient

The goal is to implement a process that is efficient and has
little or no waste. This lightens your global environmental
footprint while improving the quality of your company’s
products. Efficiency pertains to increasing your production
rates by producing the same amount of product using less
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floor space. The past 10 years has brought new ways of
thinking that have created more efficient methods for doing
things. Building and operating a production line today costs
less than its counterpart did 10 years ago.

5. Reduce Energy Consumption and Costs

By implementing an energy-saving program, you could
potentially reduce your electrical consumption by half.
Another method for reducing energy consumption and costs is
by using renewable energy sources. For example, carpet
manufacturer Tandus uses 100 percent biodiesel, a renewable
energy source. It replaced diesel fuel in its commercial boilers
and as a consequence reduced air toxins by 60 percent to 90
percent, particulates by 48 percent, and carbon dioxide by 78
percent.

6. Purchase Energy-Saving Machinery

Facilities and equipment management is an area where
manufacturers can improve their sustainability. Recent
innovations have increased the efficiency of machines while
reducing their impact on the environment. New equipment
with energy-saving and eco-friendly features can reduce costs
by operating more efficiently, utilizing materials to their
fullest, and producing a better product at a faster rate with
little or no environmental impact.

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7. Produce Products That Are Recyclable or
Biodegradable:
Design and manufacture products that are organic and health-
conscious rather than toxic to your customers. Consumers are
beginning to demand that the products they buy be either
recyclable or biodegradable. Your company should devise a
sustainability warranty that guarantees that the waste from
your products will not wind up in landfills or be incinerated
into the air. This gives your customers proof that you do what
you say.

8. Reduce and Recycle Waste

Reduce waste and create a closed-loop program. This means
recycling a product back into itself, essentially creating little
or no environmental waste. This is a key element in natural
resource preservation and sustainability.

9. Become Educated on Green Manufacturing Practices

Environmental literacy, research, and continuous learning are
essential to your process of becoming green and creating a
safer work environment. Educate your staff. Require everyone
to participate in the movement to green manufacturing.

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10. Stay Informed About Government Regulations

Take a proactive approach to stay ahead of the environmental

regulations that various government agencies impose on
manufacturing businesses. Inform yourself regarding both
current and impending regulations that affect your business.
Honda and Toyota are examples of manufacturers staying
ahead of the regulations. Both companies have developed and
produced new engines that not only meet but exceed the
requirements.

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COST REDUCTION TECHNIQUES:
1. Eliminate Paper Flow

A great way to improve productivity

while lowering costs is to eliminate paper flow. The average
office worker prints 10,000 sheets of paper a year. The best
approach is to place all documents online for employees to
download, read, and make changes to. Also, instruct all
employees not to print e-mails and other unnecessary
documents that will usually end up in the trash upon a few
quick glances. Have IT set all printers to print doubled sided.

2. Ask for Employee Suggestions

Employee suggestions play a vital role in cost reduction and
increasing productivity because employees have more
experience regarding daily operations in a business. Every
suggestion that your business implements improve your
business in some way. Performance may be improved,
customer satisfaction may increase, costs reduce, or some
other positive impact improves your business in some way.
The average employee suggestion saves the company $6,224

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in operational expenses. The more ideas you implement the
more your business will improve. These suggestions will add
up over time and can be used as a competitive advantage.

3. Collaborate with Suppliers

Your vendors are your best allies

when implementing cost reduction strategies within your
organization. Consider a variety of programs, such as vendor
managed inventory systems (VIM), vendor stocking programs
(VSP), and common supplier joint procurement policies.
Choosing a VSP reduces inventory costs for less popular
items and increases supplier reliability and dependency.
Alleviate the nightmare of managing inventory by giving the
responsibility to the vendor, which reduces your inventory
and related expenses.

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4. Reduce Lead Times
When a product arrives at the warehouse it inevitably takes
several days for it to reach the customer. Review and refine
your receiving protocols to ensure products hit the shelves
with minimal delay by maintaining adequate order supply
rates and throughput levels. Consider rationalizing SKUs by
removing inappropriate products from the shelves. Maintain
optimal levels by reducing safety stock inventory and
increasing order fill rates.

5. Manage and Optimize Your Inventory

Enhance your cost reduction efforts by monitoring your

inventory on a weekly basis, noting the exact supply levels of
each item in the warehouse. Internal inventory management is
cost efficient, however; larger companies may find external
inventory management a viable option. Create an automated
system to automatically order new supplies, which reduces
back office labor expenses. Improve efficiency and maximize
space by organizing inventory supplies and modifying the
layout of the room or warehouse. Keep the aisles free of
debris and narrow, with enough room for handcarts, forklifts,
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or other equipment. Consider liquidating products that are
expiring soon or have a history of poor sales.

6. Analyze Supply and Demand

You need to analyze supply and demand in order to

effectively lower supply costs and increase productivity in
your organization. Work with the sales team reviewing sales
figures from the past several years, forecasting sales for the
next three months based on consumer confidence, past sales,
acquisitions, and merges. Keep in mind external variables
such as weather, the economy, holidays, and national events.
Repeat the process each quarter, refining forecasts as
necessary. A good cost reduction strategy requires businesses
to stay one step ahead of the consumer.

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7. Downsizing

Some company leaders feel they can reduce costs by simply

downsizing or reducing the number of workers. If this is done
after defining the exact role of every staff, it may be a
necessary and effective method. Unfortunately, most
businesses that reduce their headcount do so without really
knowing the impact on the company's operations. All they
really do is let off some staff to reduce the wage bill. One of
the biggest effects of downsizing to reduce costs is that, often,
good employees leave for greener pastures. Thus the business
is left with the "deadwood" staffs, who are expected to do
twice as much work as before.

8. Reducing Customer Service Levels

Customer service can be a hassle and is often an expensive

issue. Sometimes to cut costs, businesses will reduce or
eliminate the range of added services they give to the
customers. Unfortunately, a neglected customer will become
an ex-customer. He or she will simply go to your competitor,
who will be glad to service their needs at your expense.
Companies must see the benefits of customer satisfaction in
establishing long-term business relationships. A satisfied
customer is often a repeat customer. Also, the customer may
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network with other clients and refer them to your business.
This means that you not only have a source of continuous
business, but you have a viable route to new business
opportunities. This can save your company money that might
be spent on advertising. Repeat business and word-of-mouth
advertising are the excellent ways of maintaining a healthy
business.

9. TQM Tools
The total quality management (TQM) philosophy of doing
business emphasises lowering costs by reducing waste,
helping suppliers provide quality products and satisfying the
customer with quality goods and services. Companies that can
produce goods at lower costs than their competitors, while
delivering quality products that satisfy their customers, have
an advantage. Implementing TQM can help a company gain a
competitive advantage in their business.

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SOME EXAMPLES OF COMPANY USING
COST REDUCTION TECHNIQUES:

INDIA MART

Supply Chain Cost Reduction

Apply Lean techniques to identify non-value added time and

cost in the supply chain.
End-to-end supply chain modelling is used to study supplier
to market allocations.
We use freight cost benchmarking and auditing to ensure that
the tariffs reflect market rates and that complex freight
invoices are accurate.
Our inventory model is used to calculate the stock levels to
achieve the required level of customer service.
Example projects have provided cost savings of 26% by
improving product sourcing by market, service improvements
of 10% with no increase in inventory, over 10% reduction in
international freight costs and 30% reduction in lead time.

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Warehousing & Transport Cost Reduction

Our Operational Benchmarking establishes how you stand

against both the industry peer group and our best practice
model.
Cost profiles clearly identify discrepancies between where
you are and where you should be. All key cost drivers such as
manning, space and mileage are assessed in terms of the
correct and forecast business volumes. Our experienced team
gives practical guidance through the implementation of our
recommendations.
Negotiations with third party contractors are supported with
clear independent reasoning.
Example projects have achieved labour cost savings of 10%
or more, 30% increased capacity and 20% on third party costs.

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Strategis IT Cost Reduction –
“Doing more with less”

The current economic climate will force all businesses to

thouroughly examine their cost structure. While
organisations in some industries are more impacted than
others, all organisations are proactively seeking ways to
cut costs. Further, over the time as IT costs make up a
higher percentage of the revenue, CIOs who will have
clear mandates to do more with less within aggressive
time frames. By taking a hollistic approach that is
Enterprise – wide, examines all IT spent and prioritizes
the right IT cost reduction opprtunities. CIOs wil be able
to successfully meet their objectives.

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 TATA MOTORS

How could Tata Motors make a car so inexpensive?

( NANO)

• No Radio, Power windows, air conditioning, anti lock

brakes, air bags, remote locks or power steering.
• Rear wheel drive: manually actuated 4-speed trans axle
that gives the car better fuel efficiency
• Wheel Bearing: Wheel bearing is strong enough to drive
the car at 72kmph but would quickly wear out at higher
speeds.

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• Analogue speedometer, odometer and fuel gauge.
• Single windscreen wiper

Fundamentally, the engineers worked to do more with

less. The car is smaller in overall dimensions than the
Maruti, but it offers about 20 per cent more seating capacity
as a result of design choices such as putting the wheels at
the extreme edges of the car.

Competitive advantages that Tata Motors has which

others do not possess:

• Cheapest car in the world tag.

• The Chairman Ratan Tata is a socialist who helped
victims of 26/11(corporate social responsibility).

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SANDOZ COMPANY (PHARMACEUTICAL
COMPANY)

We personally visited SANDOZ COMPANY in NAVI

MUMBAI. We had a conversation with Mr. Shubratoh
Banerjee. He gave us very useful information and helps us to
know about the cost reduction done in his company.

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 • Firstly the company concentrates on fixed cost and
variable cost. As fixed cost is constant the company
works on variable cost depending on how much units to
produce.
• Reutilization:
Generally one person should work on one activity,
but if u want to reduce cost, the employee should be
trained and hence he can do multi-tasking job. Due to
this number of employees will be reduced and
company’s pay packages will decrease.
• Produce more to lower the cost.
• Increase the capacity as fixed cost will b same but per
unit cost will change.
• Efficiently utilization of equipments:
The company uses energy efficient equipments.

AREAS WHERE COST REDUCTION CAN BE DONE:

• Mostly works on ABC CONCEPT. The areas having
largest cost are attacked first and then worked on
reducing its cost. Areas where variability of cost can be
done.
• Recurring expenses:

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 Preventative maintenance should be done on heavy
equipments which need time to time service to be done.
Due to this huge lose can be avoided by breakdown of
machineries.

ADVANTAGES:
• The payback period of the equipments can be calculated.
• Due to energy efficiency machineries, the company
could compute the fuel and energy that is saved.
• Their production capacity has increased three times.

BIBLIOGRAPHY:

 www.the-cost-reduction-consultant.com

 Buzzle.com

 www.infosys.com/offerings/industries

 www.indiamart.com

 www.us.sandoz.com/site/en/company/profilE

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 http://tatanano.inservices.tatamotors.com/tatamoto

rs/index

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