A cost reduction program is a type of method which is to improve profitability of the organization or by expected to get a good result that flow to the bottom line of the financial statement and exempted from any serious damage to the organization itself. As this program is much more about reducing cost or reducing expenses of the organization, so a good cost reduction program is all about how to control the damage of an organization. Furthermore, a cost reduction program is said can be improved the profitability of an organization because by reducing expenses, profits are increased without making others changes.
On the other hand, if the cost reduction program can matched with a sales improvement program and perhaps, finally it will get the double profit. A cost reduction program must be a complete plan that is results-oriented. A structured cost reduction program will put the company on track to achieve maximum profitability and achieve the highest performance. Moreover, this program also implies a series of program that retain all of the essential characteristics and quality of the product and thus it must be confined to permanent and genuine savings in the costs of manufacture, administration, distribution and selling, brought about by elimination of wasteful and inessential elements form the design of the product and from the techniques and practices carried out in connection therewith.
What is the difference between cost control and cost reduction? In fact, cost control also known as cost management or cost containment; it controls the costs of the organization at the given level. Besides, cost control emphasis on ensuring that the cost does not exceed the standard budget of the organization. Businesses use cost control methods to monitor, evaluate, and ultimately enhance the efficiency of specific areas, such as departments, divisions, or product lines, within their operations.
However, cost reduction is a power exercise or is an exercise which will out all of the effort to saving cost from whatever level they are. Cost reduction does not have any standard, or anything is accepted as ideal. Every element of cost is scrutinized, every operation is screened and every procedure is analyzed to identify the ways and means of reducing costs. Cost reduction can result in saving the product cost, manufacturing cost s, and life cycle cost.
There are two different concepts between cost control and cost reduction. Cost control is achieving the cost target as its objective while cost reduction is directed to explore the possibilities of improving the targets or company profitability. Therefore, cost control will end the exercise when achieved the organization target or objective. While cost reduction is a continuous process and it has no visible end. Furthermore, cost control try to attain the lowest possible cost under existing conditions whereas cost reduction does not recognize any condition as permanent since a change will result in lowering the cost. If the cost control emphasis is on past and present, while the cost reduction emphasis is on the present and future. Besides, cost control is a preventive function whereas cost reduction is a correlative function. It run even when an efficient cost control system exists.
The difference between cost control and cost reduction can be summarized as cost control ensuring the costs is in accordance with established standards whereas cost reduction is concerned with try to improve the cost by continuous and without accordance with any of the standard.
The main benefits of cost reduction programs are it can enhance profitability and enhance cash flow of the organization. It presents the key elements and factors to consider in program design and implementation. Cost reduction program is also can ensure the results will match with the goals or objective and the values of the organization. It is a widely-acknowledged fact that cost reduction program is one of the most challenging responsibilities or tasks that a company needs to undertake, especially when there are so many ways open to cost-conscious managers. Finally, an integrated tax reduction program can reduce the onerous financial burdens that can stable a company’s development and can free up precious capital that can be result to the firm’s long-term benefit.