Cutting costs: maximizing results

WHAT IS A COST?

Cost is usually a monetary valuation of (1) effort, (2) material, (3) resources, (4) time and utilities consumed, (5) risks incurred, and (6) opportunity forgone in production and delivery of a good or service. All expenses are costs, but not all costs (such as those incurred in acquisition of an income-generating asset) are expenses.

Managers are most experienced with cost presented as monetary expenses in an income statement. Politicians and policy analysts are more familiar with costs as an expense item in a budget statement. Consumers think of costs as their monthly bills and other expenses.

Costs have many classifications and can also be classified into Economic costs and Accounting Costs.

1. Economic costs are synonymous with opportunity costs and, as such, are the sum of all decision-relevant explicit and implicit costs.

2. Accounting costs—the costs that would appear on accounting statements—are explicit costs that have been incurred in the past. Accounting statements are designed to serve an audience outside the firm, such as lenders and equity investors, so accounting costs must be objectively verifiable. That’s why accounting statements typically include historical expenses only—that is, explicit cash outlays already made (e.g., the amounts the firm actually spent on labor and materials in the past year). An accounting statement would not include implicit costs such as the opportunity costs associated with the use of the firm’s factories, because such costs are often hard to measure in an objectively verifiable way.

WHAT IS COST REDUCTION?

Cost reduction refers to measures implemented by a company to reduce its expenses and improve profitability.

This is very essential because it is one of the strategies to prop up the bottom and increase a company's profitability.

Some the cost reduction strategies very effective include the following;

1. Laying off employees

2. Reducing Salaries

3. Closing facilities

4. Streamlining the supply chain

5. Downsizing to a smaller office or moving to a less expensive building or area

6. Reducing or eliminating outside professional services such as advertising agencies and contractors.

The above strategies are quite effective, however the over reliance on the can negatively affect business operations in the long even they the provide excellent results in the short run.

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