ACCA MA Syllabus F. Performance Measurement - Cost reduction methods - Notes ^{2 / 3}

A number of techniques are widely used as a means of attempting to achieve cost reduction, particularly in manufacturing companies.

1. Standardisation of materials and components

This relates to a policy of reducing the variety and range of materials and components purchased by the manufacturer and of components produced.

Advantages

• The manufacturer can buy or make large quantities, hence gaining the benefit of reduced unit cost

• Having proved the efficiency of a material or component, the manufacturer knows that the quality and content will not change

• Inventory control will be easier as there is a reduction in variety

• Better service can be provided to customers in the provision of spare parts

• Less time will be needed to train operatives who handle the component

Disadvantages

• If there is only one supplier of the material or component, the manufacturer will be at risk if supplies are interrupted

• There may be restriction on the design of a new model if the manufacturer wishes to continue the policy for economic reasons

• For the same reason, a standard component may be used in one model when it would be better technically if a special component was used.

2. Standardisation of product

This refers to the production of articles to the same standard, or a range of products each of which is standardised, e.g. a particular model of a car may be available in different colours but apart from this, the cars are identical.

Advantages

• The manufacturer derives the benefit of long runs of production with reduced unit cost

• Tooling is simpler because it is geared to one method of production

• Mechanization can be extensive because of the uniformity of the production method

• The consequent buying of large amounts of the same materials and parts results in a reduction of unit cost

• Production management is simpler, being confined to standard processes

• Less training of operatives is required because the processes do not change

• There are fewer demands on the design staff

• Inspection costs are low

• Customers know they are buying a proven product and that the quality will not change

Disadvantages

• the manufacturer may feel safe in doing what he knows best and may become complacent about the success of the product, so that when the product faces new competition or the public becomes disloyal, he is too slow to recognise it

• if the product has to be altered, then equipment, technical knowledge and managerial experience may be too fixed to adapt successfully

3. Reducing Labour Costs: Work Study

Work study is a means of raising the productivity/efficiency of an operating unit by the reorganization of work.  There are two main parts to work study: method study and work measurement.

Method study is the systematic recording and critical examination of existing and proposed ways of doing work in order to develop and apply easier and more effective methods, and reduce costs.

Work measurement involves establishing the time for a qualified worker to carry out a specified job at a specified level of performance.

4. Other techniques

1. value analysis and value engineering

2. investment appraisal techniques applied to re-equipping the factory

3. zero-based budgeting