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Cost reduction is the process used by organisations aiming to reduce their costs and increase their profits, or to accommodate reduced income. Depending on a company’s services or products , the strategies can vary.
Activity-based costing establishes relationships between overhead costs and activities so that costs can be more precisely allocated to products, services, or customer segments. Activity-based management focuses on managing activities to reduce costs and improve customer value. Kaplan and Cooper [1] divide ABM into operational and strategic:
Value engineering (VE) is a systematic analysis of the functions of various components and materials to lower the cost of goods, products and services with a tolerable loss of performance or functionality. Value, as defined, is the ratio of function to cost. Value can therefore be manipulated by either improving the function or reducing the cost.
It seeks to minimize costs in areas that do not differentiate it, to remain cost competitive; or; If it is focusing on one or a few segments, it is following a focus strategy. A firm may be attempting to offer a lower cost in that scope (cost focus) or differentiate itself in that scope (differentiation focus). [2]
Overall costs of capital projects are known to be subject to economies of scale. A crude estimate is that if the capital cost for a given sized piece of equipment is known, changing the size will change the capital cost by the 0.6 power of the capacity ratio (the point six to the power rule). [16] [d]
Skimpflation involves a reformulation or other reduction in quality. [6] Shrinkflation allows manufacturers and retailers to manage rising production costs while maintaining sales volume, operating margin, and profitability, and is often used as an alternative to raising prices in line with inflation.
Target costing is defined as "a disciplined process for determining and achieving a full-stream cost at which a proposed product with specified functionality, performance, and quality must be produced in order to generate the desired profitability at the product’s anticipated selling price over a specified period of time in the future."
In business economics cost breakdown analysis is a method of cost analysis, which itemizes the cost of a certain product or service into its various components, the so-called cost drivers. The cost breakdown analysis is a popular cost reduction strategy and a viable opportunity for businesses. [1] [2] [3]