Dangers of Cost Reduction

If your company uses cost control accounting, you’ll have to allocate the cost of overhead items like rent and utilities. However, there isn’t always a clean and precise way to do so. Some of your products will take less time to produce than others and, as a result, will consume a smaller portion of your rent budget. However, there are times when your shop isn’t being used at all, such as overnight, and it’s difficult to factor in these idle hours.

As you track the costs of the various items you produce, you will naturally make cost-cutting adjustments based on the data you collect. If you discover that the cost of your materials is out of proportion to your price, you may choose to use less expensive materials.

The possible dangers of any cost reduction plan may be as follows:

(1) Quality may be sacrificed at the expense of cost reduction: To save money, quality may be gradually reduced and not detected until it has reached alarming proportions. Quality may be compromised to the point where it is no longer acceptable in the market, and the business may be lost to competitors.

(2) While cost-cutting is a positive step toward developing and growing the company in the long run, it can create negative vibes throughout the company and among the employees. Employees may misinterpret it as cost-cutting and raise a panic alarm throughout the company.

(3) In the beginning, employees may dislike the cost-cutting program, and the program may be jeopardized because the success of any cost-cutting plan is dependent on the willing cooperation and active participation of the employees.

(4) Sometimes cost-cutting measures require changing processes, and not all changes are beneficial. At times, the change can be detrimental, resulting in additional losses rather than profits and improvement. For example, the iPhone 5C, the low-cost model, was a flop in the market, whereas its more expensive counterpart, the 5S, was a smashing success. It is dependent on how the company communicates the cost reduction to internal and external stakeholders.

(5) It is possible that the cost reduction will not be real and permanent. It may not be based on sound reasons, and it may be temporary, with the cost returning to its original level when the temporary conditions (i.e., a drop in material prices) that caused the cost to fall disappear.

(6) A few cost-cutting steps involve installing one-time components such as solar panels, green equipment, or automatic light-saving appliances. Installing these will reduce long-term costs but increase one-time costs, which may not be acceptable to all businesses.

(7) There may be a conflict between individual and organizational goals. It is possible that the head of a specific department will engage in activities that reduce the cost of his department but increase the cost of the organization as a whole.

At times, while focusing on cost reduction, the quality of the product may be sacrificed, affecting the company’s long-term vision by lowering the brand value. Cost-cutting is a two-edged sword that must be handled with caution. If done correctly, it has the potential to increase profits without having a significant impact on other areas, but if done incorrectly, it has the potential to backfire and fail miserably.