The disadvantages of cost control & cost reduction

Cost control and cost reduction efforts can be very successful, assuming that the underlying assumptions are correct. Serious errors can be made when cost-reduction efforts interfere with flexibility and improvement of processes. Flexibility is usually in the form of being able to quickly change production lines in a manufacturing environment or alter marketing strategies midstream. Process improvement requires recognition that many small improvements lead to large ones. Cost accounting analysis can be a barrier to the flexibility and process improvement required to grow a business.

Cost accounting will attempt to decrease the costs assigned to projects, manufactured parts and other activities. This is done by attempts to spread overhead and set up costs across parts and processes. In a manufacturing environment, set-up time is the time it takes to prepare a work station for a production run. Because the cost accountant is trying to reduce costs per piece, a larger production run per set-up is usually the goal. However, a large production run can tie up capacity in not only one work station but many, thereby eliminating the flexibility to manufacture other products that are required. If cost accounting focused on how to reduce the set-up time and batch sizes, overall costs would still go down with an increase in flexibility.

Cost accounting attempts to determine which process-improvement suggestions warrant approval and implementation. This is done by selecting a cost-reduction threshold that an improvement suggestion or project must meet to be approved. This approach does not recognise the value of many small improvements in processes. Companies that only perform process improvements on a periodic basis typically suffer from the cost threshold problem. In environments where continuous improvement occurs, where small improvements are valued, cost reductions can be much higher.

With continuous improvement comes innovation. If cost accounting is allowed to stifle improvements with cost thresholds, innovation will also be resisted. Often improvements contribute to flexibility because they actually reduce costs like set-up. In continuous improvement situations, employees are encouraged to be innovative without cost accounting constraints.

The most flexible and improved environments benefit from a throughput emphasis versus a cost emphasis. Through-put is simply getting more done with the same or fewer resources through innovative process improvements. In environments where throughput is valued above cost reduction, costs will come down faster. Focusing on throughput enables flexibility and process improvements that allow a business to grow.