Cost Reduction and Management of an Organization Essay

Cost Reduction and Management of an Organization - Essay Example Today, cost reduction as well as management happens to be the most essential thing for any organization. An organized endeavor which is intended to analyze the systems, practices, procedures, products and specifications for satisfaction of necessary functions at lowest possible cost of ownership is to be designed. This integrated effort is to be taken keeping the expected performance, quality, reliability as well as maintainability is mind. Cost reduction is not only essential, but also possible. Organizations increasingly are focusing on having models that can enable them to achieve this target. There are also software vendors who have understood the importance of this and have designed solutions catering to this need of companies looking at cost reduction by several techniques like Activity based costing and application of value analysis and value engineering. A case in point is the product of IBM, which is industry leading solution called Telecom Pass 4.0 for telecommunication industry featuring cost management and cost reduction techniques Value analysis is a tool for improvement of cost as well as processes making an use of information about the processes of business and based on examination of different attributes of the processes for identifying areas of improvement. This is an organized method which focuses on the function of each process, service or material that adds value to the organization and there by attempts to define the correct cost, quality and parameters of acceptance in the determination of value so as to be able to redesign or reengineer a particular function. It is a structured and critical analytical process which determines the value of each rupee spent by finding out which are the most essential functions at the most economic cost thereby bringing out the value for money. Value analysis (alternately called as value engineering) happens to be a cost validation exercise that identifies required processes without affecting the quality of output resulting in lower costs. The application of value engineering comprises of the following activities: Identifying the existing activities and processes Finding out activities that can be eliminated Analyzing the cost. Performing a cost benefits analysis. Making a forecast of expenditure flows. Evaluation of alternative designs. Redesigning the process Maintaining quality Undertaking feasibility Studies. Giving an advise on cost planning Giving an advice on cost limits and preparing budgets. Advising on cash flow forecasting. Activity Based Costing (ABC) It is a methodology applied for calculation of cost of the business by having a focus on the actual cost of the activities carried out for having an estimate of the actual cost of service or the product. It takes into consideration the conversion of cash based accounting system into accrual systems, defining the cost centers as well as cost allocation. Cost centers include products and services. Apart from this it also includes particular and detailed tasks in under each broad activity. Defining of cost centers varies with different kinds of businesses, but what is essential is that each and every activity and resources is identified. After identification of cost centers, the study of activities of each cost centre as