SUBJECT: ECC AIM: - TO STUDY ABOUT TECHNIQUES
OF COST REDUCTION AND INCREASING
PROFIT.
EXP NO. 8 DATE: [Link]:
AITSDS/MED/EXPT
[Link].
AIM: To Study about techniques of Cost Reduction and Increasing
Profit.
INTRODUCTION:
Reduction in cost to solve the problem of increasing cost of the
product is a problem itself for the company. Here we will learn the
present areas in which cost can be decreased and factors to be
surveyed to reduce the cost and the modern tools and techniques for
cost reduction.
AREAS OF COST REDUCTION:
1. Raw Materials: The cost of raw materials amounts about 60%
of the manufacturing cost. Cost can be reduced by selecting
proper materials from choices, proper inspection of material,
good design of product so maximum waste in providing
allowances selecting better manufacturing process, proper
setting of blank on machine and if there is no problem of storage
and money, purchase the material in larger quantities to get
larger discount. If spoiled and scrap materials is sold money is
earned.
2. Maintenance and general materials :
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Engineering Materials: - These include materials of the
product or part of product, pulley, shafts, bearings etc.
General Materials: - These include low priced items such as
nuts, bolts, washers, packing materials, stationery etc.
Plant spares: - These include the part used during the
maintenance of plant and machineries such as gears, oil
pump, bearings, belts etc.
3. Manual Work :
Production man – power: - To manufacture the product
manual work on raw material through machine is required
and also material work, which is done by machinist,
labours etc. hence the work can be reduced by simplifying
the method of doing the work and adopting standard
procedure. Also if financial incentives are provided to
machinist, labours, helpers etc then performance of the
workers will be increased ensuring reduction in cost.
Engineer man – power: - Work done in product design
process planning, supervising the production, inspection of
product is known as engineering man – power. By taking
advantages of the skill possessed by these persons,
company can have better product designing, good process
planning and proper inspection methods which will reduce
engineering work. Provision of incentives and training will
increase the performance level which will reduce cost.
Service man – power: - The persons doing maintenance
work either break down or routine or overhaul are also
doing manual work and can be reduced by giving more
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weightage to routine and preventive maintenance to avoid
breakdown and overhaul work which will save time. Hence
the plant and machines will be in better conditions and it
will result in the increase in life of machine reducing the
cost.
4. Non manual work: The man – powers should be adequate in
number if not, insufficient man – power will increase cost.
Method study principles can also be applied here to improve
ways of doing work, minimize extra activities. This will reduce
the content work, fatigue and eventually will reduce the cost of
work. Hence using the best skills of labourers or machinist or
any man – power the new methods or ideas of manufacturing
product, which will reduce the cost of product.
5. General cost such as: Services, power, water, telephone
services etc if used properly then its costs can be saved. Hence
better planning of the use of these services is a must to reduce
the cost.
FACTORS TO REDUCE THE COST:
1. To establish the possible scope of saving.
2. Critical analysis of policies.
3. Procedure and organizations
4. jobs
5. Process and Operations
6. Examinations of expenditure
7. Capital cost development scheme
8. Method improvement and work measurement on widest possible
scale.
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9. Elimination of all unnecessary work.
10. Improvement in effective use of man power at all levels.
MODERN TOOLS & TECHNIQUES FOR REDUCTION OF COST:
1. Rationalization, Modification, simplification and standardization
in design.
2. Value analysis
3. Co-ordination of sections of company
4. Market and Purchase research
5. Inventory control
6. Sub-contracting and follow up
7. Material handling and packing
8. operation research
9. Improvement in negotiating long term contract
10. Material management
11. Routine simplification
12. Code of ethics
13. Use of specialized people
14. A-B-C analysis.
DEFINITION OF PROFIT:
It is the difference between the selling price and the total cost of
the product i.e. Profit = Selling price – Total cost of production. Hence
the directors of the company decide the percentage of profit
considering statistics of the product, expenses, market condition,
income, taxes, depreciation etc.
METHODS OF INCREASING PROFIT:
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The reason for earning profit by the industry is that there should
be return on capital investment, also the demand and supply in the
market are changing and innovative ideas are made by the industries.
So in order to increase profit there are these ways:-
1. By increasing the selling price of the products or service: - The
total profit of the industry can be increased by increasing selling
price of the product or service. The method is suitable only for a
monopoly product or when the product is running in short
supply. The customer’s willingness to pay the new price is also
important.
2. Total profit can be increase by increasing the market: - The total
profit of the firm can be increased by increasing the sales of the
product in the market. The market can be increased by reducing
the profit per product, by advertising, newspaper, magazines,
radio. TV etc.
3. By Incentive Schemes and Prize Schemes: - By reducing the
profit per unit or decreasing the selling price. Total profit can
only be increased if demand for the product will be increased.
Thus there should be proper balance between reduction in
selling price and increase in demand for the product through
advertisement, radio, TV , posters, hand bills, sign boards,
stationery and in & on vehicles can draw the attention. Also by
giving sponsorship or by sales agent, or by providing some
schemes etc. this will involve consumption of some capital which
in turn will increase the sales price. Therefore the amount to be
spent on the advertisement and its effect on the sales has to be
studied carefully.
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4. Increasing of profit by reducing the total cost of the product: -
Profit margin of the firm can also be increased by reducing the
total cost of any product and keeping the selling price same.
Therefore the total cost can be reduced by anyone or more of
the elements of cost.
QUESTIONS
Q.1: State the areas of Cost reduction.
Q.2: Explain how the reduction in cost in areas of general cost and
plant spares play an important role in reduction in cost?
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Q.3: State seven factors to reduce the cost.
Q.4: Which factors are considered in deciding the profit margin?
Q.5: State the methods of increasing the profit and explain them in
brief?