Cost reduction
Cost reduction is a permanent, planned lowering of the cost of doing a task, such as a cheaper process or material, achieved without harming quality. It differs from cost control, which only keeps actual cost within an existing standard.
What it is
See it move
A bakery's standard flour cost is €0.42 per loaf. A cheaper supplier permanently lowers that standard to €0.35, saving €3,500 a month across 50,000 loaves — genuine cost reduction. When actual cost drifts to €0.45 against the unchanged €0.42 standard, the accountant investigates the €0.03 variance and restores spending to €0.42 — cost control, because the standard itself never moves.
Check yourself
A furniture maker's standard cost card lists 2.5 kg of timber per chair at €6.00 per kg, a standard set two years ago (€15.00 per chair). This month, actual timber cost came in at €16.50 per chair, and the cost accountant traces the €1.50 shortfall to a supplier price rise, then renegotiates the contract so that next month's actual cost returns to the €15.00 standard. Separately, the production team installs a laser cutter that cuts timber waste, permanently lowering standard usage to 2.2 kg per chair and the standard cost to €13.20 per chair. Which of these is cost reduction?