Cost Reduction Terms
- Administrative Cost covers all executive, organizational, and clerical costs.
- Actual Cost is a cost that has occurred.
- Budgeted Cost is a predicted or planned cost.
- Bad Cost does not serve the customer or business, therefore destroys value.
- Cost Advantage refers to the ability to produce a product or provide a service at lower cost than competitors.
- Cost Allocation involves assigning costs to drivers (lines, projects, activities) based on an established logic.
- Cost Benchmarking is the process of comparing an existing cost structure to those of peers or competitors in the same industry.
- Cost Cutting is the process of reducing spending, a short-term measure to improve financial health.
- Cost Driver is a direct cause for a cost; e.g. the number of design changes drive engineering cost.
- Cost is a resource sacrificed to achieve a specific objective.
- Cost Object is anything that cost is assigned to; e.g. department, product, employee, territory, customer.
- Cost Pool is a grouping of individual costs to be allocated later; e.g. overhead, maintenance, service center.
- Cost Structure refers to all fixed and variable costs a business will incur to meet objectives.
- Cost Transformation is a disruptive change to achieve cost excellence, create a competitive advantage, enable profitable growth.
- Conversion Cost consists of direct labor and manufacturing overhead.
- Capital Expenditures or Capex are the costs to upgrade equipment or implement a new software; can easily be deferred.
- Design to Cost means redesigning products and services to meet customer requirements at lower costs (materials, labor).
- Defects are deviations that cause a “re”-activity, such as rework, repair, reissue, replacements, scrap and double-handling.
- Direct Cost is a business expenditures that directly relates to the cost of a product or service, e.g. parts, materials, energy, labor.
- Efficiency is the amount of output per unit of input, such as miles traveled per gallon of fuel, printed papers per dollar.
- Failure Cost can be directly or indirectly related to defects, deviations, delays; anything done not right first time.
- Fixed Cost does not vary with output in the short term; e.g. rent, management salaries, depreciation.
- Good Cost creates value for the customer and contributes to business success.
- Indirect Cost is a general expense that cannot be directly assigned to a cost object; e.g. administration, security.
- Manufacturing Cost covers all processes involved to convert materials, parts, supplies into finished goods.
- Marginal Cost is the extra cost incurred to produce one additional unit of output.
- Mixed Cost has both, fixed and variable components; e.g. rental car = daily fixed rate + cost per mile.
- Operating Expenditure or Opex covers the ongoing cost for sales and general administration (SG&A), utilities, travel, insurance etc.
- Opportunity Cost is a potential benefit that is given up when one alternative is selected over the other.
- Outsourcing non-core activities to specialized partners can significantly reduce costs and improve quality.
- Overhead Cost is an ongoing cost to operate a business; it excludes direct costs for creating a product or service.
- People Cost cover salaries and fringe benefits for employees and contractors; it serves a base to calculate loaded unit cost.
- Productivity is the amount of items, services, or value produced per time unit, such as machine-hour or labor-hour.
- Supply Chain Cost covers procurement, transportation, warehousing, distribution, and supply-chain information management.
- Variable Cost changes in proportion to the production output, e.g. parts, labor, utilities, commissions.
- Waste are activities and features customers are not willing to pay for, e.g. defects, waiting, movements, overproduction, etc.