What Is Cost Reduction in Accounting Terms?


Business managers and owners are responsible for a variety of tasks and functions. Important business functions may include reducing costs from wasted inputs, the inefficient use of resources or too many employees working on too few projects. Cost cutting measures often start in the company’s accounting department, which is responsible for tracking and reviewing important financial information. Cutting costs is a common way companies improve profits and cash flows from business operations.


Accounting itself is not a specific cost cutting tool. Successful companies usually implement company-wide strategies for reducing business costs. These strategies affect all direct and indirect business functions, including production processes for goods and services to administrative functions like secretarial or mail room tasks. Company wide cost reduction strategies ensure businesses receive the most benefit from these strategies.


Three types of cost cutting are used in accounting: waste prevention, operations analysis and innovation. Accountants use these methods to determine how well the company’s production processes use economic inputs and what amount of waste occurs during each process. Direct materials, labor and equipment are the most common types of inputs reviewed by accountants. Operations analysis is the process of reviewing how well the company spends money when running its operations. Accountants may use budgets to track these expenditures. Innovation is the use of internal or external ideas for cutting business costs.


Companies may choose to implement a few traditional management accounting techniques when implementing cost reduction strategies. Management accounting is an internal process that does not need to meet any standard accounting policy; it is simply a tool for business decisions. This type of accounting gathers important financial information and funnels it to managers who can make critical business decisions. Popular management accounting tools include budgets, cost allocation methods and forecasting models.


Allowing accountants to develop cost reduction strategies can help companies prepare for economic slowdowns or market downturns. Cost reduction strategies can also help companies develop cost-conscious employees and a company culture that seeks to improve operations through simplifying or innovating current business processes. Utilizing employee ideas helps the accounting department understand how the business operates and where the company can reduce costs.

Expert Insight

Companies in serious financial positions may need outside help when cutting costs. Public accounting firms or management consultants are popular choices for helping companies implement cost reduction strategies. These individuals usually aid the accounting department by reviewing business operations and providing an objective opinion regarding cost reduction strategies. Companies facing extreme negative cash flows may need the services of a bankruptcy lawyer.

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