Cost Productivity Allocation

Most organizations pay close attention only to costs. They track them, control them, and keep them at rock-bottom levels. This could be a mistake for two reasons: First, cost should not be detached from performance. Driving costs down for its own sake inevitably drives performance down. This causes productivity to drop in the long run. Second, there are many times when costs must be allowed to go up in order to achieve an important performance target.


The key question is where the money will come from if budgets are tight. Cost-productivity allocation is a technique for the reallocation of money to improve productivity. It works against the traditional, across-the-board percentage cuts, which remove the good with the bad. The proposed technique permits the identification of cost items that are critical and finds the small outlay of money needed to improve productivity.


The theoretical background of this technique is the analysis and reallocation of the following four cost categories:

1)      Cost avoidance – removing or eliminating a cost item that is anticipated and budgeted for but not expended.

2)      Cost reduction – reducing or decreasing the amount of a cost item that has been budgeted for and is a process of expenditure.

3)      Cost control – spending, but keeping the amount of a cost item within the budget standard.

4)      Cost effectiveness – increasing the spending allocated in a budget because it will improve performance or reduce costs in the long run.


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