Basic rules regarding costs...

Basic rules regarding costs  During recession, organizations are forced to cut their costs and while doing it, they sometimes unknowingly break basic rules. There are three basic rules regarding costs which are to be followed while taking important decisions. These rules help an organization in cutting the costs without affecting its capabilities in the long run. Usually long term payoffs are forgotten while taking cost cutting measures since they are not crucial for immediate survival. And when such thing is done it adversely affects the long term working of the organization. These basic rules which provide a practical and effective alternative to the usual cost cutting methods are described below. Rule no. 1 – Cost of quality The cost of quality (Fig 1) is the cost of doing an activity and achieving the targeted results of the activity. It consists of two components namely ‘Necessary costs’and ‘Avoidable costs’. Necessary costs are required to achieve and sustain a defined objective or standard of work. These are those costs which are needed to carry out an activity efficiently and to achieve and sustain a defined standard of work. Avoidable costs occur whenever wrong things are done or things are done wrong. Necessary costs include prevention and inspection costs.  Avoidable costs include some part of inspection costs and failure costs. Fig 1 Cost of quality  Necessary costs include prevention and inspection while avoidable costs include failure costs and some inspection costs. Prevention costs of any actions are the costs intended to make sure that things will not go wrong. Inspection costs are the costs of finding out if things are going on correctly so that in case of a deviation corrective and preventive actions can be taken.   Avoidable inspection costs are also those costs which are incurred...