Cost Management Term Paper Example | Topics and Well Written Essays - 2000 words

Cost Management - Term Paper Example Defense organization of the US government manages many production facilities that operate similar to industries. The chief strategies employed by Defense Department are to reduce permanent positions for staff and workers, outsource some of the jobs and depend more on temporary workers. Authors argue that the organizations have to strike a balance while reducing fixed costs permanently. Elaborating further, they argue that Honda Motor Company reduced permanent engineering staff, which was dedicated to the design functions during 1980s; however, that went against the company when its competitors came out with new designs in automobiles. This eventually resulted into the reduced market share for Honda impacting its profitability. Honda had a great difficulty to catch up with new innovative features that competitors released time to time in the market place. Thus, a strategy to reduce fixed cost may appear lucrative in the beginning but could be detrimental to the future growth. Currentl y, similar situation exists in the Defense Department of the government. ... The impact of fixed cost is huge in any organization. Higher fixed cost compels firms to operate at higher levels of operations and sales volume to meet those fixed costs. That is why in difficult market conditions, the firms with higher fixed costs are often found in trouble. The firms with higher operating leverages are always at risk during unpredictable sales environment. Moreover, sales volatility is rampant in the industries where technology has been changing rapidly. In these kinds of industries, it becomes important to assess fixed-cost involvement and possible sales volume that are achievable. No wonder that many large sized computer firms reduced their fixed-cost commitment in recent years. IBM reduced their permanent staff by 100,000 between 1990 and 1994. Not only that the company outsourced many of its parts and products in these years; that reduced the requirement on plant and machinery to a great extent. This further reduced fixed-cost burden on the company. That is ho w IBM could adapt to changing market environment and survive. That surely is a good strategy in unpredictable and difficult market situation (Ciccotello & Green 1995). Exercising Caution in Reducing Operating Leverage Contrary to this, many private firms have been operating in the industries where market demand of their products is quite steady and predictable. With the predictable sales volume, fixed-cost commitment is easy to make and it makes absolutely no sense to reduce permanent staff compromising the future business prospects and efficiency factors. Authors further emphasize that reducing permanent employees is an expensive preposition and once removed they are very costly