9 Examples of Cost Goals

John Spacey, October 10, 2018

Cost goals are targets for spending that can be applied to overhead, unit costs, projects, purchasing and onetime expenses. The following are illustrative examples.

Unit Cost

Unit cost are costs that can be attributed to your production volume such as the cost to produce one bicycle at a bicycle factory. A firm that is producing at scale can achieve significant cost savings from reductions in unit cost. If you are producing 1 million units a month a $0.20 unit cost reduction is $200,000 a month. For example, a bicycle factory may target a $44 unit cost for a particular model from the current cost of $48. Achieving this cost reduction may involve redesigning the product, making production lines more efficient and renegotiating terms with suppliers.

Design to Cost

Designing or redesigning a product or service to meet a target cost. This may sacrifice quality and result in a poor market position. However, achieving a low cost is often a valuable market position in an industry where customers almost always buy the cheapest alternative at a reasonable level of quality. For example, a solar panel manufacturer may target a cost per watt of $0.22 meaning that a 300 watt solar module would cost the manufacturer $66. This may be critical to the competitiveness of the firm as it impacts the ability of the firm to compete on price.

Productivity

Productivity is the value an employee creates in an hour of work. Improving productivity can allow a firm to grow without hiring more workers. As such, it is a basic factor in cost. For example, an ecommerce firm may plan to improve the orders-per-hour rate of order fulfillment employees from 33 to 50 using automation that reduces workloads. This may also be expressed as a target cost saving of $44 million over 3 years based on a 22% reduction in future hiring needs.

Efficiency

Efficiency is the value produced for a unit of input. Improving efficiency is a basic type of cost reduction goal. For example, a firm may target a 3% improvement in unit cost for bars of soap by replacing slow machines on a production line that represent a bottleneck.

Purchasing

Purchasing is the process of securing goods and services from suppliers. Cost is usually a primary goal of a purchasing process. For example, an IT firm is considering changing cloud computing providers with a target to reduce computing unit costs by 44% per hour.

Overhead

Overhead is any cost that can't be directly attributed to unit cost. For example, a shampoo manufacturer that can't include the costs of its human resources, information technology and accounting teams in the cost of a bottle of shampoo. It is common for firms to target overhead cost as a percentage of revenue. A shampoo manufacturer that spends 22% of revenue on overhead may target cost reductions that bring this down to 11%. This may be done by outsourcing, improving productivity and cutting business capabilities that are viewed as non-essential.

Projects

In some cases, the sponsor of a project provides a cost goal. This acts as a constraint on the project such that quality and features must conform to a cost target. For example, a firm building a data center may set a cost goal of $14 million for the project. Design-build contractors bidding for the project need to meet a set of requirements for the facility and also fit within the target budget. If this is impossible, contractors may propose cutting requirements such as the total size of the facility to fit into the budget. Alternatively, they may propose a facility that meets all requirements that exceeds the cost goal.

Cost of Capital

Cost of capital is the cost of a company's funds such as debt. This tends to be heavily related to interest rates and the credit worthiness of the company. For example, in an environment of rising interest rates and the decreasing creditworthiness of a firm the company may target a cost of capital increase of 40% due to an upcoming need to refinance loans.

Expenses

Perhaps the easiest way to reduce costs is to cut back on one-time expenses such as business travel or office parties. For example, a firm may target a 30% reduction in business travel expenses by providing video conferencing tools and making it more difficult to get travel approved.

Overview: Cost Goals
Type	Cost Reduction
Definition	Targets for spending that can be applied to overhead, unit costs, projects and one time expenses.
Related Concepts	Cost Reduction » Overhead » Unit Costs » Economies Of Scale » Design To Cost » Market Position »