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ACCA Applied Knowledge · Management Accounting · Cost reductions and value enhancement

Which of the following is a risk of pursuing cost reduction through a lower-quality material?

The risk is that sales fall and warranty or failure costs rise because the product is less fit for its purpose. Genuine cost reduction must not reduce quality, so cheaper inputs may reduce savings through lost customers and extra after-sales costs.

  1. AStandard costs will automatically become unattainable
  2. BFixed costs will become variable
  3. CSales may fall and warranty costs may rise because the product's fitness for purpose is reducedCorrect
  4. DBudgetary control reports will no longer be required

Explanation

True cost reduction should preserve fitness for use. Cheaper, lower-quality inputs can damage customer satisfaction, reduce sales and raise failure and warranty costs, offsetting the saving. The other options do not follow from the change.

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