Cost Management

What is Cost Management? Meaning, Scope and Objectives

Table of Contents:-

Cost Management Meaning

Cost management is the process that involves planning, controlling, initiating and making decisions that improve the cost leadership of an organization. The term refers to the generation of cost information, and its active use to design and control expenses. This requires the provision of a regular flow of reliable and relevant cost information which can be communicated to the concerned managers. The information should relate costs both to the cause and to the purpose of its concurrence. 

To be useful, cost management has to be taken as a policy by corporate management. They were Japanese who first emphasized cost management, though the practices have become universal now. Cost management is the process whereby organisations use cost accounting to control or report the different costs of doing business.

The term cost management is popularly used in business now. Unfortunately, cost management has no uniform definition. Cost management commonly explains the approaches and activities of managers in short-run and long-run planning and control decisions that enhance value for customers and lower the costs of products and services.

For example, Managers make decisions concerning the quantity and variety of material being used, changes in product designs and changes in plant processes. Information from accounting systems helps managers to make such decisions, but in accounting systems, the information itself does not cost management.

Cost management has a broad focus. It includes – but is not limited to the constant control of expenses. The planning and control of costs are usually inextricably linked with revenue and profit planning.

For example, To improve wealth and profits, managers usually voluntarily incur additional costs for promotion and modifications of the product.

Scope of Cost Management 

The scope of cost management is very wide and includes the following:

1) Cost Ascertainment: It deals with the collection and analysis of expenses, the amount of the production of the various products at the several stages of manufacturing and the linking up of production with the costs.

a) The varying procedures for the collection of expenses give rise to the different systems of costing as Historical or Actual costs, Estimated costs, Standard costs, etc.

b) The varying procedures of the measurement of production have resulted in different methods of costing as specific order costing, and operation costs.

Thus, for linking up production with expenses the different techniques of costing such as the marginal cost technique, systems, methods and techniques can be used in one concern simultaneously.

2) Proper Matching of Cost with Revenue: It prepares monthly or quarterly statements to reflect the cost and income data identified with the sale of that period.

3) Aids to Management: Cost management allows a company not only to determine what various products, jobs, and services have cost to the business but also what they should have cost. It finds wastages and losses by exercising corrective measures and avoiding them in future. Researches and special cost studies help the management in preparing policies and forming plans for profitable services are also a part of cost accounting.

4) Cost Control: Cost control is the guidance and supervision by executive action of the costs of operating an undertaking. It directs managing the actual towards the line of targets; regulates the actual if they vary from the targets; this guidance and regulations are done by executive action. The cost can be regulated by budgetary control, proper presentation, standard costing, and reporting of cost audit and cost data.

Objectives of Cost Management

There are four objectives in cost management:

1) Spending Timely: Ensure that resources or money are expended by the project or corporate fund’s expenditure plan.

2) Spending Wisely: It ensures that money is well-spent, i.e., a planned unit of gain is achieved for each unit of expenditure.

3) Spending Correctly: Ensure expenditures only for those things for which the firm is obligated;

4) Spending Perceptively: It ensures that spending versus performance variations are examined, reviewed, classified, or trended so that early warnings can promote timely actions.

Cost Management

The main objectives of cost management are to reduce the costs expended by an organization while strengthening the firm’s strategic position. There are many ways to apply cost management techniques. Some of them are:

a) Establish systems to streamline the transactions between corporate support departments and the operating units.

b) Devise transfer pricing systems to coordinate the buyer-supplier interactions between decentralized organizational operating units.

c) Use pseudo-profit centers to create profit-maximizing behaviour in what were formerly cost centers.

Types of Cost Management

There are three types of cost management, which are as follows:

1. Those that strengthen the organization’s competitive position. An example of a cost management technique that strengthens an organization’s position is illustrated below. A hospital redesigns its patient admission procedure so it becomes more efficient and more accessible for patients. The hospital will become known for its easy admission procedure, so more people will come to that hospital if the patient has a choice. The hospital’s strategic position has been enhanced compared to its competitors.

2. Those that have no impact on the organization’s position. An example of a cost management technique that does not impact the organization’s competitive position is illustrated below. An insurance company reevaluates its accounts payable system to make it more efficient. The evaluation does not benefit the insurance company in the external market. The objective of the change is to make the organizations more profitable.

3. Those that weaken the organization’s position. An example of a cost management technique that will weaken the organization’s competitive position is illustrated below. A large airline company only has two desks for selling and administering tickets. This setup creates long lines for airline customers, which can ultimately result in high dissatisfaction and a bad reputation for the airline. This may decrease the amount of ticket sales when compared with the airline’s competitors. Even though having only two desks available for customers may initially be cost-effective, in the long run, it adversely affects the company. Generally, an organization should never undertake practices that weaken its position.

Techniques of Cost Management

Managing a business has to contain costs of utmost importance. Below are mentioned some of the techniques through which the overall cost of the business can be controlled and maintained within the required limits.

Time management

The one who owns the business knows the value of time for his / her business. However, passing down the relevance across the business hierarchy is vital to view the desired results. It is essential to make the employees understand the value of time and how to do more work efficiently within the same period. This is one of the methods that will help increase productivity without increasing labor costs.

Inventory management

One of the significant costs and ways of generating revenues is through inventories. First and foremost, it is essential to outline the inventory requirements, conduct quantity checks for storage, assess vendor costs, and so on. All of these steps contribute to understanding the business’s needs and preventing excess inventory accumulation. This approach allows for deploying capital elsewhere rather than tying it up in stock.


Outsourcing is one way that helps take employees on third-party roles, especially when it is for one-time projects. This saves the employer from recording the cost on their books. This is done keeping in mind that the outsourcing partners are of the standards that do not hamper the quality of services to the business’s customers. Besides the employees, specific projects can also be outsourced, which helps save the additional employee costs onboard and get access to outside talent and technology, helping optimize the resources.

Updated market sense

It is essential to be updated with the market trends as it is a game of survival of the fittest. One has to be constantly in touch with the vendors and see that renewal of the contracts keeps happening with the price trend. This will help negotiate the best prices available rather than dragging on the set prices of long-term contracts.

Control of headcount

The second most significant cost to a business is the employee cost. Although we take employees as assets or the backbone of the business, one must remember that they also have associated costs. Besides the regular pay and salaries, workplace, licenses, and software are the additional costs added per employee. That is why the manager must know how to reduce employee costs by taking fewer people on board or more low-cost employees rather than a few high costs.

Advantages of Cost Management

Advantages of Cost Management are given as follows:

1. It helps control the project-specific cost and, in turn, the overall business cost.

2. One can predict future expenses and costs and work towards the expected revenues accordingly.

3. Predefined costs can be recorded as business records.

4. It helps take necessary actions to ensure that the resources and business operations aim to attain the chalked objectives and goals.

5. It helps in analysing the long-term trends of the business.

6. The actual cost incurred can be compared to the budget to see if any business component is spending more than expected.

7. It helps analyse the business’s acquisition positioning, factoring in the cost component involved.


Cost management collects, analyses, and presents data to plan, monitor, and control costs. Cost management techniques identify how an organizational resource needs to be allocated to different projects while comparing its worth or outcome. Under cost management, we identify, collect, and report the information managers and other users require. Its main objective of cost management is to make the information available to the internal users of an organization. Efficient cost management helps the organization improve its business potential by providing information to managers for cost optimization and improving cost-effectiveness.

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