Cost Management

Cost Management Scope and Objectives

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