The topic of cost management involves a number of elements of cost analysis and measurement, as well as cost control and reduction. These are depicted below. After this introductory section, each of these elements will be covered in detail.
Overview of cost management
What is cost management and how is it relevant to all businesses?
- How does cost management impact the various aspects of a company's operations?
- What are the three basic cost models and why is an understanding of these models important?
What is a cost?
- A cost is any expense incurred by the company in its activities
- Some examples include:
- Direct Labor
- Social Assets
What is cost management?
Cost management is about managing a company's costs in order to maximize profitability.
Cost management consists of:
- Having a systematic approach to identifying and accumulating cost data
- Understanding why costs are incurred (i.e., what are the key influences on different cost elements)
- Taking action to improve a company's cost structure:
- cost control
- cost reduction
- improved strategic choices
How is cost management relevant to all businesses?
- Cost analysis and measurement
- Proper cost measurement is critical to understanding and assessing business performance
- Overall firm performance
- Individual product/product-line performance
- Management decision-making
Cost control and reduction
With an understanding of the relationships between business costs and performance, management can assert control over costs to maximize performance and thereby:
- Improve profitability
- Enable competitive pricing to increase sales
- Better allocate resources
What are the expected benefits of efficient cost management?
- More cost competitive products, along with improved pricing
- Better resource allocation
- A better managed business
- Better understanding of the performance of individual products and business units
What are the consequences of inefficient cost management?
- Financial resources are wasted
- Product prices are set incorrectly
- Prices may be too high compared to the market and thus decrease sales
- Resources are dedicated to the "wrong" products, activities or customers
- Management does not know where to reduce the company's costs
- Costs rise without being noticed because they are not managed
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