Cost Management - The Process

WHAT IS COST MANAGEMENT?

Horngren, Foster and Datar explain that cost management comprises of the activities of managers in short-run and long-run planning and control of costs. Information from accounting systems help managers make such decisions. But the systems and the information by themselves are not cost management.

Planning is deciding on organization goals and developing programs to achieve them.  The term organization implies a section or a department also. To develop programs to achieve organization goals, various alternative ways are to be identified first and results from them are to be predicted. Based on the estimated or predicted results from various alternative ways, programs are finalised to attain the desired goals.

Control is taking actions to see that desired results are coming out of the programs. Control comprises of targets and standard procedures, performance evaluation, and feedback mechanisms that change the way of things are being done to attain the planned results instead of the current actual results which are not  in line with the planned results.

Management Process

The process of management involves five steps (Koontz and O'Donnell):

Planning
Organizing
Staffing
Directing
Controlling

Narayana Rao advocated that resourcing is more appropriate term in the place of staffing. By adding resourcing to the list and removing staffing we can write the process of management as:

Planning
Organizing
Resourcing
Directing
Controlling

The objectives of  an organization headed by a manager are decided during the planning stage. The term organization is a generic term and it can imply  single-man business or activity, a section within a department, a department, a SBU or a whole company.

In any business organization, the mission will be to serve the customers by providing certain products or services that provide benefits to the customers. The objectives  can be many and include customer satisfaction and profitable operations. The goals for a period include certain revenue targets, cost targets and the resulting profit targets. Every manager in a business organization has a revenue target and cost target. Naturally, the cost target is related to the revenue target.

Cost management involves the planning of the cost in relation to the output target planned by the managers. It may be allotted to him by the top management. But once he accepts it,  it is part of his planning output. He needs to organise his section or department to achieve the revenue or output target and this organization will consume resources and incurs cost. Managers need to design organizations that meet profit goals of the organization. Hence cost management activity starts during planning and organizing. Cost estimating needs to be done during the organization stage to find out costs of various alternatives. Resourcing is  the step in which resources planned in the organization design are acquired. There have to be efforts to acquire resources within the estimated costs. Directing is the stage wherein the resources are allocated to subdivisions within the organization and various persons are given authority to use these resources. Acquisition of additional short term resources like raw materials and services do take place during the operations of the organization. Directions have to be given to various personnel to conduct operations within the estimated costs. Budgeting helps in this regard.

Controlling is observing the actual happenings and taking control actions. Observation in the orgnaizational context refers to various measurements as well as reports. Cost accounting department is recording the various cost transactions and informing the summary information to all concerned. Any out of control situation, which means deviations of actual results from the planned or estimated costs needs replanning, reorganizing, additional acquisition or disposal of resources and redirecting.

Managers of any organization are continuously engaged in cost management. Cost management information systems helps them at all steps in the cost management process.

Articles - Cost Management Process

(Numbers knol numbers to give links)


Cost Management - Planning and Control of Costs 
Cost Management - Activities - Job Positions - 503
The Need for Cost Facts

Cost Accounting - Introduction - 265
Cost Terms and Concepts - 1210
Concept of Cost Objective - 442
The Role of Accounting in Organizations - search knol backup
Project Cost Accounting - 577



Accounting for Material Receipts and Issues - 1415

Job Costing - 1212
Activity based costing - 788
Activity based costing (ABC) - 12


Budget, Budgeting and Budgetary Control - search knol backup
Activity based budgeting - 787

Customer Cost Analysis - 64


Contribution Analysis - 63
Economic Analysis of Costs -
Overhead Costs
Analysis of Overhead Cost
Setting Expense Budgets

Strategic Cost Management -

Material Cost Management - 700

Activity based management - 789
Kaizen Costing and Kaizen Cost Management - 381
Target Costing and Target Cost Management - 380

Building Cost Estimating, Planning, Controlling and Reducing - 430
Software Cost Management - 573
Software Cost Management - Resources and Bibliography - 571
Supply Chain Cost Reduction - 460


ERP Systems in Cost Management - 382

Cost Accounting, Costing and Cost Management - Article Directory - 1205
Knol Sub-Directory - New Knols - Cost Accounting and Management - 1652

Cost, Economic, and Financial Analysis for Operating Executives - 383
Economic, Accounting, Cost Control and Financial Analysis Skills for Technical Personnel - 1915
Strategic Cost Management - Course - 379

BIBLIOGRAPHY

Cost Management - Chapter
http://www.stsc.hill.af.mil/resources/tech_docs/gsam4/chap6.pdf

The Supply Chain Cost Management
Jimmy Anklesaria
AMACOM
http://books.google.co.in/books?id=N0WtfE6JPnkC
http://www2.amanet.org/training/books/9780814474754.aspx

A Preliminary Checklist for Software Cost Management, Jorgenson
http://www.ifi.uio.no/forskning/grupper/isu/INCO/Papers/a_preliminary.pdf

Army Cost Manual
http://archive.asmconline.org/files/PDI/armycost.ppt


Reports of Leading Consultants

Accenture - 2010 report.
Contains survey results on various cost reduction initiatives taken up by companies and initiatives they would like to take in the future.
http://www.accenture.com/SiteCollectionDocuments/PDF/Accenture_Cost%20Management.pdf