What is Cost Management?

//What is Cost Management?
What is Cost Management? 2017-10-02T07:16:35+00:00

Definition: Cost management is a method of reducing operating or production expenses in order to provide less expensive products or services to consumers. In other words, it’s the process management uses to analyze its production and streamline its operations to keep costs low and manage expenses in the future.

What Does Cost Management Mean?

Cost management is the main focus of managerial accounting that helps a firm forecast future expenditures in an effort to reach their budgeting goals. This process is typically divided into three main phases: planning, implementation, and final analysis.

In the planning phase, expected costs are projected and approved by higher management. Once the plan has been properly approved, the implementation phase monitors and records the cost making sure that they keep in line with the budget. After the project is finished, actual and budgeted costs are compared and variances are investigated in the final analysis. If the company did not meet their budgeted numbers, management might consider switching production materials, change plant processes, or product design in an effort to lower costs.

The basic concept is to gather information about current operations, analyze it, and evaluate the results. Most managerial accountants strive to:

  • – Measure the operational costs
  • – Minimize all non-value added costs if not eliminate them
  • – See if operations can be run more efficiently and effectively
  • – Create processes that will work better for future operations

Let’s take a look at an example.

Example

The Shine Company just completed its first building project. Here are the steps and details.

Planning – All possible costs are projected and estimated.

Implementation – All costs are recorded.

Final Anaysis – Costs are compared and analyzed. Variances are investigated.

Materials Budgeted Actual Variance Over/ Under Budget
Concrete $26,000 $36,000 $10,000 Over
Cement composites $15,600 $15,040 ($560) Under
Glass $12,300 $12,450 $150 Over
Metal $9,000 $8,500 ($500) Under
Ceramics $1,500 $1,500 Over
TOTAL $10,590 OVER

By going through these three phases and analyzing the cost variances, Shine can identify costs that should be minimized or eliminated as well as areas that the company is not as efficient as it should be. This is the essence of managing costs.