- 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:
- Materials
- Direct Labor
- Electricity/Heat
- Overheads
- 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