Cost and management accounting is a form of accounting that aims to maximize profit by managing revenues and expenses. It provides data and reports used by managers to inform their strategies around long-term profit and growth.
A company’s profitability can be increased by cost management accounting, which manages, controls, and reduces expenses. Cost accounting aids organizations in figuring out the costs of their projects, goods, and operations, which reveals where they are making and losing money and is crucial for budget planning. Managers can use data and analysis reports from cost and management accounting to make decisions that will result in long-term success and growth.
In Project management, cost management involves the planning, estimating, and overall control of the budget. Its processes are in place to help project teams plan and control budgets during the project life cycle. It is broken down into four processes. Resources planning, cost estimation, cost budget, and cost control.
Resource management is in place to plan, allocate, and schedule the resources needed for each stage of a project, resource planning looks at the costs associated with each of these resources.
Cost estimation is an important part of cost management that looks at the process of approximating the costs associated with each of the resources required for all scheduled activities. It forecasts the cost of completing a project within a defined scope. Effective cost management requires project managers to keep abreast of budgetary changes during a project’s lifespan.
Cost estimations lead directly to cost budgets. A good project budget will help you make key decisions concerning the project schedule and resource allocation constraints.
Good project managers should have a constant eye on cost and potential scope creep. This includes being vigilant for times when costs vary from estimations. Cost control also involves informing the stakeholders of cost discrepancies that vary too much from the budgeted cost.
Strategic cost management is the process of reducing total costs while improving the strategic position of a business. This goal can be accomplished by having a thorough understanding of which costs support a company’s strategic position and which costs either weaken it or have no impact. It is an approach focusing on making a business more competitive by reducing the costs of operations. This is achieved by integrating cost information into the decision-making structure as a means of reinforcing the organization’s business strategy
Conversely, it may be useful to increase costs that support the strategic position of the business. It is rarely worthwhile to cut costs in strategically important areas since doing so reduces the customer experience and therefore will eventually lead to a decline in sales. Therefore, management needs to be involved in cost reduction activities, so that they can provide input regarding how certain costs must be incurred to support the competitive position of the firm.
There are three important components of strategic cost management:
Strategic Positioning Analysis – What is the company’s competitive position in the market?
Cost Driver Analysis – Identifying the activities generating costs in the organization. Costs are then divided into one of two categories: Structural Cost Drivers and Executional Cost Drivers. Each cost driver is measured and examined in terms of how the costs relate to or affect specific activities of the organization.
Value Chain Analysis – Value chain analysis is the process of identifying how all organizational activities related to the final product or value proposition are delivered to the customer or client.
Strategic Cost Management helps in the following ways:
- Allows for a better understanding of the cost structure when making management decisions.
- It improves upon traditional cost analysis measures by integrating organizational strategy.
- It relates costs to the various elements of the value chain.
- Uses specific metrics in furtherance of achieving competitive advantage through cost leadership.
Being strategic in managing cost, positions the company in the right direction to make good decisions thereby improving profitability, growth, and sustainability in the long run. It is therefore recommended that every business manager should have strategic cost management as a key tool to guide her decision-making.