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Saturday, December 6, 2008

Cost Management

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(Refer our High Quality Management Encyclopedia “Management Universe” at:

Cost Management or Cost Control

In broad sense, both the terms have the same meaning. Yet cost management seems to connote broader perspective. Cost control to an un-initiated may mean cutting down the incurrence of cost or expenditure every time or in every situation. In reality it is not always so. In many specific situations, many times, one has to spend or incur cost in order to gain or make more money. It is in fact like an investment. Cost management sounds better then.


Making profits or running with surpluses is an essential objective of any organization whether a business organization, non-government non-profit making trust or government.

Profit = Revenue (or Price X Units Sold) - Overall Costs (or All Expenses)

One can make more profit by:
  • Increasing the price
  • Selling more units
  • Reducing costs
In globally competitive environment, increasing the price is not always feasible, Therefore, one has to resort to increasing the sales volumes or decreasing the costs.

Overall Cost Reduction: Better Strategy

If you do some quick calculations, you may find that:

  • Increasing the sales volumes by say, 5% will increase the profit by only by that much percentage i.e. 5% increase in profit.
  • On the other hand reducing the overall cost by 5% may increase the profit in the range from 20% to 45%.

Cost Build-up

There are two ways of looking at as to how products or services start costing.

Conventional Way

Cost = Direct Labor Cost + Direct Material Cost + Overhead Cost

Activity Based Costing (ABC) Way

  • Various activities are performed.
  • Activities attract resources like man, machine, material, money, time and information.
  • These resources mean money or cost.
  • Number of activities multiplied by costs attached to the resources consumed by the activities = Overall Cost

Cost Reduction Methods


  • Reduce direct labor expenses
  • Reduce direct material expenses
  • Reduce overhead expenses


  • Reduce or eliminate (non-value adding) activities
  • Reduce the consumption of the resources by these activities and even by value adding activities.

Cost Management/Control by Controlling Non-Value Adding Activities

  • Product or services go through processes.
  • Processes consist of activities.
  • Activities are: value adding and non-value adding.
  • Therefore, reduce and finally, eliminate non-value adding activities.
  • One may think of spending money on value-adding activities if the returns because of putting that extra money (investment) exceed the invested amount.

Cost Management/Control by Controlling Seven Notorious Wastes

  1. Waste of overproduction
  2. Waste of waiting
  3. Waste of transportation
  4. Waste of processing itself
  5. Waste of stocks
  6. Waste of motion
  7. Waste of making defective products/services

Cost Management/Control by Controlling Cost of Poor Quality

Also refer: (Cost of Quality- COQ)

Costs of poor quality or non-conformance of quality are:

  • Preventive costs
  • Appraisal costs
  • Internal failure costs
  • External failure costs

Statistically, it has been found that if you spend $1 on preventive costs, you can save in the range of $1110. Thus quality comes free. First time right gives you overall cost reduction.

Other Management Initiatives For cost Management

For More Guidance, Assistance, Training and Consultation


Training in "Cost Management and Cost Control" is provided by Prodcons Group's Mr Shyam Bhatawdekar, eminent management consultant, management educationist and trainer- par excellence, with distinction of having trained over 150,000 people from around 250 organizations. Assistance in implementation of cost management/control systems is also provided by the team of Prodcons Group.

Also refer: (Prodcons Group), (Training Programs by Prodcons Group), (Productivity Consultants)

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