Cost Management

2008-12-06T02:55:00.000-08:00

For everything you wanted to know on building leadership and management, refer Shyam Bhatawdekar’s website: http://shyam.bhatawdekar.com

(Refer our High Quality Management Encyclopedia “Management Universe” at: http://management-universe.blogspot.com/)

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.

Profits

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

Conventional

Reduce direct labor expenses
Reduce direct material expenses
Reduce overhead expenses

Non-conventional

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

Waste of overproduction
Waste of waiting
Waste of transportation
Waste of processing itself
Waste of stocks
Waste of motion
Waste of making defective products/services

Cost Management/Control by Controlling Cost of Poor Quality

Also refer: (Cost of Quality- COQ) http://cost-of-quality.blogspot.com/

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

Just-in-time (JIT) management. Refer: (Just in Time Management- JIT) http://just-in-time-management.blogspot.com/
Cycle time and lead time management. Refer: (Lead Time Management) http://lead-time-management.blogspot.com/
Total quality management (TQM) and Zero defects. Refer: (Total Quality Management- TQM) http://total-quality-concept.blogspot.com/
Six sigma. Refer: (Six Sigma) http://six-sigma-system.blogspot.com/
Total productive maintenance (TPM). Refer: (Total Productive Maintenance- TPM) http://total-productive-maintenance.blogspot.com/
Business process engineering (BPR). Refer: (Business Process Reengineering- BPR) http://business-process-reengineering-bpr.blogspot.com/
Benchmarking. Refer: (Benchmarking) http://benchmarking-system.blogspot.com/
Quality circles. Refer: (Quality Circles) http://quality-circles.blogspot.com/ and (Quality Circles History) http://quality-circles-history.blogspot.com/
Kaizen. Refer: (Kaizen) http://kaizen-improvement.blogspot.com/
Gemba kaizen. Refer: (Gemba Kaizen) http://gemba-kaizen-improvement.blogspot.com/
5 S housekeeping. Refer: (5S Housekeeping) http://5s-housekeeping.blogspot.com/

For More Guidance, Assistance, Training and Consultation

Contact: prodcons@prodcons.com

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) http://prodcons-group.blogspot.com/, (Training Programs by Prodcons Group) http://training-development-function.blogspot.com/, (Productivity Consultants) http://productivity-consultants.blogspot.com/

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