What is Cost Management?
Benefits & Precautions!

Cost management does not necessarily mean cost reduction. Sometimes you have to increase the costs at peak times and reduce when demand is low.

There is no agreed definition of this term.

Various experts explain managing costs according to their real-time experiences, backgrounds and business models. Furthermore, like any other economic concepts, this one also has certain exceptions. Some like to call it cost accounting.

No business, private or public, can ignore applications and possibilities of cost management!

Some take it as a process, others as a strategy and yet some as a collection of activities to reduce costs of business as well as the price for the end-users.

While managing a hospital, I realized that cost accounting has never been a part of the overall business-cum-charity operation of the hospital. I needed following data just to start with cost accounting: 

  • Month-wise income from two wards
  • Month-wise expenditures of the both wards
  • Costs of operational process
  • Costs of operational process
  • Percentage of outdoor patients converting to indoor patients
  • Cost per patient
  • Revenue per patient
  • Expenses on development activities
  • Expenditures on free medicines delivered to the patient
  • Expenditures on salaries

We found yearly trends for the demand for our services. The peak period starts from July and ends after December. The demographic structure of the country and our city showed that the demand should continue to rise at least for the next two decades. The salaried hospital structure was extremely tilting towards doctors.

We also observed that our contracts, hiring and firing patterns and human resource management was not according to various trends. The hospital used to hire staff at the same level without analyzing the workload. It was paying less in peak periods and more in low times. 

But cost management can’t be handled in isolation as it should be part of our overall planning to the run our businesses. When a project is defined in its objectives, it becomes easier to manage our costs.

Benefits

The benefits of the cost management have been obvious. You can predict your future expenditures by analyzing different sets of data and trends in demand and supply at different times of the year.

You can maintain a centralized record of the predicted expenditures. This shall help us to complete your project within the estimated costs.

A good strategy can save you from financial losses that you may face otherwise. When you change your objectives frequently, every turn may cost you more than we predict initially.

If you fail to research about our future costs, we may underestimate them and face massive increase at times. Furthermore, you may develop unrealistic expectations about results of the projects.

The managers don’t have all out powers to make expenditures. If they analyze the expenses and put them before their senior authorities, they can get approvals in advance.

A Word of Caution!

Without monitoring the whole process, explicit and implicit costs, opportunity costs, accounting costs and economic costs during execution of a project, so all costs remain within the planned expenditures. Once a project is complete we can compare our predictions and the actual expenses incurred on it to use the data for other projects.

While reducing costs, you must not forget sustainability. If you can’t sustain cuts for long, then your may have to face massive losses on end of the day. Short-term measures seem reasonable but they often backfire. For example, in our case, if we fire experienced people at low hours we may have to pay much more to hire them at peaks.

You must not compromise on the quality of your product or services to cut costs. Similarly, you need to analyze cost structure of your institution before deciding on a cut.

You need to analyze long-term as well as short-term activities, processes, services, supplies and other objects to manage costs of a project or the company. Furthermore, we can’t ignore quality management, environmental costs, productivity-enhancing costs and strategic cost accounting.

Cost management is a continuous process which includes collecting data about costs, analyzing, evaluating and adding in the budget. Its horizon expands over predicting business activities while analyzing various trends of supply and demand.

While analyzing cost accounting, we must not ignore various forms of costs like opportunity costs, sunk costs, fixed costs, variable costs and marginal costs. Cost management also analyzes environment and society related costs.

While applying to individual projects the managers should develop specific cost management plans. However, in public sector and the companies, the overall process of the day to day business should include cost management as a strategy.

What is Opportunity Cost?

Types of Opportunity Cost?

Transaction Costs

Transaction Cost Analysis


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