Cost Management & Management Control

Definition
Cost management generally describes the approaches and activities of managers in short run and long run planning and control decisions that increase value for customers and lower costs of products and services. services.

Features of cost management



It focuses on cost reduction and continous improvement and change rather than cost containment The planning and control of costs is usually inextricably linked with revenue and profit planning Cost management is not practiced in isolation

         

Classification of costs Nature of element Functions Identifiability Variability Controllability Normality Financial accounting treatment Time Association with the product Planning and control

Nature of element


Material: Material: physical or tangible inputs which go into manufacture of any product or rendering of services Labour: Labour: human effort that goes into the production of goods Overheads: Overheads: all other items other than material and labour come under this class

Function


Manufacturing and production cost: all cost incurred cost: from the time of procurement of material to the finished goods Administrative cost: cost pertaining to any activity cost: comprised in the administrative function of a business organization Selling and distribution cost: cost: Selling cost are the cost of promoting the product and service, building up brand equity etc Distribution cost are the cost associated with the activity of making goods or services physically available to the consumer

 

Total Cost
Production Cost Administration Cost Selling Cost Distribution Cost Research & Developm

Identifiability


Cost unit or cost object: it is an entity, object: object or activity for which we determine cost Direct cost: cost that can be readily and cost: specifically identified with the cost object Indirect cost: cost that cannot be readily cost: and specifically identified with the cost object

Total cost

Direct Cost

Indirect Cost

D.Mat

D.Lab

D.Exp

In D. Mat

InD Lab

InD.Exp

Prime Cost

Overhead

Variability Fixed cost: remain fixed irrespective of cost: the level of activity Variable cost: vary in direct cost: proportion to the volume of output SemiSemi-variable cost: partly fixed and cost: partly variable

Controllability


Controllable cost Uncontrollable cost

Normality


Normal cost Abnormal cost

Treatment in financial accounting



be derived by the business for more than one accounting period

Capital cost: benefits can cost:

Revenue cost: benefits are exhausted in cost:

the same period in which they are incurred

Time


Historical cost Predetermined cost: serve as a cost: tool for cost control, cost reduction and cost analysis

Association with product Product cost Period cost

Planning and control



Budgeted cost: cost that represents an cost: estimate of expenditure Standard cost: predetermined cost cost: based on a technical estimate of material, labour and overhead for a selected period of time and a prescribed set of working conditions. conditions.

Distinction between Standard cost and Budgeted cost

Budgeted cost
Budgeted cost are along functional lines Budgets are top-down topapproach of estimation Budgets are more arithmetic an exercise Budgeted cost are expected cost Budgeted cost facilitate planning

Standard cost
Standard cost are along elementary lines Standard cost are bottom up approach to estimation Standard cost are more technical and scientific exercise Standard cost are desired cost Standard cost facilitate control

Cost and managerial decision



Marginal cost: cost incurred for producing an additional cost: unit Out- ofOut- of-pocket cost: cost that results in cash outflow cost: Differential cost: change in cost due to change in level of cost: activity, pattern or method of production Sunk cost: cost that has already been incurred cost: Imputed or notional cost: these cost do not entail cost: actual cash outflow from the business to a third party

foregone

Opportunity cost: cost of next best alternative Replacement cost: cost of replacing an asset or
material at its present condition

can be avoided or unavoided because of a particular decision

Avoidable and unavoidable cost: those which

Future cost: all cost that are expected at a future date Programmed cost: cost that are attributable to
major policy decision taken by the top management from time to time

Conversion cost: cost incurred in converting raw material into finished goods Committed cost: cost that has been committed due to decision taken by management in the past Discretionary cost: cost whose contribution to revenue or profit cannot be conclusively established Joint cost: cost incurred till the point of different products become separately identifiable