Cost Management & Management Control

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 .

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   .Identifiability  Cost unit or cost object: it is an entity.

Total cost Direct Cost Indirect Cost D.Lab D.Exp In D.Exp Prime Cost Overhead . Mat InD Lab InD.Mat D.

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   .

labour and overhead for a selected period of time and a prescribed set of working conditions. conditions.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.  .

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 .

ofOut. 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     .of-pocket cost: cost that results in cash outflow cost: Differential cost: change in cost due to change in level of cost: activity.Cost and managerial decision  Marginal cost: cost incurred for producing an additional cost: unit Out.

 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    .

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