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cost management

Programmatic advertising is a system that automates the processes and transactions involved with
purchasing and dynamically placing ads on websites or apps.

Cost management is the process of planning and controlling the budget of a


business. Cost management is a form of management accounting that allows
a business to predict impending expenditures to help reduce the chance of
going over budget.

Many businesses employ cost management plans for specific projects, as well
as for the over-all business model. When applying it to a project, expected
costs are calculated while the project is still in the planning period and are
approved beforehand. During the project, all expenses are recorded and
monitored to make sure they stay in line with the cost management plan. After
the project is finished, the predicted costs and actual costs can be compared
and analyzed, helping future cost management predictions and budgets.

Implementing a cost management structure for projects can help a business


keep their over-all budget under control. Several business intelligence
programs, such as Oracle Hyperion, offer cost management software to help
businesses monitor costs and increase profitability. While the software may
help, it is not imperative that software is used when executing a cost
management plan.

Vendors may refer to cost management software applications as cost


accounting, spend management or cost transparency products.
A fundamental concern for managers in executing their duties to plan, control,
make decisions and evaluate performance is how their actions affect
organizational costs and benefits. Financial experts, especially cost
accountants, bear the primary responsibility for providing managers
information about measurements of costs and benefits. Because of their
responsibility for financial accounting, however, cost accounting is frequently
found to be of limited value to managers.

Differences between financial accounting and strategic cost management:

Financial accounting : cost information can be highly aggregated, and


historical and must be consistent with GAAP

Strategic cost management: cost information may be segregated,


current and relevant to a particular purpose.

Cost management systems are needed to enable cost accountants to provide


managers with the cost and benefit information that they need. A cost
management system is a part of a management information and control
system.

MANAGEMENT INFORMATIN AND CONTROL SYSTEMS

A management information system (MIS) is a structure of interrelated


elements that that collects, organizes and communicates data to managers so
that they can pan, control, make decisions and evaluate performance. It
emphasizes internal demands for information rather than external demands.
The MIS is part of a management control system (MCS) which has the
following for components:

A detector or sensor, which measures what is actually happening in the


process being controlled

An assessor, which determines the significance of what is happening


An effector (or feedback) which alters behavior when the assessor
indicate a need for doing so

A communications network, which transmits information between the


detector and the assessor and between the assessor and the effector.

A management control system also requires the application of judgment. It


can be referred to as a black box (an operation whose exact nature cannot
be observed).

DEFINING A COST MANAGEMENT SYSTEM

A cost management system (CMS) consists of a set of formal methods


developed for planning and controlling an organizations cost-managing
activities relative to its short-term activities and long-term strategies. It should
provide information to meet two major challenges: profitability in the short term
and maintaining a competitive position in the long term.

Organizational role of a CMS:

Managing core competencies so as to exploit opportunities and fend off


threats

Linking plans and strategies to actual organizational performance


Objectives of Cost Management

The main objective of cost management is to reduce the costs expended by an


organization while strengthening the strategic position of the firm. Three ways to
institute cost management techniques are as follows:

Establish systems to help streamline the transactions between corporate


support departments and the operating units.

Devise transfer pricing systems to coordinate the buyer-supplier interactions


between decentralized organizational operating units

Use pseudo profit centers to create profit maximizing behavior in what were
formerly cost centers.

These cost management systems will not only manage costs, but also enhance profit
consciousness. This will help the organizations ability to serve its customers because
divisions will become increasingly more focused on operating more efficiently.
Three types of cost management are:

1. Those that strengthen the organizations competitive position.

An example of a cost management technique that strengthens an organizations


position is illustrated as follows. A hospital redesigns its patient admission
procedure so it becomes more efficient and easier for patients. The hospital
will become known for its easy admission procedure so more people will come
to that hospital if the patient has a choice. The strategic position of the hospital
has just been increased over its competitors.

2. Those that that have no impact on the organizations position.

An example of a cost management technique that has no impact on the


organizations competitive position is illustrated as follows. An insurance
company decides to reevaluate its accounts payable system to make it more
efficient. The evaluation has no positive benefits to the insurance company in
the external market. The objective of the change is to make the organization
more profitable.

3. Those that weaken the organizations position.

An example of a cost management technique that will weaken the


organizations competitive position is illustrated as follows. A large airline
company only has two desks for administering and selling tickets. This set-up
induces long lines for the airline customer which can ultimately result in high
dissatisfaction and a bad reputation for the airline. This may reduce the amount
of ticket sales when compared with the airlines competitors. Even though
having only two desks available for customers may initially be cost effective, in
the long run, it harms the company.
As a general rule, an organization should never undertake any practices that are
predicted to weaken the position of the organization.