Cost Management Defined

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The Purchasing Handbook defines cost management as, "the establishment of programs that regularly analyze purchase requirements and suppliers to identify lowest total cost and maximize total value to the company.”

Strategic Cost Management:
– Strategic cost management can be defined as “scrutinizing every process within your organization, knocking down departmental barriers, understanding your suppliers' business, and helping improve their processes"

Strategy: a) A strategy in general terms refers to a plan of action that will shape the direction of organization's success.Applications of Strategic Cost Management: • There are three basic business areas where strategic cost management can be applied. b) Before formulating any strategy. 1. . the management should think about the business model whether it is still relevant or need to be changed? c) Whether the objectives of the business are going to be accomplished through laid out strategy.

Operations: – By setting the priorities according to its significance we can operate the tasks effectively and efficiently. Organization: – Company should watch and check whether it is allocating its limited resources in the businesses which generate more value for the entire organization. – Resources as such are the liming factors for any organization and that's why the company should be focus whether it should own all resources or not? . 3.2.

Strategic Strategic Cost Management • Components of Cost management framework: .

Support Functions: – As the name suggests. sales. Customer Delivery Function: – This step emphasizes more on value addition with various activities such as marketing. HRM. .Core Functions: – Core functions elaborate on the nature of the business. procurement and logistics. Finance and Accounting. manufacturing. – Excellence in those activities can create a sort of competitive advantage for the company if it could harness (rule) its resources intelligently than its competitors. and product development. customer service and technical support etc. quality assurance and control. research and development. sourcing. – It answers the very obvious question what type of business are we in? – At this stage the company has to clearly identify its courses of actions with respect to strategy planning. engineering and maintenance. to support the core activities of business some secondary activities are to be carried out which includes IT. – These activities will facilitate the performance of the core activities in a way that goals of the business can be accomplished successfully without wasting limited resources. & General administration.

. steering guidance and offering ad hoc assistance. Reviewing the strategies will lead to clear identification of performance gaps and this will help to bridge the gap by improving targets already set beforehand. c) Setting up of project management structure will facilitate the implementation of strategic cost management by clearly identifying the day to day activities. b) To implement the planning.Strategic Management Programme Steps: Focus: a) Focus state starts with reviewing the different strategies of the company. a manager should gather very efficient team members and train them accordingly. Planning and Training: a) Planning plays a crucial role in implementing strategic cost management programme. b) Modifying the targets will lead to developed plan of attack which will foster better internal communication within the organization.

For example.Conducting interview. cost driver analysis. who. -. floor space occupied. machine operator(s).) • b) An action plan for proposed change should address the following questions what. -. a production activity may have the following associated cost-drivers: a machine.Developing benchmarks. how aspects of the activities rectified. Analysis and Recommendations for changes: a) It can be done by various strategic cost management analytical tools viz. -. activity-based costing. power consumed. . and the quantity of waste and/or rejected output. An activity can have more than one cost driver attached to it. (Cost driver: A factor that can causes a change in the cost of an activity.Data gathering.Fact Finding: This stage includes the tasks such as: -. selective business process reengineering etc.Conducting and customer surveys. when .

Implementation: In implementation stage the first task to be done is to define responsibilities and accountability of each individual and controlling i.e. fourth and fifth sate in the above process indicates continuous improvement. The third. And this is how the continuous improvement can be achieved. . monitoring and corrective action should be the taken at each stage of programme.

Bruns as a chapter in their book Accounting and Management: A Field Study Perspective.Activity-based costing • Activity-based costing was first clearly defined in 1987 by Robert S. . Kaplan and W. • Activity-based costing (ABC) is a costing model that identifies activities in an organization and assigns the cost of each activity resource to all products and services according to the actual consumption by each.

• Companies which have implemented activity based costing: • IBM • Daimler Chrysler • Siemens • BMW • BASF .

Conventional Costing • Total Cost = Material + Labour+ Overheads • Overheads are allocated to the products on volume based measures e. labour hours.g. machine hours. units produced Will this not falsify the costing in the new environment? ABC provides an Alternative .

AB Costing Conventional Costing Resources Expenses Activities Work Performed Cost Objects Cost Objects Product or service .

Basics of A B C • Cost of a product is the sum of the costs of all activities required to manufacture and deliver the product. • Products do not consume costs directly • Money is spent on activities • Activities are consumed by product/services .

Each Product is charged based on the extent to which it used an activity • The primary objective of ABC is to assign costs that reflect/mirror the physical dynamics of the business .Basics of A B C (contd.) • ABC assigns Costs to Products by tracing expenses to “activities”.

• It recognizes that many organizational resources are required not for physical production of units of product but to provide a broad array of support activities.Basics of A B C (contd. customers. .) • Provides ways of assigning the costs of indirect support resources to activities. business processes. products.

departments and activities • It helps to allocate more resources on profitable products. departments and activities • It helps to control the costs at an individual level and on a departmental level • It helps to find unnecessary costs • It helps fixing price of product or service scientifically .Uses of ABC • It helps to identify inefficient products.

Financial Engineering .

and the formulation of creative solutions to problems in finance. Specializing: Financial Engineering is risk management via creative structural tools. and the implementation of innovative financial instruments and processes. 19 . the development.What is Financial Engineering? Generalizing: Financial Engineering involves the design.

Multinational Corporate Finance Financial Engineering International Financial Market Corporate Finance Capital Market (Investments) Financial Economics 20 .