Core Objectives of Cost Management for Business Growth

Prabhat Nigam

10 Sep, 2022

The term ‘Cost Management’ is in vogue in business jargon these days. Unfortunately, no specific definition has been available to entirely cover all the aspects of cost management. It is a highly dynamic concept. To put the concept of cost management in a nutshell, it comprises the approaches employed by the management of a business both in the long-run and short-run to plan and take decisions that lower the cost of production for the management and ultimately enhance the value for the customers. 

This piece of writing discusses the concept, scope and core objectives of cost management.

What is cost management?

Cost management is the process where the management of a business initiates planning, controlling and taking decisions in the direction of improving the cost leadership of the business. Cost management includes the tasks of generating cost information and its usage to control the expenses of the product or service offered by the organization. To successfully execute the task of cost management, a regular supply of reliable cost information is required, which can be clearly and quickly communicated to the concerned departmental managers. The information so generated should highlight the cause and purpose of concurrence of cost.  

What is cost accounting?

Cost accounting is the accounting process of ascertaining the cost of a product or an activity. Here, the accounting is done with a view to classification, analysis, interpretation and control of cost. It measures the operating efficiency of an enterprise. Cost Accounting^[1] is aimed at providing the cost data, reports and statements to the management in order to assist them in making financially wise decisions.         

Scope of cost management

The scope of cost management is quite expansive and includes the following aspects within its scope:

1. To ascertain the cost: The management collects the data of expenses incurred and further analyses the amount spent on the production of multiple products at various stages of production and thereafter links the production with the costs incurred. Since there are different procedures for the collection of expenses, different methods of measurement of costing are employed, such as Estimated Costs, Standard costs, Historical or Actual Costs etc. This has resulted in the adoption of different methods of costing, such as operating costing and specific order costing.
2. To match the cost with the revenue generated: Cost management assists in making financial statements at short intervals as and when the management requires. However, the general financial statements are prepared once a year or twice a year. These financial statements are prepared by the management on the basis of weekly, monthly and quarterly reports about the units produced, accumulated cost and analysis, along with the information on the stock of raw materials, semi-finished and finished goods. It enables the management to match the cost of the product with the income generated by the product.
3. To identify the unproductive and unprofitable activities: Another important objective of cost management is to identify the unproductive and unprofitable activities in the production so that the management can take appropriate action to limit the losses and increase efficiency. This exercise thus helps in the elimination of wastages.

Key Objectives of Cost Management  

Following are the major purposes and key objectives of Cost Management for the growth of any business:

• To ascertain the selling price: The primary objective of cost management is to ascertain the cost of the production and selling price of the product. Cost management allows determining the total cost in the production of one unit and the overall cost, which is then used in deciding the selling price of the product. It not only tells the overall cost of production but also the total cost of selling the product. Though there are several factors that are taken into consideration in determining the selling price, the cost of production of the product plays a major role.   

• To determine the profitability of the product:  In furtherance of determining the cost of production and the selling price, cost management’s objective is to provide an objective analysis of the costing profit or loss by any activity by matching the cost with the revenue generated by the product. Thus, it can be said that one of the objectives of cost management is to determine the profitability and loss made by a product.     

• To control the cost of the product: The aim of cost management is to control the cost of the product. Cost management employs a number of techniques such as budgetary control, inventory control and standard costing, wherein every item in the making of the product, such as material, labour and expenses, are budgeted at the beginning of the production period, and a comparison of that budget is compared with the expenses incurred in the actual production of the product. This process highlights the aspects where the management can take decisions to control the cost of the product.   

• To calculate bonus plans for the organisation: Cost management also allows the management to calculate the bonus plans or incentives for the daily workers in order to incentivise them and consequently to extract maximum output. It is only through cost management that the management is able to know the extent of the amount that an organisation can set aside for the purposes of incentives and bonus plans for employees.      

• Assistance in making informed decision making: Cost Management lays down the foundation for making sound decisions by the management. Cost Management assists the management by providing information in terms of cost-volume-profit relationship, making or buying of a component, winding up of operations or continuing with the operations, continuing with the existing machinery or replacing it with improved and economical machines. Cost Management assists the management in formulating the operative policies for the business.  

• To enhance the communication among departmental managers: Whenever the management calls for a cost management meeting, the departmental managers of various departments are called and they share their departmental statements with each other. This exercise enhances inter-department cooperation and finds out the delays, wastes, and underproduction done by various departments, which is ultimately taken into consideration by the management in making key decisions.  

Conclusion 

For a business to reap the benefits of cost management, it is necessary that cost management is adopted as a policy by the management. The Japanese were the first who internalised the practice of cost management, and the practice has become universal now. Cost management involves the process of cost accounting to report the costs incurred in doing business and consequently to control the same.    

Read our Article: Importance of Cost Management for Business