Costing Strategy

Dr.Soubhagya H
SHDCW, Banglore.
Elements of Cost

 Direct Material. It represents the raw material or goods necessary to produce or

manufacture a product. ...
 Indirect Material. ...
 Direct Labour. ...
 Indirect Labour. ...
 Direct Expenses. ...
 Indirect Expenses. ...
 Overhead. ...
 Factory Overhead.
Influence of cost elements on business enterprise &
importance of analysing cost elements

 It helps in determining the total cost of production, setting selling prices, and
analyzing the efficiency of the production process. Moreover, separating direct and
indirect materials aids in more precise budgeting, cost control, and managerial
decision-making regarding resource allocation and operational efficiency.
 Identifying and analyzing cost elements helps control and reduce costs by
identifying areas where efficiencies can be improved. Performance Evaluation:
Cost elements are crucial for evaluating different departments' performance and
identifying improvement areas
Cost Control

 Cost control refers to the process of monitoring and

managing expenses within an organization to maintain financial
stability and achieve profitability. This process involves identifying
and analyzing various cost factors, such as operational expenses,
production costs, and overheads, and implementing measures to
reduce or optimize them.

 It aims to strike a balance between minimizing costs without

compromising the quality of products or services. By effectively
controlling costs, businesses can enhance their competitiveness,
improve operational efficiency, and generate higher profits,
ultimately leading to long-term growth and success.
Importance of cost control

 Cost control is vital for organizations for multiple reasons. It helps

maximize profitability by optimizing expenses, enabling
businesses to generate higher profits and improve financial
performance. What’s more, it ensures financial stability,
minimizing the risk of crises and cash flow problems.
 It facilitates strategic decision-making by providing insights into
cost drivers and spending patterns, enabling informed resource
allocation and investment choices. In short, cost control is a
strategic tool that balances financial stability, profitability, and
growth, empowering organizations to thrive in a dynamic business
environment.
 Benefits of cost control management

 1. Cost savings
Effective cost control management helps identify areas of excessive spending,
inefficiencies, and waste. By implementing cost-saving measures, businesses can reduce
expenses, optimize resource allocation, and improve their financial position.
 2. Improved profitability
By reducing costs and increasing efficiency, cost control management directly
contributes to improved profitability. It enables businesses to generate higher revenues,
enhance profit margins, and achieve sustainable financial growth.
 3. Enhanced cash flow
Proper cost control management ensures that cash flow remains healthy and stable. By
minimizing unnecessary expenses and managing payment cycles effectively,
organizations can maintain a steady flow of funds, meet financial obligations, and invest
in growth initiatives.
 4. Competitive advantage
Cost control management allows organizations to offer competitive prices while
maintaining the highest level of quality. This pricing strategy helps attract customers,
retain market share, and gain an edge over competitors in the marketplace.
 5. Resource optimization
It helps ensure that resources, including materials, labor, and equipment, are utilized
efficiently, eliminating any instances of underutilization or excess capacity.
 6. Strategic decision-making
Cost control management provides decision makers with valuable insights and data that helps
immensely in the strategic decision-making processes. With accurate cost information, organizations
can make informed choices regarding pricing strategies, product development, market expansion, and
investment decisions.
 7. Operational efficiency
Effective cost control management streamlines processes and improves overall operational efficiency.
What’s more, it helps identify bottlenecks, implement process improvements, and optimize workflow,
resulting in higher productivity and smoother operations.
 8. Risk management
Organizations can mitigate financial risks by actively monitoring and controlling costs. It helps identify
potential cost overruns, budget deviations, or unforeseen expenses, allowing proactive measures to be
taken to prevent or minimize such risks.
 9. Improved financial stability
It’s no secret that maintaining a strong financial position is vital for business sustainability. Cost
control management helps in financial stability by reducing unnecessary expenses, avoiding
inessential debt, and enabling organizations to weather economic uncertainties or market fluctuations.
 10. Long-term growth
By optimizing costs and improving profitability, cost control management frees up financial resources
that can be reinvested in growth initiatives. This capital can be utilized for research and development,
marketing campaigns, talent acquisition, technological advancements, or market expansion, fostering
long-term growth and success.
 Cost control techniques and methods
 1. Cost reduction
This involves identifying and implementing measures to minimize expenses without
compromising product or service quality. For effective cost reduction organizations can
renegotiate supplier contracts, optimize operational processes, and improve efficiency.

 2. Cost accounting
It is the process of focussing on tracking and analyzing the costs associated with
producing goods or services. Cost accounting can help organizations understand the
cost structure, allocate expenses accurately, and make informed decisions regarding
pricing, resource allocation, and project cost control strategies.
 3. Budget
In organizations the budget is a financial plan that outlines projected revenues and
expenses over a specific period. It serves as a benchmark for cost control efforts by
setting limits and targets for various cost categories. Monitoring actual expenses against
the budget allows organizations to identify deviations and take corrective actions. This in
turn will help your company’s baseline.

 4. Standard cost accounting

Standard cost accounting sets predetermined standard costs for materials, labor, and
overhead. In this process actual costs are compared with the standard costs, enabling
organizations to identify and address cost variances. This technique helps in measuring
cost performance and improving cost control measures.
 5. Earned value management
Earned Value Management (EVM) is a project management technique that integrates cost, schedule, and
performance data. It helps in tracking the value of work completed in relation to the planned budget and
schedule. EVM helps organizations to monitor project costs effectively, assess performance, and take
corrective actions.
 6. Analysis of variance
Analysis of variance (ANOVA) is a statistical technique that is used to analyze and understand the
differences between planned and actual costs. ANOVA helps in identifying the causes of cost variances,
such as changes in material prices or production inefficiencies.
 7. Budgetary control
Budgetary control involves monitoring and controlling expenses based on the approved budget. It includes
periodic reviews, tracking actual expenses and actual expenditures, comparing them with budgeted
amounts, and implementing corrective actions when necessary. Budgetary control helps organizations
maintain financial discipline and ensures effective cost control.
 8. Outsourcing
It is the process of delegating specific tasks or functions to external vendors or service providers.
Outsourcing can help organizations reduce costs and decarese operational expenses.
 9. Continual improvement process (CIP)
It is the systematic approach to drive ongoing enhancements in cost control. This involves identifying
areas for improvement, setting goals, implementing changes, and measuring the impact of those changes.

 By employing these cost control techniques and methods, organizations can proactively manage
expenses, optimize resource allocation, and drive financial efficiency and stability.
Cost control in different industries

 Manufacturing industry
 Healthcare
 Hospitality
 Retail
 Construction industry
 Informational technology industries
 Transportation and logistics industry
 Professional services industry
 cost control strategies
 1. Inventory management
In this strategy the inventory levels are effectively managed to avoid
overstocking or understocking. By monitoring and controlling inventory,
organizations can minimize carrying costs, reduce the risk of obsolete
stock, and optimize cash flow.
 2. Supplier management
This focuses on developing strong relationships with suppliers to
negotiate favorable pricing, terms, and conditions. What’s more, effective
supplier management also involves selecting reliable and cost-effective
suppliers, maintaining clear communication, and fostering collaborative
partnerships to drive cost savings and improve overall supply chain
efficiency.
 3. Process optimization
Process optimization aims to streamline operations, eliminate
inefficiencies, and reduce costs. This is done by analyzing and improving
workflows, identifying bottlenecks, automating repetitive tasks, and
enhancing productivity through continuous improvement initiatives.
 4. Waste reduction
The waste reduction strategy aims to minimize waste generation and
maximize resource utilization. This is achieved by implementing
recycling programs, optimizing production processes to minimize
scrap or rework, and promoting sustainable practices.
 5. Pricing strategies
Pricing strategies involve setting competitive prices that balance
customer value and profitability. This may include strategies such as
value-based pricing, cost-plus pricing, or dynamic pricing. By
analyzing market dynamics, customer demand, and cost structures,
organizations can optimize pricing to maximize revenue and achieve
profitability.
 Cost reduction strategies

 Implement well thought cost reduction strategy by identifying areas where

costs can be reduced without compromising quality or performance. This
could involve renegotiating contracts with suppliers, optimizing
operational processes, improving energy efficiency, or implementing
technology solutions that automate tasks and streamline operations.

 1. Financial controls
By establishing financial controls you can ensure budgetary guidelines are
followed, this in turn will prevent overspending.
Approval processes for expenses, setting spending limits, and implementing
monitoring systems to detect any potential financial irregularities, are some
of the examples of financial controls.
 2. Performance measurement
Measuring performance against cost targets and benchmarks is one of the
most effective ways to control cost. To assess the efficiency of your cost
management effort you can track key performance indicators related to cost,
such as cost per unit, cost variance, or cost-to-revenue ratios.
Cost reduction: Meaning

 Cost reduction refers to the process of permanently reducing the expenses

involved in manufacturing products or rendering services. It comes about without
unduly impairing the end use or quality of the product or service.
 All reductions that are a result of a temporary fall in raw material costs or are in
response to a change in government policy do not fall under the ambit of cost
reduction. Thus, cost reduction involves the following:

 A fall in expenditure with the same production volume.

 An increase in production with the same level of production.

Cost reduction: Examples

 Some common cost reduction examples are:

 Reducing labour costs by automating routine tasks or by outsourcing non-core
business functions.

 Bringing down office expenses, such as electricity bills, by opting for energy-saving
technologies or scaling down on office space by offering remote working options.

 Negotiating better terms with suppliers to source material at lower costs or be

offered higher trade discounts.
Cost reduction: Process

 Determine the scope for cost reduction: A cost reduction process starts by
analysing the existing cost structure of your firm. These costs are then compared
against pre-established benchmarks or industry standards to identify areas for cost
reduction. In the case of multiple opportunities, it is best to undertake a spending
analysis and prioritise those yielding the greatest benefit.

 Create a cost reduction programme: After ascertaining problem areas, firms must
carry out a detailed analysis by employing various quantitative and qualitative
techniques. The aim is to decide on the most suitable cost reduction techniques
and their possible impact. Some preliminary testing of these techniques may also
be carried out at this stage.
Continued….

 Plan for implementation: After designing a cost reduction programme, it’s time to
bring all business executives, key management personnel, contractors, and
employees on board to create the plan of action. This is to ensure there is a clear
demarcation and delineation of roles, and that everyone remains on top of the
details to minimise any lapses.

 Put the programme into action: Finally, deploy the cost reduction programme by
establishing a governance structure and control deadlines. Continuously monitor
the progress and optimise the strategies further based on the results.
Cost reduction framework
A typical cost reduction framework involves the identification of wasteful expenses and the
implementation of cost reduction strategies and techniques.

 Types of cost reduction

reworking an old design, companies can rework the following costs. 1) Material cost: Whether
a change in design can reduce costs by allowing for the substitution of a cheaper raw material
or utilising a lower material quantity. Economic Order Quantity (EOQ) is a useful cost reduction
technique at this stage. 2) Labour cost: A design change may reduce operational time or time
devoted to after-sale services, minimising labour costs.
 Organisation or factory layout costs: Companies may see the potential for cost reduction
in using under-utilised machines, spaces, and manpower.

 Administrative costs: A cost reduction analysis can be carried out to determine if the
company is incurring any unnecessary routine expenses. Some expenses worth reviewing
are telephone expenses, travel costs, office stationery, and postage charges.

 Management costs: Some SMEs may be needlessly incurring expenses due to poor
communication. Framing a proper delegation and accountability framework with well-
defined responsibilities can go a long way in reducing firm costs.
Continued…

 Marketing costs: Firms must evaluate the impact of marketing on enhancing their
sales. If the marketing system is ineffective, costs allocated to advertisement,
warehousing, and distribution can be streamlined. ABC analysis is a handy cost
reduction strategy for determining the appropriate allocation of marketing budgets
to different customers.

 Financing costs: Financial management is another cost reduction area. Here, you
must consider whether there are any over-investments or if the cost of capital is
too high. You can also track issues with working capital, like any inventory hold-
ups.
Cost reduction techniques

 Budgetary control: Companies can compare their actual costs incurred against the
budgeted numbers and take remedial actions in case of discrepancies and
unnecessary costs, achieving better cost efficiency.

 Simplification: The role of efficiency and cost reduction comes into play when
firms reduce the diversity of their product offerings and scale the remaining
products. It helps streamline business operations, raise cost efficiency, and reduce
costs.
Continued…

 Standard costing: In this cost reduction technique, enterprises carry out a variance
analysis to bring out the differences between standard estimated costs and actual
costs. Consequently, they can track the areas exhibiting high-cost variances and the
possible reasons for them.

 Value analysis: Also called value engineering, a value analysis entails a systematic
review of product design and production processes with an emphasis on reducing
total production costs without compromising product quality or functionality.

 Design improvement: By improving product designs, companies can improve

production processes, enhance product performance, and generate cost savings.
Cost management

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

business. Having a good cost management system in place makes it easier for an
organization to estimate and allocate its budget.
 Cost management is a form of management accounting that helps a business
reduce the chance of going over budget with more accurate forecasts of impending
expenditures. Many businesses use cost management tactics for specific projects
and for the overall business.
Steps of Cost Management

 1. Setup
The setup phase determines what's included in the cost management plan. It identifies who
the stakeholders in the plan are, the tools used to manage costs and the data structure needed
to track costs.
 2. Resource planning
This planning phase identifies the resources needed to complete a project. These could be
physical materials, information assets, staff and cloud computing resources.
Resource planning determines resource allocation, including how much of a resource is
needed, for how long and how it will be allocated.
 3. Budgeting and cost estimation
In this stage, project teams develop a project budget. Budgeted cost estimates get more
specific as the project scope is refined. A picture of the full project costs emerges as resources
are allocated.
Continued…

Project managers compare the current project to earlier ones to gain insight. They can
use top-down and bottom-up estimation methods. In the top-down approach, upper
management in an organization determines the project duration, the tasks and project
activities involved and the estimated costs for each of them. In a bottom-up approach,
each team estimates the duration and allocated budget of their individual tasks.
Management uses that information to determine the project's duration and estimated
budget.
 4. Cost control
This phase involves monitoring and controlling costs as the project progresses, using
data from different project teams. Managers track how costs differ from the estimated
budget and take action to accommodate cost overruns, reduce deviations from the
budget and cap the budget when necessary.
Effective cost management processes require accurate cost reporting. This involves
access to real-time cost data and insight using data visualization. Variances from
budgeted costs must be measured, and corrective measures taken.
 Benefits of cost management
• Reduces overspending. Cost controls help project managers keep their budget on track and not
let costs get out of control.
• Encourages planning. Cost management helps identify what is and isn't working. It provides
insight into resources and processes that helps managers make faster and better decisions about
the current project and future ones.
• Facilitates financial health. Continuous monitoring, cost control and cost reporting contribute to a
company's long-term financial health. These efforts provide the data necessary for good decision-
making. Implementing a cost management structure for projects helps a business keep its overall
budget under control.
• Mitigates risk. Cost management typically involves setting a risk allowance for unforeseen costs, a
useful step to prevent overspending.
• Supports standards. Consistent cost control, analysis and reporting help organizations adopt
standards for assessing future cost data and productivity levels.
• Improves visibility. Many cost management tools for cloud services give real-time visibility into
cost management metrics, like savings. They also provide a list of the users' assets, and some use
machine learning to provide suggestions on areas where users can change behaviors to save
money.
Techniques

 Value analysis
 Quality control
 Cost benefit analysis
 ABC analysis
 Market research
 Budgetary control and standard costing
 Design analysis
 Technological forecasting
 etc
 Areas of Cost Management
 Benchmarking :Benchmarking is the practice of comparing business processes and performance
metrics to industry bests and best practices from other companies. Dimensions typically measured
are quality, time and cost.
 Target Costing: Target costing, or target pricing strategy, is a pricing strategy that involves setting a
price for a product or service based on the costs associated with making it and the desired profit
margin. In target costing, all things are planned around a specific price point.
 Activity Based Costing : Activity-based costing (ABC) is a costing method that identifies activities
in an organization and assigns the cost of each activity to all products and services according to the
actual consumption by each. Therefore, this model assigns more indirect costs (overhead) into direct
costs compared to conventional costing.
 Just In Time : Just-in-time, or JIT, is an inventory management method in which goods are received
from suppliers only as they are needed. The main objective of this method is to reduce inventory
holding costs and increase inventory turnover.
 Shared Service :Shared services is the provision of a service by one part of an organization or
group, where that service had previously been found, in more than one part of the organization or
group. Thus the funding and resourcing of the service is shared and the providing department
effectively becomes an internal service provider.
Difference between cost management and cost
accounting
Cost Management Cost Accounting
Role of cost accounting in strategic planning
and management control
 He needs to exposure to multidiscipline
 He needs to be the change agent
 He should help in building scm
 Integrate customer satisfaction into total cost management using value chain
analysis
 Be a part of the management team
 Ability to under take environmental scan
 Be a part of cross functional team
 Ability for developing targets
 Sustain kaizan (Kaizen is a continuous improvement process that targets
small, incremental enhancements to existing processes.)
 Difference between cost control and cost
reduction
Cost Control Cost Reduction
A technique used for maintaining the costs as per A technique used to economise the unit cost
the set standard without lowering the quality of the product
Savings in total Cost Cost per unit
Retention of quality not guaranteed Retention of quality guaranteed
Temporary in nature Permanent in nature
Emphasis on past and present cost Emphasis on present and future cost

Ends on the pre determined cost is achieved No end

preventive function Corrective function
standard costing, budgetary control tools value engineering, market research, job
evaluation & merit rating tools
it is achieved through compliance with the it can be achieved by way of continuos process of
standard critical examination
it aims at maintaing the cost in accordance it is concerned with reducing cost
with established standard
it seeks to attain lower possible cost under there is no condition as permanent since a
existing condition charge will result in lesser cost
lack of dynamism Dynamic