Cost Control Management

Cost control management is a particular branch of management which deals particularly with the control of the various costs associated with running a business. So how does a company control its costs? What are the various cost control methods and systems?

What is Cost Control?

It includes a wide range of activities under its purview. The way I see it, cost control management has three basic aspects. The first is to find out the cost centers and their variance (if any), with the industry standards. The second is to find out why we are incurring more costs than our competitors. And the third aspect deals with ways in which we can drive our costs to the level at which our competitors are, or lower. Here's the cost control definition:

Application of (1) investigative procedures to detect variance of actual costs from budgeted costs, (2) diagnostic procedures to ascertain the cause(s) of variance, and (3) corrective procedures to effect realignment between actual and budgeted costs. ~ Business Dictionary.

Determining the Costs as Per Industry Average
There is a step before cost control, which is called cost analysis. The cost analysis exercise yields what is known as a cost sheet. A cost sheet gives a detailed post-mortem report of the costs incurred by the company at various cost centers. A cost center is any department in the company where costs are incurred i.e. purchase, production, administration, sales and marketing, distribution etc. The total cost is broken down to the average cost per product.

Now that we have determined what are the costs incurred in each department of the company, we now compare these individual costs to the costs incurred by our competitors. Why? Because the whole point of the cost control exercise is to maximize our profits by reducing the costs incurred in production. So if the costs of our competitors is lower than ours, this means that we have to close down this gap. The difference between our costs and our competitors' costs is known as cost variance.

Finding Answers
The next step in managing cost control is to diagnose why our costs are more than those of our competitors. And how we can reduce the gap between our competitors and ourselves. By monitoring the various departmental costs of our company and those of our competitors, we can see where exactly we are falling behind and make the efforts to make up the lost ground.

Having said that, it is important to understand that each company has its aces up its sleeve. Some companies which have a better established distribution network WILL have distribution costs that are so low that it is madness to think of bridging that gap in the short term. Perhaps it is a good approach to build our own strength areas rather than matching up to the strengths of others. For example, a smaller company cannot compete with the distribution muscle of a larger company, but it can compete by reducing the production costs, following the notion that smaller companies give lesser salaries.

But then again, it is each one on his own really.

Implementing the Approach
Business is a constant fight for survival, self-improvements and cost cutting. So a company needs to be dynamic in trying to implement the changes if it wants to survive in the market. The market in most sectors today is uber-competitive and the only way to not see your company being gobbled up by the competitors is to implement positive changes in yourself. The previous step helped us find the chinks in our cost armor. It is now time to fix it and come back strongly. The company should set a cost target for the year based on current results and competitor costs and try achieving it by the end of the year. It is imperative that revision and review throughout the year is done to see if things are going according to plan.

Cost control software largely help in computerizing this process. Cost management is crucial for any company to survive in the market and hence companies these days take it very seriously.