Good cost management is fundamental to the growth of any organization that wants to keep up in a market that´s getting more and more competitive.
No matter how big or what kind of business you have, forecasting, knowing and controlling your company´s costs is essential to the management process. We´ll give you a better idea of what efficient cost management means and what you should do to achieve it, as well as the errors that you can and should avoid.
What cost management is
Cost management is a process that seeks to understand in detail all the costs and expenses related to the production process and revenue earning for a given company.
Efficient cost management is the rational use of these resources in an intelligent manner. In other words, it’s conducting this process while maintaining the quality of your products and services.
Basic concepts of cost management
To put efficient cost management into practice, you need to first understand the difference between the two main components of this process: costs and expenses. In manufacturing firms, costs are those components that are used in the production process, such as raw materials, labor, and the indirect costs of manufacturing represented by rent, electricity, water, and wages among others.
Expenses on the other hand are monetary values consumed in obtaining revenues that are not directly related to the production process, such as administrative salaries and the money spent on sales and advertising.
Fixed and variable costs
Another important distinction is the difference between fixed and variable costs. This distinction is necessary so that we can determine the difference between the costs that are not related to the production process which will exist even if there are no revenues, such as rent and administrative salaries, and costs that are related to the size of a company´s production such as raw materials, other materials and labor (in the case of manufacturers).
These classifications are important so that the sales price can be defined in the most precise manner possible, taking into account not just the values that are directly associated with products or services, but also those that are necessary to maintain the company itself. If these classifications are not made, prices may not be defined correctly and the company may run into difficulties because it’s actually selling its products below cost.
Efficient cost management
For cost management to be efficient, one has to understand not only how costs behave, but also how to use reports and distinct analyses to display product and service costs per distribution channel and client. This includes a view of the production and non-production processes involved, which will include a broader view of administrative costs, which have grown in importance in recent years.
We should also take into account the small errors and deviations that can occur during the production process which can affect the final values for products and services to a significant extent. Ignoring the cost of support areas or using simple cost assignments based purely on production quantities or revenues can also result in important distortions in the calculation of the costs of these products and services.
It’s important to emphasize that it’s crucial to analyze the relevance of these errors so that the most important/significant points in terms of cost management are considered first. This way you won’t waste a lot of time on decisions that won’t greatly affect your final results.