Cost Management

Introduction

Cost management revolves around reducing, estimating, containing and avoiding costs using various different methods (Drury, 2008) (Groth and Kinney, 1994). Reducing costs is done through seeking to lower both fixed and variable costs associated with an activity. Containing costs is achieved by constraining or avoiding future increases to costs and cost avoidance revolves around eliminating unnecessary activities (Groth and Kinney, 1994). Cost management starts at identifying how costs arise and the events associated with them, only once activities have been identified can they start to be managed successfully. Cost management is often ignored by managers instead they are in favour of increasing sales. Most of the time excessive costs can be an underlying problem and cost control can be very effective in creating larger profits, “a dollar of cost savings goes directly to the bottom line, while a dollar increase in sales may in fact produce a loss to the bottom line” (Reider, 2011). Methods that can be used to manage costs are lifecycle costing, target costing, Kaizen costing, activity-based management, and business process reengineering. Life-cycle costing, target costing and Kaizen costing are all methods of cost management and will be the focus of this essay. How they are used to control costs and the advantages of each will be discussed along with when it is appropriate to use each type of costing system.

Life-cycle costing:

Life-cycle costing is a process of analysis that estimates the cost of an investment over a products economic life. It determines whether the profits during production will cover all the costs involved, including the costs of setting up all the way through to the disposal costs (Norman, 2007). I...

... middle of paper ...

...m. (2014). What is target costing? definition and meaning. [online] Retrieved from: http://www.businessdictionary.com/definition/target-costing.html [Accessed: 7 Apr 2014].

In-text: (Drury, 2008)

Bibliography: Drury, C. (2008). Management and Cost Accounting. 7th ed. London: Cengage.

In-text: (Groth & Kinney, 1994)

Bibliography: Groth, J. C. & Kinney, M. R. (1994). Cost management and value creation. Management Decision, 32 (4), pp. 52--57.

In-text: (Kren, 2008)

Bibliography: Kren, L. (2008). Using Activity-Based Management for Cost Control. Journal Of Performance Management, 21 (2), pp. 18--27.

In-text: (Norman, 2007)

Bibliography: Norman, G. (2007). Life cycle costing. Property Management, 8 (4), pp. 344--356.

In-text: (Reider, 2011)

Bibliography: Reider, R. (2011). Cost management in tough times. Journal Of Corporate Accounting & Finance, 22 (3), pp. 9--15.