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What Is Cost Control: Methods, Steps, and Challenges

Juhi Dubey
Juhi Dubey at August 27, 2023
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Cost Control

The manner businesses approach cost control is transforming drastically as most industries continue to undergo digital transformation. Gone are the days of cost-focused companies. The new version of Cost Control is a hybrid approach focused on managing costs and driving growth.

While most companies dread the idea of ​​going over budget, simply cutting costs isn't enough anymore. Instead, companies need to focus on context if they are willing to increase profits, optimize budgets, and secure long-term financial viability. Staying on course with the perfect cost controls is a must, so let's talk about cost control and its many aspects.

Table of Contents

What is Cost Control?
Why Cost Control Matter?
When to Use Cost Control?
The Importance of Cost Control
Cost Control as a Function of Cost Management
Cost Management in Project Management Cost
Control Methods
Factors of Cost Control
The Role of Cost Control Software
Cost Control Process Steps

What is Cost Control?

Cost control is a method of diminishing business expenses by managing and interpreting financial statements. Managing costs in a consolidated format allow organizations to make more authentic and knowledgeable projections, know where they can underestimate costs, and determine areas of overspending. 

That's why cost control and supplier management often go hand in hand because optimizing the way you interact with your suppliers can create significant savings for your business. You may be looking to streamline contract renegotiation to ensure favorable pricing, work to build long-term relationships with dealers and customers, and create additional partnerships that complement both businesses.

After all, the purpose of cost control is to provide your business with an effective framework designed to improve visibility and allow you to control your costs.

Why Cost Control Matter?

Project programs can be split up into segments and steps, and most managers assign the overall budget to each part according to its requirements. Assembling an action to control costs benefits:

  • Track advancement and KPIs (key performance indicators) and take corrective action when costs ascend to increase.
  • Maintain anticipated profit margins.
  • Set transparent anticipations and prevent content creep.
  • Accomplish clarity with management, stakeholders, and clients.
  • Develop useful metrics for managing future projects.

Maintaining a proper budget in place instantly affects critical decisions like what fresh employees to hire, what features to include, and how much duration should be spent on each part of the job. A well-kept budget that pursues an organization’s business practices leads you to where the project is heading and how it will complete it. Project execution in this case is directly tied to its budgeting.

 

When to Use Cost Control?

The primary steps are suggested if a company routinely endeavours to cause its actual costs incurred to match its budgeted cost system. If there is no budget, then an alternative method to rehearse cost control is to plan separate cost line items from the income statement on a trend line. If there is an unusual spike in the trend line, then the spike is investigated concerning the average cost level, and corrective action is taken. Therefore, working without a budget eradicates the first two steps in the preceding list of activities, but cost control still demands investigatory assignments and suggestions to management for disciplinary action.

The Importance of Cost Control

Cost control is significant in helping organizations reduce costs and expenses throughout the year by analyzing and monitoring variances at all ranks of budget control. Managers are responsible for results. Companies that manage costs well through optimization techniques and cost management tools have a competitive advantage. Cost control in project control is crucial for an activity in which cost overruns could easily occur.  

Costs are reduced via cost control strategies, standards, and procedures. Cost control will enhance business execution data metrics and improve profits, cash flows, and return on investments (ROI). Engagement by team members improves as their capacity to complete significant contributions to results boosts.  

Cost Control as a Function of Cost Management

Cost Management reduces costs and expenses by managing budget-actual variances and taking corrective action by cost centre, profit centre, department, or project. Cost management is one step in the cost management process. 

Cost Management contains analysis methods for forecasting resource essentials and performing cost estimation, budgeting, cash flow forecasting, financing the budget, controlling costs, and fulfilling a post-project evaluation for prospective cost-saving possibilities. An enterprise cost accounting function contributes to the cost control process.

Cost Management Vs Cost Control

Cost control and cost management are both essential concepts in business finance, aimed at optimizing expenditure, yet they differ in scope and approach.

Cost control primarily involves monitoring, regulating, and reducing expenses within an established budget. It focuses on immediate actions to minimize costs and maintain financial discipline. This might involve negotiating better deals with suppliers, eliminating wasteful spending, or implementing tighter budgetary controls.
Cost control is often short-term and aims to ensure that expenses stay within predefined limits.

On the other hand, cost management is a broader and more strategic approach. It encompasses planning, analyzing, and optimizing costs throughout a project's lifecycle. Cost management includes activities like budgeting, forecasting, resource allocation, and performance measurement. It aims to enhance overall efficiency by making informed decisions that balance costs with value creation. Unlike cost control, cost management takes a longer-term perspective and considers the impact of spending decisions on the organization's goals and competitiveness.

In summary, while Cost control focuses on immediate cost reduction, cost management takes a holistic and strategic view of managing expenses to achieve sustainable business growth and competitiveness.

Cost Management in Project Management Cost 

Project management cost requires monitoring and engagement during the project activities stage before fulfilment. Specialized project management software and metrics should be utilized to evaluate cost baseline by assignment, control, and decrease project costs in a Cost control system. Post-project research can create forthcoming tasks more efficiently via a learning curve. 

Control Methods

Control methods for expenditure and cost management possess target net income, variance analysis, and earned value management. Control practices also include operating specialized cost management software for the company and project management to enhance cost budgeting and cost performance. 

Target Net Income

Target net income is the standard portion of corporation profits after taxes for an accounting period. Target net income is used to specify a suitable level of expenses and costs in a budget to make the expected income level for a business or project. 
   
Target net income can be used in the break-even analysis formula to choose the number of units needed to meet the target net income rather than a zero break-even amount. The distinction between sales and variable costs (sales – variable costs) is comprehended as the contribution margin. 

The formulation for target net earnings is:
Target Net Income = Total Sales values - Total Variable Costs - Total Fixed Costs
where
Target Net Income = (Unit x Selling Price) - (Unit x Variable Cost) - Fixed Costs

You can use these formulas by furnishing the target net income amount to solve for either units or sales dollars needed to reach the target net income. Alternatively, if you predicted other variables, you could solve for the net profit target. 

Variance Analysis

Variance analysis compares budget and actual amounts for accounting classes for some duration or project. Unfavourable variances arise when actual costs surpass budget amounts. Favourable variances designate actual costs below budget, suggesting better actual results than expected. 

Cost accounting systems with standard costs (usually used by manufacturing enterprises) are valuable for variance analysis of actual costs versus standard costs for labour, materials, and overhead.

Each month and at year-end or project conclusion, financial analysts drill down to the detailed source of significant unfavourable variances to determine causes and correct overspending through future cost or expense deductions. 

Earned Value Management

Earned Value Management (EVM) manages the progress of orders, including schedules and actual costs compared to planned costs. The projected planned project costs for the percentage of completion of the project to date are compared to the actual costs incurred for the project to date to establish project control and evaluate project performance.

Earned value management furnishes an opportunity to use Cost control on a project while progressing by observing whether cost overruns occur. When managers diminish project costs in reaction to EVM metrics, project management results will improve accordingly. If cost variances are extreme and cancellation is possible, a business should decide to conclude an unprofitable project before completion. 

Factors of Cost Control

Here are various aspects that are concerned with observing the cost control of a project:

Cost of Labour

The aggregate wages disbursed to workers working on a project, including employee benefits and taxes, is the cost of labour. When budgeting an assignment, it's noteworthy to enclose the cost of labour, since a project may involve several employees operating at one juncture. For instance, if you are developing a budget, including the total number of employees on the project and how prolonged workers can work on the project, get an exact estimation of the total cost of the project.

Cost of Materials

The total cost of all collections and tools needed for a project is the cost of materials. Materials are ordered before the project begins, during the completion of the project, and once the project is concluded.

The Actual Cost

The actual cost is the entire cost that a project has, the cost from the beginning of the project to the end. That possesses the cost of labour, materials, and other costs connected to the project.

The Cost Variance

Cost variance guides any discrepancies in price between the actual cost of the project and the budget you have set. For illustration, if you have a budget for a project that is Rs. 1,000, but the actual cost of the project is Rs 1,500, then the cost variance is Rs. 500 since that is the distinction between the budget and the actual cost of the project.

Return on Investment (ROI)

Return on investment (ROI) is how profitable a project is, analogized to how much money you financed in a project. Maintaining a high ROI represents the project brought in better funds than the authentic cost of the project.

The Role of Cost Control Software

It’s no wonder that cost management and control are data and analysis-heavy areas, and it’s no wonder then why software developers have discovered an automation application here. Software-based management optimizes the function in numerous forms:

  • Tedious calculations and other quantitative tasks are almost instant and immune to human error through software.
  • The analysis is much easier when the data is reported through dashboards and easy-to-use user interfaces.
  • Standardization of information is automated this way which can be used for projects on an international ranking that must use numerous currencies.
  • Third-party integrations with further control explanations enable pool data more virtually.

Cost Control Process Steps

Handling business expenses is not a “set it and forget it” consideration. Preferably, assume it as a constant, cyclical procedure that applies the subsequent steps:

Resource Planning

Cost control begins by executing project controls; anticipating the impending costs of a project, whether it’s for tools, materials, team, or even time spent. The resource planning stage surfaces before the actual work commences.

Companies usually use the work-breakdown system to review each subtask in the program and determine what skills or equipment are necessary individually. Recorded financial data for similar projects and feedback from team associates are important issues to believe in for this task.

Estimating Cost

Following, approximate the prevailing cost of resources required for the work. Cost estimation is a complex matter that relies on your current budget and how much data you have available. 

Budgeting

Once the assignment is underway, the following step is allotting the budget to each task. Cost budgeting is a mixture of using the calculated costs for project scheduling. Every activity in the workflow gets its specific amount of the budget here.

Cost Monitoring

Ultimately, project management requires protecting and handling changes in the budget. Cost control calculates the friction of the actual costs from the predetermined baseline cost and takes action whenever demanded. This stage also needs you to review the actual results of those activities.

Common Challenges in Cost Control

Balance Between Human and Automation:
Striking the right balance between human and automated control is crucial. Overreliance on automation can lead to complacency and decreased human vigilance, while insufficient automation can overwhelm human operators.

  • Communication and Coordination:

Effective collaboration requires seamless communication and coordination between human and automated systems. Mismatched expectations, unclear cues, and poor information sharing can hinder this collaboration, leading to misunderstandings and suboptimal performance.

  • Interface Design:

Designing interfaces that cater to both human and machine needs is complex. Interfaces must account for human cognitive limitations and machine capabilities. Ensuring an intuitive interaction that enhances performance rather than causing confusion is a challenge.

  • Situational Awareness:

Maintaining situational awareness is challenging in common control systems. Humans might struggle to comprehend complex automated processes, while automation might fail to understand the nuances of unpredictable human behaviour, leading to decision-making errors.

  • System Failures and Transitions:

The potential for system failures or malfunctions requires careful consideration. When a shared control system breaks down, responsibility for the task needs to be quickly and smoothly transitioned between human and automated components to avoid disruptions or safety hazards. 

Successfully addressing these challenges is essential for creating safe, efficient, and reliable common control systems. It involves a delicate balance of human expertise and automation capabilities while prioritizing effective communication, intuitive interfaces, and seamless transitions between the two components.

Conclusion

Cost control and cost reduction are critical processes for many organizations that reduce production costs. Accordingly, a reduction in total production cost and cost per unit is necessary, which we can accomplish using cost control and cost reduction. Cost control demands the predetermination of an estimated cost, which is not practical in all industries. In contrast, cost reduction is applicable in all industries as it centres on lowering production costs while increasing profit.

Finally, we can conclude that cost control provides a road map for organizations, while cost reduction challenges brands by lowering product costs.

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