Cost Control Procedures

[Jayme Bostic]

Costcontrol that produces cost savings is an essential tool in financial management to reduce business and project expenses through cost accounting, budgetary control, financial statement analysis, and project management tools.

Cost control and vendor management often go hand-in-hand, since optimizing how you interact with vendors can produce significant cost savings for your business. And expense management automation helps your company achieve savings through cost control.

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

Cost management is a broader term, encompassing estimating methods to forecast resources required and perform cost estimation, budgeting, cash flow forecasting, funding the budget, controlling costs, and performing a post-project evaluation for future cost-saving opportunities. The cost accounting function in a business contributes to the cost management process.

Project management cost needs monitoring and attention during the project activities phase before completion. Specialized project management software and metrics should be used to estimate cost baseline by task, control, and reduce project costs in a cost control system. Post-project analysis can make future projects more efficient through a learning curve.

The factor estimation method is the fastest way to get a general overview of what to expect. The industrial sector is familiar with one convenient trick known as the sixth-tenths rule, where the expected cost goes up by six-tenths as the size of the manufacturing facility increases.

Past financial data is an invaluable tool for accurately predicting new expenses. Parametric methods involve analyzing previous contract prices and values and finding out the relationships between materials and labor in previous works.

For instance, you might notice that the thickness of the sheets of metal used in an engineering project consistently correlates to higher costs. Think about ways you can use that information the next time a similar project begins.

The resource-based technique is an option if time is considered a sensitive asset. Here, the team will estimate and manage the amount of time it takes to complete a certain portion of the work and schedule it to a calendar. Keeping the duration of the workload under control can be just as important as keeping monetary costs low.

Control methods used for expense and cost management include target net income, variance analysis, and earned value management. Control methods also include using specialized cost management software for the business and project management to improve cost budgeting and cost performance.

Target net income is the expected amount of business profits after taxes for an accounting period. Target net income is used to determine an appropriate level of expenses and costs in a budget to produce the desired income level for a business or project.

You can use these formulas by supplying the target net income amount to solve for either units or sales dollars required to reach the target net income. Or you can solve for target net income if you have forecasted the other variables.

Variance analysis compares budget and actual amounts for accounting categories for a time period or project. Unfavorable variances occur when actual costs exceed budget amounts. Favorable variances represent actual costs below budget, indicating better actual results than expected.

Each month and at year-end or project closing, financial analysts drill down to the data source of significant unfavorable variances to identify causes and correct overspending through future cost or expense reductions.

Earned value management (EVM) controls projects as they progress, including the schedule and actual costs vs planned costs. The planned project costs expected for the percentage of completion of the project to date are compared to actual costs incurred on the project to date to establish project controls and evaluate project performance.

Regardless of the setbacks, a well thought-out cost control system can set an organization up for success. Standardizing the process and giving the company flexibility is the best way to deal with complicated or changing projects.

ERP (enterprise resource planning) and accounting systems have built-in actual vs. budget comparisons for detailed financial statements by account, with drill-down to underlying data. These budget variance features are essential for cost control.

Standard vs. actual costing can be implemented in feature-rich ERP systems for manufacturing companies. Standard costing variances include labor hours, labor pricing, material purchase price, material usage, and overhead spending and overhead usage variances due to changes in production volume or machine hours.

Fully-featured business forecasting and budgeting software may be offered as an ERP software module or a stand-alone software product. Advanced financial forecasting and budgeting software will generate a more accurate sales forecast and cost budget for cost control variance analysis.

Cost control software includes specialized features within ERP systems for a smart shop floor application using IoT sensors (Internet of Things), machine learning, and artificial intelligence software.

These applications initiate real-time alert notifications when manufacturing processes deviate from standards to trigger exceptions. Generally, the sooner the alert is issued, the less scrap and rework costs a manufacturer experiences.

Accounts payable automation software integrates with ERP and accounting systems to streamline and reduce the payables and global mass payments workload by up to 80%, reducing future labor costs for new hires.

Expense management software streamlines employee expense reporting and payment. Travel-management software that may be included in expense management software helps companies track and control travel-related spending. Specialized tail spend software can be used to control employee-initiated routine spending on low-cost items outside the procurement department.

Project management software includes project costing, estimating the project schedule, resource estimation, resource costing and budgeting, Gannt charts, and variance analysis. The software should help you perform a post-project evaluation of actual expenditures resulting in total cost vs. budget and benchmarks with similar projects and competitors.

The difference between cost control and cost management is that cost control is the process of analyzing and adjusting spending activity to control spending and costs, while cost management involves the tracking and understanding of financial activities so that potential changes can later be made.

Cost control has importance because it lets businesses reduce costs and expenses during the year through analysis and monitoring variances at each budget control level. Managers are accountable for results. Companies that control costs well through optimization practices and cost control tools have a competitive advantage.

Costs can be reduced through cost control strategies, measures, and systems. Cost control will improve business performance data metrics and increase profits, cash flows, and return on investments (ROI). Engagement by team members improves as their ability to make meaningful contributions to results increases.

Investor stakeholders may be attracted to the stock of publicly-traded companies with effective expense control and corporate governance. Lenders will have an increased likelihood of approving debt and loan financing. Successful companies attract the best talent.

Just like personal budgeting, you can do a variety of things, like categorize spending, determine areas where your team spends the most money, and find ways to limit spending in each area. Successfully doing all these things is what controls the budget and increases profits.

Cost control involves identifying and reducing expenses to increase company profits. Cost control can occur at the project level or company wide. Here, we'll focus on how you can apply the cost control process to a project or group of projects.

A reporting tool can also be helpful to identify when you exceed your project budget. Say the freelance designer you brought on to a new project took much longer than expected to edit images. Once you identify this cost, you may decide to hire an in-house designer on your next project to reduce costs and drive efficiency.

Does your team have a hard time staying within scope or budget? This is where cost control comes into play. Even if your team does stay within budget, cost control can help you reduce your budget further, which will lead to an increase in income.

Understanding the key factors that influence project costs is essential for effective cost control. By implementing a robust cost management system and deploying cost control methods, project expenses can be optimized and workflows can be streamlined.

Labor costs are a significant expense in most projects. This includes salaries, benefits, and other associated costs of the workforce involved in the project. Controlling labor costs involves ensuring that the right number of people with the appropriate skills are assigned to the project and that their time is used efficiently.

Material costs can also be a major factor in project expenses. This includes raw materials, components, and any other physical items needed for the project. Effective cost control requires careful planning and monitoring of material purchases and usage to minimize waste and overspending.

Actual cost refers to the real amount spent on a project, as opposed to the estimated or budgeted cost. Tracking actual costs in real-time is key for identifying variances from the project budget and making necessary adjustments to keep the project on track financially.

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