COST MANAGEMENT

INTRODUCTION

DEFINING A COST MANAGEMENT SYSTEM

A cost management system (CMS) consists of a set of formal methods developed for planning
and controlling an organization’s cost-generating activities relative to its short-term objectives
and long-term strategies. Business entities face two major challenges: achieving profitability
in the short run and maintaining a competitive position in the long run. An effective cost
management system must provide managers the information needed to meet both of these
challenges.

The short-run requirement is that revenues exceed costs—the organization must make efficient
use of its resources relative to the revenues that are generated. Specific cost information is
needed and must be delivered in a timely fashion to an individual who is in a position to
influence the cost. Short-run information requirements are often described as relating to
operational management.

Meeting the long-run objective, survival, depends on acquiring the right inputs from the right
suppliers, selling the right mix of products to the right customers, and using the most
appropriate channels of distribution. These decisions require only periodic information that is
reasonably accurate. Long-run information requirements are often described as relating to
strategic management.

The information generated from the CMS should benefit all functional areas of the entity. Thus,
the system should integrate the areas shown in Exhibit 2–5 and should “improve the quality,
content, relevance, and timing of cost information that managers use for short-term and long-
term decision making.

Crossing all functional areas, a cost management system can be viewed as having six primary
goals:
(1) Develop reasonably accurate product costs, especially through the use of cost drivers
(activities that have direct cause-and-effect relationships with costs)
(2) Assess product/service life-cycle performance
(3) Improve understanding of processes and activities
(4) Control costs
(5) Measure performance
(6) Allow the pursuit of organizational strategies.

First and foremost, a CMS should provide the means to develop accurate product or service
costs. This requires that the system be designed to use cost driver information to trace costs to
products and services. The system does not have to be the most accurate, but it should match
benefits of additional accuracy with expenses of achieving additional accuracy. Traceability
has been made easier by improved information technology, including bar coding.

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COST DRIVER
The product/service costs generated by the cost management system are the input to managerial
processes. These costs are used to plan, prepare financial statements, assess individual
product/service profitability and period profitability, establish prices for cost-plus contracts,
and create a basis for performance measurements.
If the input costs generated by the CMS are not reasonably accurate, the output of the preceding
processes will be inappropriate for control and decision making purposes.

Although product/service profitability may be calculated periodically as a requirement for

external reporting, the financial accounting system does not reflect life-cycle information. The
cost management system should provide information about the life-cycle performance of a
product or service. Without life-cycle information, managers will not have a basis to relate
costs incurred in one stage of the life cycle to costs and profitability of other stages. For
example, managers may not recognize that strong investment in the development and design
stage could provide significant rewards in later stages by minimizing costs of engineering
changes and potential quality-related costs. Further, if development/design cost is not traced to
the related product or service, managers may not be able to recognize organizational investment
“disasters.”

A cost management system should help managers comprehend business processes and
organizational activities. Only by understanding how an activity is accomplished and the
reasons for cost incurrence can managers make cost-beneficial improvements in the production
and processing systems. Managers of a company desiring to implement new technology or
production systems must recognize what costs and benefits will flow from such actions; these
assessments can be made only if the managers understand how the processes and activities will
differ after the change.

The original purpose of a cost accounting system was to control costs. This is still an important
function of cost management systems given the current global competitive environment.

A cost can be controlled only when the related activity is monitored, the cost driver is known,
and the information is available.

For example, if units are spoiled in a process, the CMS should provide information on spoilage
quantity and cost rather than “burying” that information in other cost categories.

Additionally, the cost management system should allow managers to understand the process
so that the underlying causes of the spoilage can be determined.

Armed with this information, managers can compare the costs of fixing the process with the
benefits to be provided.

The information generated from a cost management system should help managers measure and
evaluate performance. The measurements may be used to evaluate human or equipment
performance or to evaluate future investment opportunities.

As indicated in the accompanying News Note, one of the critical decisions managers must
make involves trade-offs between long-run strategic benefits and short-run operational
benefits.

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Lastly, to maintain a competitive position in an industry, a firm must generate the information
necessary to define and implement its organizational strategies

DESIGNING A COST MANAGEMENT SYSTEM

In designing and revising a cost management system, managers and accountants must be
attuned to the unique characteristics of their firms. A generic cost management system cannot
be “pulled off the shelf” and applied to any organization.
Each firm warrants a cost management system that is tailored to its situation. However, some
overriding factors are important in designing a cost management system.

ORGANIZATIONAL FORM, STRUCTURE, AND CULTURE

An entity’s legal nature reflects its organizational form. Selecting the organizational form is
one of the most important decisions business owners make. This choice affects the costs of
raising capital, operating the business (including taxation issues), and, possibly, litigating. The
available organizational form alternatives have increased remarkably in recent years. The most
popular form for large, publicly traded businesses is the corporation.

However, smaller businesses or cooperative ventures between large businesses also use general
partnerships, limited partnerships, limited liability partnerships (LLPs), and limited liability
companies (LLCs). These latter two forms have recently emerged due to new federal, state,
and international legislation. Both the LLP and LLC provide more protection for a partner’s
personal assets than a general partnership in the event of litigation that leads to firm liquidation.
Accordingly, LLPs and LLCs may offer better control for legal costs than general partnerships.

Organizational form also helps determine who has the statutory authority to make decisions for
the firm. In a general partnership, all partners are allowed to make business decisions as a mere
incidence of ownership. Alternatively, in a corporation, individual shareholders must act
through a board of directors who, in turn, typically rely on professional managers. This ability
to “centralize” authority is regarded as one of the primary advantages of the corporate
organizational form and, to some extent, is available in limited partnerships, LLPs, and LLCs.

Once the organizational form is selected, top managers are responsible for creating a structure
that is best suited to achieving the firm’s goals and objectives

The extent to which managers decentralize also determines who will be held accountable for
cost management and organizational control. An information system must provide relevant and
timely information to persons who are making decisions that have cost control implications,
and a control system must be in place to evaluate the quality of those decisions.

The globalization of markets has created, in many industries, competition among qualitatively
and functionally equivalent. Without being able to distinguish one competitor’s products from
those of another based on quality or functionality, the consumer’s focus switches to price. In
turn, price-based competition changes the internal focus to costs. One industry currently
particularly affected by price-based competition is communication. The accompanying News
Note illustrates the shift to an intensive internal focus on costs

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Clarification of mission can be served by identifying the organization’s core competencies,
which are dimensions of operations that are key to an organization’s survival. Most
organizations would consider timeliness, quality, customer service, efficiency and cost control,
and responsiveness to change as five critical competencies.

Once managers have gained consensus on an entity’s core competencies, the cost management
system can be designed to

(1) Gather information related to measurement of those items.

(2) Generate output about those competencies in forms that are useful to interested parties.

ELEMENTS OF A COST MANAGEMENT SYSTEM

A cost management system is composed of three primary elements: motivational elements,
information elements, and reporting elements. These elements are detailed in Exhibit 2–10.

The elements as a whole must be internally consistent, and the individually selected elements
must be consistent with the strategies and missions of the subunits.

Different aspects of these elements may be used for different purposes. For example, numerous
measures of performance can be specified, but only certain measures will be appropriate for
specific purposes.

MOTIVATIONAL ELEMENTS
Performance measurements are chosen so as to be consistent with organizational goals and
objectives and to “drive” managers toward designated achievements. These measurements,
which are discussed in depth in Chapters 20 and 21, may be quantitative or no quantitative,
financial or nonfinancial, and short-term or long term

For example, if a subunit is expected to generate a specified dollar amount of profit for the
year, the performance measure has been set to be quantitative, financial, and short-term. A
longer-term performance measure might be an average increase in profit or change in stock
price over a five-to-ten-year period.

Today, performance measures and rewards are designed not only to motivate employees and
managers to act in the best interest of the organization but also to help recruit and retain
qualified employees. These roles are illustrated in the accompanying
News Note.

The performance measurement system should encourage managers to act in the best interest of
the organization and its subunits and to support organizational missions and competitive
strategies. Once defined, the nature of the criteria used to measure performance should be
linked to the organizational incentive system because, as implied in the News Note, “you get
what you measure.”

This linkage sends the message to managers that they will be rewarded in line with the quality
of their organizational and subunit decisions and, thereby, their contributions to achieving the
organizational missions. In addition to performance measures, different forms of rewards have
different incentive effects and can reflect different time orientations.

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 In general, longer-term incentives encourage managers to be more long-term oriented in their
decisions, while short-term incentives encourage managers to be focused on the near future.

To illustrate, cash is the most obvious reward for short-term performance. All managers receive
some compensation in cash for paying living expenses. However, once a manager receives a
cash reward, its value is not dependent on future performance. In contrast, a stock option that
is not exercisable until a future time

NEEDS OF COST MANAGEMENT

COST ESTIMATION
One of the most important elements of a project cost management tool is cost estimation, which
is the practice of forecasting the price of a complete project with a defined scope.

There are several types of cost estimation in project management, including fixed, variable,
direct, and indirect cost estimation.

Because the project scope, project schedule, or other factors can change, it’s important to
update price estimates with the help of cost management software so you have an accurate idea
of how much the project will cost.

Use software that employs powerful estimation capabilities, such as bottom-up estimation and
project portfolio history.

These features will allow your team to measure their performance and make any necessary
adjustments. In addition, project estimates will become more refined as you discover variables
and actual costs.

BUDGETING
Once you’ve created an accurate cost estimation in your project management plan, the software
you choose should allow you to finalize and approve the project’s budget.

The best cost management tools send project managers weekly and monthly reports on
expenses, so you can rest assured that your project never goes over budget, which could cost
you thousands in unexpected expenses.

Plus, these tools allow teams to set budget limits based on time or cost. When a project budget
is nearing its limit, the software will send you a notification so you can adjust the project’s
scope.

Having regular updates on a project’s expenses can offer you important clues about the
direction your project is going and whether or not additional action is required.

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PROJECT PERFORMANCE MEASURING
Measuring your project’s performance determines if you’re on schedule and within budget.
The easiest way to keep track of your project’s performance is by using a dashboard that
updates data in real time. Your dashboard should include your cost baseline, planned and actual
project costs, schedule variance, and the percentage of completion.

EASY REPORTING
To keep projects running smoothly, find a cost management tool that offers a variety of easy
reporting options. If building a report requires a manual or the help of an outside consultant,
continue your search. Secure sharing in the cloud for total visibility is also important when it
comes to reporting.

USER FRIENDLY INTERFACE

Cost accounting is difficult as it is, so a user-friendly cost management tool is a must. In fact,
24% of surveyed users say ease of use is the most important element of project management.

A user-friendly interface can minimize project hiccups and increase your team’s productivity.
If you’re struggling to use your tool, you should probably look for another one.

AFFORDABILITY
Small businesses need functional cost accounting tools to achieve business success—but
without a hundred-dollar price tag.

Fortunately, many of these tools offer low-cost or even free options to help increase
productivity while reducing costs. But even if the price is an important driver, carefully weigh
the benefits against the price.

THIRD PARTY INTEGRATION

Project cost management tools should give you an added advantage by offering seamless third-
party integrations. This will streamline your entire project management process.

KEY COMPONENTS OF COST MANAGEMENT PLAN

A cost management plan defines how you manage, control, and communicate a project’s
costs—so you complete the project on budget. Project cost management software often makes
it easier to create these plans. Although you can customize a cost management plan to fit your
unique needs, it generally follows a standard format, which includes items like these:

COST VARIANCE PLAN

Cost variances are a key part of the standard costing system used by many manufacturers. In
such a system the cost variances explain the difference between

1) The standard, predetermined and expected costs of the good output, and

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 2) The actual manufacturing costs incurred. These cost variances send an early signal to
management that the company is experiencing actual costs that are different from the
company's plan. Standard costing systems will report a minimum of two cost variances for each
of the following manufacturing costs: direct materials, direct labour and manufacturing
overhead.

COST ESTIMATION
A cost estimate is the approximation of the cost of a program, project, or operation. The cost
estimate is the product of the cost estimating process. The cost estimate has a single total
value and may have identifiable component values. A cost estimator is the professional who
prepares cost estimates.

COST BASELINE
The cost baseline is that part of the project baseline that handles the amount of money the
project is predicted to cost and on the other side when that money will be spent. It is an
approved budget usually in a time distribution format used to estimate, monitor, and control
the overall cost performance of the project.

COST CONTROL AND REPORTING PROCESS

Cost control is the practice of identifying and reducing business expenses to increase profits,
and it starts with the budgeting process. A business owner compares actual results with the
budgeted expectations, and if actual costs are higher than planned, management takes action.

CHANGE CONTROL PROCESS

The change control process in project management ensures that each change proposed during
a project is adequately defined, reviewed and approved before implementation. The change
control process helps avoid unnecessary changes that might disrupt services and also ensures
the efficient use of resources.

PROJECT BUDGET
Project Cost Management (PCM) is a method that uses technology to measure cost and
productivity through the full life-cycle of enterprise level projects.

OBJECTIVES

The main objective of cost management - the creation of a mechanism to optimize the
cost of the bank, bring them in line with the selected return. This mechanism should be the
basis for profitable work each banking division at any given time and thus reduce dependence
on bank market situation.

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 The basis of cost management in the bank - their planning, whose goal is to establish
the amount and the costs of the bank during the planning period of structural units and in
general for the bank. Planning costs of the bank in several steps:

1. Analysis of costs in the pre-planning period. The main objectives of this analysis
is to identify key trends in the amount and level of expenses in the bank's pre-
planning period, setting the size of the deviation of actual performance against
plan, identify the main causes of these abnormalities.

2. In the first stage examines the dynamics of the total costs and the level of pre-
planning period are determined by the rate of change of these indicators are
calculated rates of absolute and relative deviations with respect to the previous
period.

3. In the second stage of analysis are considered indicators of the dynamics of

individual items of expenditure. This analysis is complemented by the study of the
dynamics of individual share of expenditures in their total volume. In the third
stage is considered the level of implementation of the planned cost of banking
services.

4. The results of this analysis are necessary to adjust the plans for the provision of
services and prices. In the fourth stage is determined by factors that have caused
changes in the costs of the bank. Such an analysis is carried out by the bank as a
whole and according to responsibility centres.

COMPANY PROFILE

Asian Paints Limited (BSE: 500820, NSE: ASIANPAINT) is an Indian multinational paint
company headquartered in Mumbai, Maharashtra.[2] The Company is engaged in the business
of manufacturing, selling and distribution of paints, coatings, products related to home decor,
bath fittings and providing of related services. Asian Paints is India's largest and Asia's third
largest paints corporation. [3][4][5] As of 2015, it has the largest market share with 54.1% in
the Indian paint industry. [6] Asian Paints is the holding company of Berger International.

The inception of the Asian paints goes back to 1942. Armed with little knowledge Champaklal
N. Choksey, Chima C.Dai and Arvind R. Vakil started manufacturing paints for house hold
use. It was the family business of Mr. N. Champaklal in the time 1942. The business continued
12 years in its same shape and size till 19561

• After 1 ~56 the company was transformed from family business to professionally managed
business with appointing specialized personneL The company has been able to become an
international company in 1960.The first country where it landed its branch, is Fiji. At present
Rs. 35001 cr. APL operates in 22 countries and has 30 paint manufacturing facilities in the
world serving consumers in 65 countries. The countries are New Zealand, Nepal, Mauritius,
Bangladesh, Fiji, Solomon Island, Tonga, and some others. 4.2 Products group produced:
Distempers, primers. Architectural paints: Solvent Thinnable Elastomeric
High stretch exterior paint, E~amels and water thinnable.

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Industrial Paints:
• Solvent Thinnable and Wood finishes, Water Thinnable.
• Protective Coatings: Solvent Thinnable, Interior Paints
• Power Coating: Pure Epoxy
• Arcylic distemper: Pure Polyesters, Epoxy Polyesters.
• Pathalic Anhydride .and Pentaery Thritol, Exterior, wall paints 4.3 Joint Venture and
Subsidiaries

The company has a joint venture with Asian PPG Industries Ltd. The following are the
subsidiaries of Asian Paints:
• Asian Paints {Maurities) Ltd,
• Asian Paints (Middle East) LLC,
• Asian Paints (International) Ltd.,
• Asian Paints (Nepal) Pvt. Ltd.,
• Asian Paints (Vanatu) Ltd.,
• Asian Paints (SP) Ltd.
• Asian Paints (Bangladesh) Ltd.,
• Asian Paints (Lanka) Ltd.

Type Public
Traded as BSE: 500820
NSE: ASIANPAINT
Industry Chemicals
Founded 1942
Founders Champaklal Choksey,
Chimanlal Choksi,
Suryakant Dani and
Arvind Vakil
Headquarters Mumbai, Maharashtra, India
Area served Worldwide
Key people Ashwin Choksi (Non-Executive Chairman)
Ashwin Dani (Non-Executive Vice Chairman)
K. B. S. Anand (CEO & MD)
Abhay Vakil (Non-Executive Director)
Products Basic and industrial chemicals,
decorative paints,
industrial (re)finishing products, coatings
Revenue ₹15,852 crore (US$2.2 billion) (2016)
Operating income ₹2,808 crore (US$390 million) (2016)
Net income ₹1,779 crore (US$250 million) (2016)
Total assets ₹6,205 crore (US$860 million) (2016)
Number of employees 6,067 (2016)

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REVIEW OF LITERATURE

The objective of literature review was to develop a framework for the Research study
and it provided the complete understanding and information on the “Cost Management
Processes and Techniques” for various “Construction Project Processes”. It also gave some
methodology for the present research, highlighted by the past researchers. In the Literature
Review, some of the papers published by Youngsoo Jung and Sungkwonwoo (2004), Albert
P.C. Chan et al (2004) and Young Hoon Kwak and C. Williams Ibbs (2002) gave a hint for
future research that the project cost management is the process that ensures all the factors and
variables in all stages of project. So attention has been paid to CMP happening at various five
project stages of

(i) Initiating

(ii) Planning

(iii) Executing

(iv) Controlling

(v) Completion stages.

The successful implementation of cost control depends importantly on the effective

management tools, techniques, processes and practices and in specifically, on the role of
Project Manager, who is the primary tool for the 8 Cost Management in Construction
Projects, as per “Project management body of knowledge” publication.

COST MANAGEMENT PROCESS IN INITIATING STAGE

The project initiating process recognized that a project or phase should begin and the project
management team is committed to do so. It includes developing a proposal for a potential
project and analyzes and validates feasibility of the project. Anderson S.D. and Lynn Cook E
(1995), found, ‘if the total Costconscious and other Management approach is adopted in the
proposed initiation strategy itself to implement the scope of the Project, it will lead to the
continuous improvement for the other processes of the Project. Further the end result will
also be more cost effective’.

COST MANAGEMENT PROCESS IN PLANNING STAGE

The project planning process leads to the development and maintenance of a workable
scheme to accomplish the business needs for the project. It includes defining overall scope,
identifying planning strategy, developing the work breakdown structure for cost and
schedule, refining estimates and analyzing commitments optimizing the project plan,
developing risk management plans; and organizing the project team to establish a project–
driven organization environment. According to Young Hoonk wak (2002), the project cost

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management includes scope planning, scope definition, resource planning, cost estimating
and cost budgeting Scope planning is the process of developing a written scope statement as
the basis for construction project decisions including cost management.
Scope definition involves subdividing the major project deliverables into smaller, more
manageable components in order to,

(i) Improve the accuracy of cost, time and resource estimates.

(ii) Define a baseline for performance measurement and control.

(iii) To facilitate clear responsibility assignments.

(iv) To do project success critically.

Resource planning involves determining what physical resources like

(i) Men
(ii) Materials
(iii) Machinery
(v) Methods and what quantities of each should be used to perform project activities.

Cost estimating involves preparation of estimate for the Costs of the resources needed to
complete project activities. Cost estimating differs from pricing. Cost estimating is an
assessment of the likely quantitative result, how much it will cost the performing organization
to provide the product or service involved.

Pricing is a business decision as to how much the performing organization will charge for the
product or service that uses the cost estimate.

Cost budgeting involves allocating the overall cost estimates to individual work items in
order to establish a cost baseline for measuring project performance and for cost controlling.
As defined under Project Management Institute Standard Committee (PMI) (2000) and Royal
Institution of Chartered Surveyors, (RICS) (1998), the Cost Information System will be
useful for the CMP in project planning process.

The main cost information system in planning process is identified as,

(i)Cost Management Processes of Pre-Design stage:

Various preliminary studies are performed including a preliminary site investigation, a
market analysis of similar projects, a study of probable financial risks etc.

(ii) Cost Management Processes of Detailed Design Stage:

It is essential that intermediate estimates be prepared.
Design and specifications of items is moderated whenever cost variance (CV) is identified
finally details design drawings are documented.

(iii) Cost Management Processes of Bid and Award stage:

Quotations from short listed vendors are invited keeping the
BOQ from detailed design phase as a baseline.

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COST MANAGEMENT PROCESS

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