Cost Analysis Techniques

The importance of cost analysis in management decisions has been long recognized, mostly
in determining, actual cost data, cost estimates for the company and a product. Cost data
and analysis helps managers in making decisions in such areas like pricing, profit planning,
setting standard cost, capital investment decisions, marketing decisions etc. One of the
responsibilities of managers is to pass decisions on various issues concerning their
organizations, especially from total supply chain perspective. Over the last decade, many
companies have been focused their costing system internally. These included approaches
such as value analysis, process improvements, standardization, improvements in efficiency
by utilizing technology, and others. This influence has been caused by increased amount of
outsourcing and majority of cost of good are driven by supplier. In this business environment
company wants to take every benefit of cost reduction techniques. For example, In case of
Southwest Airlines, company have gone so keen to keep the cost down over last five years.
They have modified their business model in such a way that it bring all conceptualize
knowledge into practice. From the start of year of 2013, company have taken few steps those
tends to be very helpful for company to keep the cost down.
1. Utilize secondary airports wherever possible in major cities, for lower cost as well as
reduced traffic and congestion to improve on-time reliability.
2. Standardize on one type of equipment (Boeing 737) to improve the efficiency of pilots
and crew, maintenance, flight turn around and equipment substitution, when necessary.
3. Implement performance enhancing upgrades to the equipment to lower fuel costs,
maintenance costs, and noise level and improve range, contributing to lower cost and
improved customer satisfaction.
4. Do not use pre-assigned seating, different classes of service or meal service in order to
lower cost and speed turnaround of airplanes.
5. Careful hiring and cross training of associates so that employees support the mission of
friendliness and customer service, and are flexible to meet the needs of whatever job is
required, within reason.
6. Customer self-ticketing, early adoption of ticketless travel and no use of travel agencies
to reduce costs and promote efficiency.
Cost based pricing is basically setting up price based on cost of goods sold and services
used to get the finished product. The price varies as company can add a fixed cost or
percentage to the product that reflects in retail price of product. The main advantage of
using this costing techniques, that company always keep the profit margin a s long as
the profit figure is enough and unit sales meet expectations. However, this approach
sometimes can go against the company, so that either the product is selling at high price
and is attracting few customers, or it is selling at low a price and so is losing profits that
customers.

Product specification is another techniques, but in this company work closely with
customers need for the specific product. This provides product teams the information
they need to build out new features or functionality according to customer requirement.
But again this model is helpful as company and track the demand of the product and set
the price according to that.
Reverse Pricing Analysis

The capability to create a cost analysis is a function of the quality and availability of
information. If a purchaser and seller maintain a distant relationship, cost data will be
more difficult to identify due to the lack of support from the seller. This is where company
apply reverse pricing analysis. In this analysis the estimations and analysis are based on
the few factors.
1. Relationship with that company in past.
2. What is the current market trend of the company and their products?
3. Their financial status in market, and how company responds to market variations?

Conclusion

It can be seen an effective cost analysis can bring a better costing system that can reduce cost
and at the same time make business more profitable. Not only that but, cost analysis reports
are useful in various management decision making areas such as, product costing and pricing,
cost management, unique product decisions, , standard setting, product/ customer
profitability etc.
With its various techniques provide company a better budgeting, and competitive advantage
over other companies, the technique to be used also depends on the nature of the business
and product at hand. Conducting detailed cost analysis to ensure high degree of accuracy
demands more time, energy and money for compiling and supplying cost information.