COST MANAGEMENT.
Cost Management – analyzing the costs of purchased goods in order to develop strategies to lower costs while improving supplier relationships. The following table is from a paper written by Lisa Ellram entitled “A Structured Method for Applying Purchasing Cost Management Tools.” The article was published by the International Journal of Purchasing and Materials Mangement 11-19. I highly recommend reading this article.
Questions to be Addressed During Cost Analysis/Overhead Analysis
1. Which costs are necessary and legitimate?
2. Are amounts estimated for the necessary cost items reasonable?
3. Is the overhead allocation to this item potentially subsidizing another item which the organization sells?
4. Have the correct allocation bases been used? If not, is it to our benefit to challenge the allocation methods?
5. Are only those expenses which should be allocated to our purchase so allocated?
6. Are there allowances for contingencies? Do these allowances seem legitimate?
7. Are profits reasonable enough, yet not excessive, to keep the supplier motivated?
Order Cost = (Annual Demand * Order Cost)/Order Quantity in Units
Purchasing Cost = Annual Demand * Price per unit
Total cost = Ordering Cost + Carrying Cost + Purchasing Cost
Cost management is the process of identifying, analyzing, and controlling the costs associated with a business or project. It involves identifying the costs that are necessary to achieve the desired objectives, and then taking steps to minimize or control those costs in order to achieve the greatest possible return on investment.
Cost management can involve a wide range of activities, including:
- Identifying and tracking costs: This involves identifying all of the costs associated with a business or project, including direct costs (e.g. materials, labor) and indirect costs (e.g. overhead). It also involves tracking these costs over time to understand how they are changing and where opportunities for cost savings may exist.
- Analyzing costs: This involves evaluating the costs associated with a business or project in order to understand their drivers and identify opportunities for cost reduction. This may involve using tools such as cost-benefit analysis or cost-volume-profit analysis to better understand the relationship between costs and revenues.
- Controlling costs: This involves implementing strategies and processes to minimize or control costs in order to achieve the desired level of profitability. This may involve activities such as optimizing the supply chain, implementing cost-saving initiatives, and negotiating better pricing with suppliers.
Overall, cost management is a critical component of business success. By effectively managing costs, companies can improve their profitability, increase their competitiveness, and achieve their business objectives.