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Principles of Cost Management

Updated on November 29, 2012

Key Principles to successful strategic cost management

To manage costs successfully, businesses should continually review them in the face of new threats and pressures rather than relying on particular techniques to provide solutions. Hopwood suggests that to transform costs over time in order to fit the strategic objectives, businesses do not need very sophisticated techniques or highly bureaucratic systems. Rather, they need to change the ways in which costs are viewed and dealt with. He suggests that the following five broad principles should be adopted.

1 Spread the responsibility

Employees throughout the business should share responsibility for managing costs. Thus, design experts, engineers, store managers, sales managers, and so on. should all contribute towards managing costs and should see this as part of their job. The involvement of non-accountants is, of course, a feature of target costing and kaizen costing, and so this point already appears to be widely accepted. Hopwood suggests that employees should be provided with a basic understanding of costing ideas such as fixed and variable costs, relevant costs and so on, to enable them to contribute fully. As cost-consciousness permeates the business, and non-accounting employees become more involved in costing issues, the role of the accountants will change. They will often facilitate, rather than initiate, cost management proposals and will become part of the multi-skilled teams engaged in creatively managing them.


2 Spread the word

Throughout the business, costs and cost management should become everyday topics for discussion. Managers should seize every opportunity to raise these topics with employees, as talking about costs can often lead to ideas being developed and action being taken to manage costs.


3 Think local

Emphasis should be placed on managing costs within specific sites and settings. Managers of departments, product lines or local offices are more likely to become engaged in managing costs if they are allowed to take initiatives in areas over which they have control. Local managers tend to have local knowledge not possessed by managers at head office. They are more likely to be able to spot cost-saving opportunities than are their more senior colleagues. Business-wide initiatives for cost management which have been developed by senior management are unlikely to have the same beneficial effect.


4 Benchmark continually

Benchmarking should be a never-ending journey. There should be regular, as well as special-purpose, reporting of cost information for benchmarking purposes. The costs of competitors may provide a useful basis for comparison, as we saw earlier. In addition, costs that may be expected as a result of moving to new technology or work patterns may be helpful.


5 Focus on managing rather than reducing costs

Conventional management accounting tends to focus on cost reduction, which is, essentially, taking a short-term perspective on costs. Strategic cost management, however, means that in some situations costs should be increased rather than reduced.

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    • Ericdierker profile image

      Eric Dierker 4 years ago from Spring Valley, CA. U.S.A.

      I have yet to meet a manager that performs his best when his focus is just about cost. Your over emphasis would seriously impede, productivity, creativity, and synergism. Somebody has to be cost conscious but most do not work well under the strain of both money and the job they have to do.

    • cheetah786 profile image
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      cheetah786 4 years ago

      i think you missed intro's paragraph.. this your answer. cost minimization has been challenging issue for the organizations, especially industries of high competition. Many big organizations employee expert cost and management accountants to plan and control costs..!

      professional planning of costs always incorporate financial costs as well as nonfinancial costs.. achieving balance between these two is main goal of cost management... people perceive cost management and minimization as reducing financial costs alone.. this is narrow thinking..

    • Ericdierker profile image

      Eric Dierker 4 years ago from Spring Valley, CA. U.S.A.

      Nope I reread it. The intro is straight forward and correct. My issue is with putting it squarely in the minds of employees. Obviously we are talking degrees here. Wastefulness bad, conservation good, everyone should have that in mind. But there are reasons that we have the experts.

      I come from a more risk management loss mitigation, shrinkage prevention school of thought. And of course we must be aware of the hidden costs like time management.

    • cheetah786 profile image
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      cheetah786 4 years ago

      ericdieker, you are correct, direct consoling may lead to big pressures on employees.

      thanks for commenting and sharing your expert views !

    • Gvkishore profile image

      Kishore 4 years ago from Nellore

      Excellent Work cheetah786. I am very much Inspired and planning to develop my hubs too as yours . Thank you so much Friend.

    • cheetah786 profile image
      Author

      cheetah786 4 years ago

      thanks for reading and commenting!

    • profile image

      CFO 4 years ago

      all of your points are valid but you went very simply all through

    • profile image

      Chief 4 years ago

      great work dude. u were almost simple and clear

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