Principles of Cost Management
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.