Cost management defines the process of predicting future cost either on an individual or organizational basis.
It mostly involves management accounting practices in an attempt to minimize cost, expenditure, and to maintain a cost-effective budget for financial survival.
Depending on the nature of your business and the activities that you perform, your cost management structure will differ accordingly.
There are various types of businesses, such as producing and selling products, providing services, both, or implementing project management techniques such as cost allocation on tasks.
Cost management principles for budgeting
Is your business producing and selling products?
If you are a producer and seller at the same time, then your cost management structure is more complex as it involves the following cost process in brief:
- Purchasing of raw materials
- Conversion of these materials to products
- Preservation of the products
- Delivery of the products to the customers or stores
- Maintaining the products at the stores
Does your business provide services?
If you are providing services to customers, then your cost chain is simpler, and it involves the following steps:
- Time spent (working hours) on the clients
- Daily running expenses, e.g. overheads, administration
- Providing the end idea or consultation service to the clients
Are you both, producer and provider?
Being both, a producer and a provider, you are involved in more complex management accounting procedures. Therefore, in such a scenario the so-called ”group of companies” is formed to help the business allocate accordingly the cost incurred.
Are you planning your project(s)’ cost structure?
In the condition where you are a project manager, e.g. a developer or real estate constructor, you allocate and manage your project(s) cost accordingly.
It is similar to any business that produces products where a production line is needed.
The only difference is that in project management, e.g. building of houses and other similar premises, the cost allocation is divided between the different projects.