Cost management
Cost management is the process of estimating, allocating, and controlling project costs. The cost management process allows a business to predict future expenses to reduce the chances of budget overrun. Projected costs are calculated during the planning phase of a project and must be approved before work begins.
A cost management system is a set of formal methods developed for planning and controlling an organization’s cost-generating activities relative to its strategy, goals, and objectives.
As the project plan is executed, expenses are documented and tracked, so things stay within the cost management plan. Once the project is completed, predicted and actual costs are compared, providing benchmarks for future cost management plans and project budgets [Wrike].
When applied to a project, expected costs are calculated while the project is being planned and are approved beforehand. All project expenses are recorded and monitored to ensure they align with the cost management plan. After the project is finished, the total costs are compared to the predicted ones. This analysis enhances future cost management predictions and cost budgeting [Techarget].
Business entities face two major challenges: achieving profitability in the short run and maintaining a competitive position in the long run. An effective cost management system must provide managers the information needed to meet both of these challenges. Crossing all functional areas, a cost management system can be viewed as having six primary goals:
(1) develop reasonably accurate product costs, especially through the use of cost drivers (activities that have direct cause-and-effect relationships with costs);
(2) assess product/service life-cycle performance; (3) improve understanding of processes and activities;
(4) control costs;
(5) measure performance;
and (6) allow the pursuit of organizational strategies.
The original purpose of a cost accounting system was to control costs. This is still an important function of cost management systems given the current global competitive environment. A cost can be controlled only when the related activity is monitored, the cost driver is known, and the information is available. The information generated from a cost management system should help managers measure and evaluate performance .
⠀ Kinney, M. R., Raiborn, C. A. (2011). Cost Accounting: Foundations and Evolutions (8th ed.). Cengage Learning (p. 25)
⠀ Barfield, J. T., Raiborn, C. A., Kinney, M. R. (2001). Cost Accounting: Traditions and Innovations (4th ed.). Cincinnati: South-Western (p. 45-47)
Lutkevich, Ben. (n. d.). Cost management. Techtarget. Retrieved from: https://www.techtarget.com/whatis/definition/cost-management
What is Cost Management in Project Management? Wrike. Retrieved from: https://www.wrike.com/project-management-guide/faq/what-is-cost-management-in-project-management/