Four Requirements for Effective Cost Control

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Cost-control procedures are an important tool for business managers.
Cost-control procedures are an important tool for business managers. (Image: Goodshoot/Goodshoot/Getty Images)

Cost-control procedures are a vital tool for managers who wish to produce satisfactory ratios of profits, or benefits, to resources invested. The only way to know if your business is cost-efficient is to carry out cost-control analysis and procedures and base business decisions on the results of your analysis. It is important to note that efficient cost control is not limited to the planning stages; you must maintain it throughout the life of the project or business.

Performance Standards

Cost-control procedures are used to create cost-efficient projects. However, the term cost-efficient might mean different things depending on who you ask. It is important to understand what standards and requirements are being used to determine the cost-efficiency of the project. For instance, if you are working on a cost-efficient building, this could mean the cheapest structure that meets the program's requirements, the building with the longest life span, or the building in which workers are more productive. Which of these definitions you use will influence the cost-control measures you would need to meet your project's goals.

Budget

Efficient cost-control requires a budget or cost estimate as a baseline, or benchmark, to work from. Budgets take on different forms depending on the type of business or project they describe. For example, a manufacturing company will need detailed estimates on the operational costs required to manufacture the products they sell, while a construction company will need a schedule of works that describes the activities required to finish the project and their respective costs. Once you have a budget you can apply cost-control procedures to monitor and assess the financial performance of your project.

Cost Accounting System

Cost-control procedures are only useful if they are based on an up-to-date and accurate accounting of the costs incurred by the company. This is usually a costly and time-consuming system which records and categorizes all the expenses involved in a business. To be useful, the accounting system must use the same formats and standards used in the budget so they may be compared to the estimated costs in the budget.

Variance Analysis

The best laid plans, and budgets, have the habit of taking a route of their own, which is why successful managers use variance analysis to differentiate between their budgeted costs and actual costs. Managers use variance analysis to assess a wide variety of factors, such as the costs incurred by the business and the revenue it produces. A variance analysis of a business, or project, does not only identify the areas where actual costs have deviated from the budget, but also offer suggestions on how to bring the business back on track with initial estimates.

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