Business Analysis Toolkit

Cost management is a widely used term in business nowadays. Cost management generally involves managers and describes their short-term and long-term plans and programs to reduce the cost of their products and services, and at the same time, increase the value of the company in the market. It also involves their decision-making processes to achieve this. Cost management includes the continuous planning and control of costs. It does not operate by itself. It is included in the general management strategies and enforcement. The cost management BSC or balanced scorecard details six perspectives that are involved in cost management and grades the company according to each perspective.

The first perspective in the scorecard is the Labor Cost. Salaries and wages of employees comprise the largest operating cost for any company. Taken into accounts are the number of people employed by the company, their number of working hours, their salary rate, and other compensation benefits, like bonuses. The labor cost is averaged monthly and a good company should be able to control the labor cost based on profit margins.

Equipment Cost is the second perspective in the balance scorecard. Equipment can indeed be costly, therefore, every piece of equipment should have a significant impact in reducing the amount of work for employees. The cost of maintenance of new equipment is taken into consideration and even equipment downtime. Downtime is the amount of time a piece of equipment may not be available for use due to system malfunction, routine maintenance, or any unforeseen event.

The third perspective in the scorecard is Project Time. The amount of time spent in planning, discussing, brainstorming, and testing projects affect labor cost. The planning time, including time for project specifications and design, should not exceed the actual amount of time spent putting the project into motion. Being conscious of this could save company expenses.

Quality Metrics is the fourth perspective in the scorecard. Companies aim for perfection in the quality of their products and services, but sometimes, there are unavoidable defects. The time and money spent to examine and repair these defects affect company expenses as well. Good cost management requires readiness, speed, and efficiency in dealing with possible product or service defects.

The fifth perspective is Actual Cost versus Planed Cost. Managers and accountants have projected costs of expenditures, projects, and product manufacturing. These costs are usually prepared quarterly but it could be done on a per project basis. However, due to many aspects that affect production or service provision, the actual costs could balloon into a few more dollars. The discrepancy between the actual and planned cost should be realistically viable.

The last perspective is the Product Cost. To manufacture products a company must spend, of course. The total number of cost should be divided by the total number of units produced. This would give companies a guideline in determining the price of their product.

The cost management BSC is a very comprehensive one because it could serve as a guide for management in controlling company costs and determining how effective their present cost management system is.
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