2. What is Cost
Management ?
Cost management is a process involved in the
planning , estimation, budgeting and controlling cost
so that budget can be completed in estimated budget.
It is also considered a form of management
accounting that helps to identify future expenditures
in a business to reduce budget overages.
3. Why do we
ManageCost?
• Chart out team-based and task-based costs
• Monitor all costs and ensure that they remain aligned
with the forecasted budget
• Set hourly and task-based rates as necessary, in order
to stay on budget
• Keep track of actual productivity to accurately
estimate billable hours
4. Basic
Principles of
Cost
Managment
Cash flow analysis determines the estimated annual costs and
benefits for a project and the resulting annual cash flow Too
many projects with high cash flow needs in the same year may
not be able to be supported which will impact profitability
Tangible costs or benefits are those costs or benefits that an
organization can easily measure in rupees
A task that was allocated 150,000 but actually costs
100,000 would have a tangible benefit of $50,000 if the
assets allocated are used for other projects
Intangible costs or benefits are costs or benefits that are
difficult to measure in monetary terms
Costs – resources used to research related areas of a
project but not billed to the project
Benefits – goodwill, prestige, general statements of
improved productivity not easily translated in rupees
5. Direct costs are costs that can be directly related to
production and services of the project
Salaries, cost of hardware and software purchased
specifically for the project
Indirect costs are costs that are not directly related to the
products or services of the project, but are indirectly related
to performing the project
Cost of electricity, paper towels
Sunk cost is money that has been spent in the past; when
deciding what projects to invest in or continue, you should
not include sunk costs
To continue funding a failed project because a great
deal of money has already been spent on it is not a
valid way to decide on which projects to fund
Sunk costs should be forgotten
6. Learning curve theory states that when many items are produced
(or tasks are performed) repetitively, the unit cost of those items
decreases in a regular pattern as more units are produced (or more
tasks performed)
Reserves are money included in a cost estimate to mitigate cost risk
by allowing for future situations that are difficult to predict
Contingency reserves allow for future situations that may be
partially planned for (sometimes called known unknowns)
and are included in the project cost baseline
Recruiting and training costs for expected personnel
turnover during a project
Management reserves allow for future situations that are
unpredictable (sometimes called unknown unknowns)
Extended absence of a manager; supplier goes out of
business
9. Types of
Estimation
Expert Judgement
This is probably the most
common way people get an
estimate. Talk to the men
and women with the best
hands-on experience and
understanding of the
project requirements. Just
make sure that everyone
has the same
understanding of what
needs to be delivered. And
try to find experts who will
actually be working on the
project.
Comparative or
analogous estimation
If your current project is
similar to past ones, take the
data from previous work and
extrapolate it to provide your
estimates for the new job.
Before proceeding, make
sure to check whether those
projects were successful!
10. Top-down
Using a high-level work
breakdown structure and data
from previous projects, you
can add estimates for each
project work item to determine
the overall effort and cost.
The top-down method lacks
detailed analysis, which
makes it best suited for a
quick first-pass at a
prospective project to assess
its viability.
Bottom-up
This method uses a detailed
work breakdown structure, and is
best for projects you’re
committed to. Each task is
estimated individually, and then
those estimates are rolled up to
give the higher-level numbers.
This process makes you think
about what’s required in order to
take a step back to see if the big
picture still makes sense. You’ll
receive more accurate results
than the top-down method, but
it’s also a greater investment of
time.
14. Functional Budgets
It relates to any function of
the firm such as sales,
production, cash, etc.
Following budgets are
prepared in functional
budgets:
Sales Budget
Production Budget
Material Budget
Manufacturing Budget
Administrative Cost Budget
Plant Utilization Budget
Capital Expenditure Budget
Research and Development
Cost Budget
Master Budget or Summarized
Budget or Finalized Profit plan
This budget is very useful for
the top management of the
company because it covers all
the information in a
summarized manner.
Types of
Budget
15. Cash Flow Budget
A cash flow budget
examines the inflows and
outflows of cash in a
business on a day-to-day
basis. It predicts a
company's ability to take
in more money than it
pays out.
Cash flow budgets also
suggest production
cycles and inventory
levels so that a
company's resources are
available for activity, not
sitting idle on warehouse
shelves.
Static Budget
A static budget contains
elements where
expenditures remain
unchanged with variations
to sales levels. Overhead
costs represent one type
of static budget, but these
budgets aren't confined to
traditional overhead
expenses.
This condition occurs
routinely in public and
nonprofit sectors, where
organizations or
departments are funded
largely by grants.
16. Cost
Controlling
Cost control is the practice of identifying and reducing
business expenses to increase profits, and it starts with the
budgeting process. A business owner compares actual
results to the budget expectations, and if actual costs are
higher than planned, management takes action.
Project cost control includes:
Monitoring cost performance
Ensuring that only appropriate project changes are
included in a revised cost baseline
Informing project stakeholders of authorized changes
to the project that will affect costs
17. Performance review meetings can be a powerful tool to help
control project costs
Knowing you have to report on your progress is an
incentive for people to perform better
Budgetary control, Standard costing, Inventory control,
Ratio analysis, Variance analysis
Performance measurement is another important tool for cost
control
There are many general accounting approaches for
measuring cost performance but earned value
management is a tool unique to project management
18. Earned
Value
Managment
EVM is a project performance measurement technique
that integrates scope, time, and cost data
Given a baseline (original plan plus approved
changes), you can determine how well the project is
meeting its goals
You must enter actual information periodically to use
EVM
Was a WBS item completed or approximately
how much of the work was completed
Actual start and end dates
Actual cost
19. Planned value (PV), formerly called the budgeted cost
of work scheduled (BCWS), also called the budget, is
that portion of the approved total cost estimate planned
to be spent on an activity during a given period
Actual cost (AC), formerly called actual cost of work
performed (ACWP), is the total of direct and indirect
costs incurred in accomplishing work on an activity
during a given period
Earned value (EV), formerly called the budgeted cost
of work performed (BCWP), is an estimate of the value
of the physical work actually completed
EV is based on the original planned costs for the
project or activity and the rate at which the team
is completing work on the project or activity to
date
20. Ways of Cost
Management
(Budgetary Control)
Budgetary control is a system of controlling costs
which includes the preparation of budgets,
coordinating the departments and establishing
responsibilities, comparing actual performance
with the budgeted and acting upon results to
achieve maximum profitability.
Process Of Budgetary Control
1. The objects are set by preparing budgets.
2. The business is divided into various responsibility centres for
preparing various budgets.
3. The actual figures are recorded.
4. The budgeted and actual figures are compared for studying the
performance of different cost centres.
5. If actual performance is less than the budgeted norms, a remedial
action is taken immediately.
21. Objectives
To ensure planning for future by setting up various
budgets, the requirements and expected
performance of the enterprise are anticipated.
To operate various cost centres and departments
with efficiency and economy.
Elimination of wastes and increase in profitability.
To anticipate capital expenditure for future.
To centralise the control system.
Correction of deviations from the established
standards.
Fixation of responsibility of various individuals in
the organization.
22. Standard
Costing
Standard Costing discloses the cost of deviations
from standards and clarifies these as to their
causes, so that management is immediately
informed of the sphere of operations in which
remedial action is necessary.
Process Of Standard Costing :
Ascertainment and use of Standard Costs;
Recording the actual costs;
Comparison of actual costs with standard costs in order to
find out the variance
Analysis of variance
After analysing the variance, appropriate action may be
taken where necessary.
23. Objectives
After analysing the variance, appropriate action may be
taken where necessary.
It helps to ascertain performance evaluation.
It supplies the ways to utilise properly material, labour
and also overhead which will be economic in character.
It also helps to motivate the employees of a firm to
improve their performance by setting up a ‘standard’.
It also helps the management to supply necessary data
relating to cost element to submit quotations or to fix up
the selling price of a firm.
It also helps the management to make proper valuations
of inventory (viz.,Work-in- progress, and finished
products).
It acts as a control device to the management.
It also helps the management to take various corrective
decisions viz., fixation of price, make-or-buy decisions
etc. which will be more beneficial to the firm.
24. Ratio
Analysis
Ratio analysis is the process of determining and
interpreting numerical relationships based on
financial statements. A ratio is a statistical yardstick
that provides a measure of the relationship
between two variables or figures.
Process of Ratio Analysis
An analyst should decide the objectives of ratio analysis.
Select th0 appropriate ratios on the basis of objectives of ratio
analysis.
Calculation of the selected such ratios.
Comparison of the calculated ratios with the ratios of the same
business concern in the past.
Comparison of the calculated ratios with the same type of ratios of
other similar business concern.
Comparison of the calculated ratios with the same type of ratios of
the industry to which the business concern belongs.
Interpretation of the ratios.
25. Using
Software To
Assist in
Cosst
Managment
Spreadsheets are a common tool for resource planning,
cost estimating, cost budgeting, and cost control
Many companies use more sophisticated and centralized
financial applications software for cost information
Project management software has many cost-related
features, especially enterprise PM software
Several companies have developed methods to link data
between their project management software and their
main accounting systems
26. Advantages
of Cost
Coontrolling
It helps the firm to improve its profitability and
competitiveness.
It helps the firm in reducing its costs and thus
reduce its prices.
It is indispensable for achieving greater
productivity.
If the price of the product is stable and reasonable,
it can maintain higher sales and thusemployment
of work force
27. Disadvantages
Of Cost
Controlling
Reduces the flexibility and process improvement in
a company.
Restriction on innovation.
Requirement of skillful personnel to set standards.
28. Features of
Cost
Controlling
Cost reduction is not
concerned with setting
targets and standards. Cost
reduction is the finalresult in
the cost control process.
Cost reduction aims at
improving the standards.
It is continuous, dynamic and
innovative in nature, looking
always for measures and
alternativeto reduce costs.
It is a corrective function.
This is applicable to every
activity of the business.
It adds thinking and analysis
to action at all levels of
management.
Techniques of cost reduction
Organization and methods
Work study
Material handling
Automation
Value analysis
29. RoleOf an
Architectin
CostControl
The Architect to provide the Owner with a preliminary
estimate of construction costs at the end of the Schematic
Design Phase
The Architect to provide the Owner with adjustments to its
preliminary estimate of construction costs at the end of the
Design Development and Construction Document Phases,
respectively.
The Owner shall cooperate with the Architect in making
some adjustments.” The problems presented by this phrase
include the following:
There are no boundaries for the “adjustments” necessary to
bring the Architect’s estimate of cost into line with the
Owner’s budget. That is to say, this is a totally open-ended
obligation;
The amount of redesign work necessary to adjust the
Architect’s estimate is similarly open-ended notwithstanding
the potential mismatch of the Owner’s evolving program
with the Owner’s budgetary constraints; and
The Architect is bound to provide redesign services for free
notwithstanding the fact that the estimate of the costs of
work may have increased due to factors that are totally
unrelated to the Architect’s services.
30. Role ofCivil
Engineer
Planning starts even before the starting of project.This
phase is very important. Successfully completion of a project
and success of a project manager mostly depend on this
phase. In this phase a CPM selects the source of materials,
source of necessary equipment, justify the sub-contractors,
choose the project team, prepare project's budget, calculate
project's risk, etc.
Risk management is the most difficult part of project
management. Civil engineer calculates the project risks
before starting the project though, there are many critical
risks can arise during project's life cycle.To mitigate these
risks without hampering the project's progress is another key
responsibility of a construction project manager.
Suppose building materials price now is lower in the market
than the time of preparing budget.That doesn't mean you
can waste materials as you wish. So, cost management is the
procedure of choosing best quality materials with lowest
possible price and using them with minimum possible
wastage.
