GHCl Digest - JANUARY 2018

Issue 93, February edition
6
Effective Cost Management
-By Mr. S. Somasundaram,
Dy. Manager-Costing, Yarn division
Cost management is concerned with the process of planning and controlling the budget of a project
or business. It includes acvies such as planning, esmang, budgeng, financing, funding, managing,
and controlling costs so that the project can be completed within the approved budget. Effecve
cost management is the central measure of accountability for business leadership.
Steps involved in Cost management Process:
Step 1: Resource planning
In the inial phase of a project the required resources to complete the project acvies need to be
defined. Planning phase involves the esmaon of the required me, material, labor, equipment,
etc., needed to complete the work. Once the resource types and quanes are known the associated
costs can be determined.
Step 2: Cost es$ma$ng
Several cost esmang methods can be applied to predict how much it will cost to perform the project
acvies. The choice for the esmaon method depends on the level of informaon available.
Analogous esmang using the actual cost of previous, similar projects can serve as a basis for esmang
the current project. Another opon is to use parametric models in which the project characteriscs
are mathemacally represented. Esmates can be refined when more informaon becomes
available during the course of a project. Eventually this results in a detailed unit cost esmate with a
high accuracy.
Step 3: Cost budge$ng
The cost esmate forms together with a project schedule the input for cost budgeng. The budget
gives an overview of the periodic and total costs of the project. The cost esmates define the cost of
each work package or acvity, whereas the budget allocates the costs over the me period when the
cost will be incurred. A cost baseline is an approved me-phased budget that is used as a starng
point to measure actual performance progress.
Step 4: Cost control
Cost control is concerned with measuring variances from the cost baseline and taking effecve correcve
acon to achieve minimum costs. Procedures are applied to monitor expenditures and performance
against the progress of a project. All changes to the cost baseline need to be recorded and the
expected final total costs are connuously forecasted. When actual cost informaon becomes available
an important part of cost control is to explain what is causing the variance from the cost baseline.
Based on this analysis, correcve acon might be required to avoid cost overruns.