Cost Management

Synopsis

Cost overruns are dangerous as they demand funds allocated for other purposes and needs. To avoid them, managers must have a top-notch cost management strategy up their sleeve at all times. The good news is that our Cost Management agement presentation deck allows you to introduce your strategy for effective management of cost with ease and, therefore, provide your businesses with the freedom to make the right choices, remedy the shortcoming between strategy and execution and fuel growth.

Questions and answers

What are some external factors that can affect the effectiveness of a cost management strategy?

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Some external factors that can affect the effectiveness of a cost management strategy include market fluctuations, changes in labor costs, changes in material costs, regulatory changes, economic conditions, and competitive actions.

How can a cost management strategy contribute to the growth of a business?

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A cost management strategy can contribute to the growth of a business by providing it with the freedom to make the right choices, remedy the shortcomings between strategy and execution, and fuel growth. It helps avoid cost overruns that can divert funds allocated for other purposes and needs. With a top-notch cost management strategy, a business can effectively manage its costs, which can lead to improved profitability and growth.

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Slide highlights

Use this slide to list all cost determinants for the project. Although determinants vary from organization to organization, they depend on two main factors: The Quantities of Resources and Combinations and Techniques of Productions.

High costs most likely prevent your team from achieving goals, thus, identifying obvious and hidden causes for inefficient costs is crucial. Use this slide to discuss causes for high costs and introduce elimination solutions.

With this slide, introduce cost reduction potential and propose strategies for savings. These can include: bartering with other businesses, monetizing marketing methods, sponsoring your events and introducing four-day work week.

Questions and answers

How can a four-day work week contribute to cost savings?

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A four-day work week can contribute to cost savings in several ways. Firstly, it can reduce overhead costs such as utilities and maintenance for the extra day that the office is closed. Secondly, it can increase employee productivity and reduce absenteeism, as employees are likely to be more rested and satisfied with a better work-life balance. Lastly, it can reduce costs related to employee turnover, as a four-day work week can be an attractive benefit for potential employees.

What are some potential strategies for cost reduction in a business?

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Some potential strategies for cost reduction in a business could include bartering with other businesses, monetizing marketing methods, sponsoring your own events, and introducing a four-day work week. It's also important to identify and eliminate any obvious and hidden causes for inefficient costs.

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Overview

Cost management is the process of estimating, allocating and controlling the costs in a project, which enables an organization to forecast upcoming expenses and avoid exceeding the allocated budgets.

The most important element in cost management, says David Axson, managing director at Accenture Strategy, CFO & Enterprise Value "is to live and breathe a relentless customer focus. All too often cost reductions lead to service reductions, opening the door to disruptors who can deliver great service at the same or lower cost. Digital tools allow organizations to deliver better service at lower costs – it's no longer a trade-off of one for the other. Think about automatically checking into your hotel room, choosing your room and accessing your key through the app on your phone. For the hotel this lowers costs (no check in line, no plastic keys, etc.) while for the guest it delivers faster, more personalized service."

Questions and answers

What are some practical applications of cost management in the hospitality industry?

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Cost management in the hospitality industry can be applied in various ways. One practical application is in the use of digital tools to enhance customer service while reducing costs. For instance, allowing guests to check into their hotel rooms, choose their rooms, and access their keys through a mobile app. This not only improves the guest's experience by providing faster, more personalized service, but also reduces costs for the hotel by eliminating the need for check-in lines and physical keys. Other applications can include efficient energy management, waste reduction, and strategic sourcing of supplies to reduce costs.

Can you name a company that could benefit from implementing cost management and explain how?

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A company that could benefit from implementing cost management is a hotel chain. By leveraging digital tools, they can deliver better service at lower costs. For instance, allowing guests to automatically check into their hotel room, choose their room, and access their key through an app on their phone. This lowers costs for the hotel (no check-in line, no plastic keys, etc.) while delivering faster, more personalized service for the guest.

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Application

There are four major steps to the process:

1. Resource planning – the process of discovering future resource requirements for an organization or a particular project. This requires the assessment and planning of the use of the labor, finances and other resources.
2. Cost estimating – the process used to quantify, cost and price the resources required for an organization or a particular project. It requires the employment of tools that transform technical and programmatic data into finance and resource data.
3. Cost budgeting – the process used for evaluating the estimated cost of resources into cost accounts and measuring cost performance against them.
4. Cost control – the process used for measuring variances from the cost baseline and establishing effective correctional action to achieve minimum costs.



Case study

Boeing Commercial Airplane Group Wichita Division

The case study published by Massachusetts Institute of Technology examined the effects of employing Activity-Based Costing and Management Practices (ABCM) – an approach where activity-based cost (ABC) models provide economic information for management decision making, within the Aerospace Industry.

According to MIT, BCAG is the world's largest manufacturer of commercial airplanes, which comprises about 60% of Boeing's total revenues. The main focus of BCAG Wichita is the development of a lean, efficient design and production system supported by an effective cost management strategy in order to capture and maintain world-class aerospace manufacturing reputation.


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Can you provide a case study that demonstrates the effectiveness of BCAG Wichita's cost management strategy?
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I'm sorry, but I don't have a specific case study on BCAG Wichita's cost management strategy. However, it's known that BCAG Wichita focuses on developing a lean, efficient design and production system supported by an effective cost management strategy. This approach has helped them maintain a world-class aerospace manufacturing reputation. For more specific details, I would recommend reaching out to BCAG Wichita directly or looking for case studies in aerospace industry publications.
How does the cost management strategy of BCAG Wichita align with the overall profitability goals of Boeing?
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The cost management strategy of BCAG Wichita aligns with the overall profitability goals of Boeing by focusing on the development of a lean, efficient design and production system. This approach helps to minimize costs and maximize efficiency, thereby contributing to Boeing's profitability. Additionally, BCAG Wichita's effective cost management strategy supports its aim to capture and maintain a world-class aerospace manufacturing reputation, which can lead to increased market share and further enhance Boeing's profitability.
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The MIT researchers write: "One of the most attractive and counterintuitive characteristics of activity-based costing arises from the previously untapped sources of added value that it allows a company to discover. As the emphasis on costs shifts from labor to overhead, companies are changing their business strategies to capture these gains. Although overhead costs now dwarf labor costs as a percentage of overall expenditure, companies have not changed the methods they use to quantify costs."


Questions and answers

How can companies implement activity-based costing in their operations to maximize profitability?
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Companies can implement activity-based costing (ABC) in their operations to maximize profitability by first identifying all the activities involved in their production process. Each activity is then assigned a cost based on the resources it consumes. This allows companies to accurately determine the cost of each product or service, leading to more informed pricing and budgeting decisions. ABC also helps in identifying inefficient processes and areas where costs can be reduced. It's important to note that implementing ABC requires a thorough understanding of the company's operations and may require a cultural shift within the organization.
What are common challenges in applying activity-based costing and how can they be overcome?
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Common challenges in applying activity-based costing include: difficulty in identifying all activities and assigning costs to them, resistance from employees due to change in traditional costing methods, and the time and resources required to implement the system. These challenges can be overcome by: providing adequate training to employees, using software to automate the process, and ensuring top management support for the change.
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And continue: "Advocates of ABCM believe that unless there is a change to a new way of identifying monetary output, companies will never know the true costs of production. At present, a majority of the companies that have adopted ABCM operate in the commercial sector. Traditionally, these companies have been perceived to be more exposed to economic variability, and thus must be able to adapt to changing market conditions in order to retain competitiveness.5 Although the aerospace industry has been slower to adopt activity-based costing methods, cycles of instability in the industry may lead to increasing interest in ABCM. The successes of the pilot projects at BCAG Wichita may illustrate the benefits of investigating different cost management strategies. BCAG Wichita hopes to move ABCM principles into other areas of the manufacturing process, and encompass an ever-increasing portion of the facility's operations."


Questions and answers

What are the potential advantages of investigating different cost management strategies in industries exposed to economic variability?
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Investigating different cost management strategies in industries exposed to economic variability can have several advantages. Firstly, it can help companies understand the true costs of production, which is crucial for making informed business decisions. Secondly, it can enable companies to adapt to changing market conditions and retain competitiveness. For instance, the adoption of activity-based costing methods can help companies better allocate costs and improve profitability. Lastly, it can lead to innovation in cost management, as companies seek new ways to reduce costs and improve efficiency.
How can ABCM principles improve the manufacturing process in the aerospace industry?
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ABCM (Activity-Based Cost Management) principles can improve the manufacturing process in the aerospace industry by providing a more accurate understanding of the true costs of production. This is achieved by identifying and assigning costs to specific activities involved in the manufacturing process. By doing so, companies can better adapt to changing market conditions and retain competitiveness. The aerospace industry, which has traditionally been slower to adopt ABCM, may find it beneficial especially during cycles of instability. Successful implementation of ABCM, like the pilot projects at BCAG Wichita, can lead to its application in other areas of the manufacturing process, thereby improving overall operations.
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