COST MANAGEMENT AND COST OPTIMIZATION IN CURRENT ECONOMIC CONDITIONS

Korneva Mariia Aleksandrovna
Saint-Petersburg State University of Economics
2st-year-student (Master Degree), Management – Quality and competitiveness management

Abstract
There are cost management and cost optimization considered in this article. Moreover, cost optimization methods in the current economic conditions are regarded, because the successful cost management, cost optimization and cost reduction obtain great value in the unfavorable economic conditions. In addition, the comparison of approaches of the cost optimization in the enterprise and the analysis of points of views to this theme are advanced in this paper.

Keywords: cost management, cost optimization, cost optimization methods, cost reduction, costs, effectiveness of cost management


Article reference:
Cost Management and Cost Optimization in Current Economic Conditions // Economics and innovations management. 2015. № 9 [Electronic journal]. URL: https://ekonomika.snauka.ru/en/2015/09/9705

View this article in Russian

There is a significant economic situation in the whole world economy. Nowadays the economies of every country restore after the global crisis. Consequently, these global economic conditions influence the economic situation of each separate country in the world. Therefore, all companies depend on the economic conditions in the country and in the world, so the result is a complexity of increasing of profit for companies. Thus, with the passage of time and due to the prompt development of competition in the market and reducing the rate of profit, the perspectives for further development of enterprises to a large extent depend on cost management and optimization. Systematic and rational cost management and cost optimization in the company as an efficient extension of cost management increase the chances for a successful outcome to the enterprise for its activity.

The level of costs is a crucial indicator of the evaluation of the economic results of the activity of the particular enterprise and the whole economy as an overall picture. Accordingly to this the importance of research of the aspects of cost management and optimization of the company is evident. Moreover, in current conditions of market relations in the world the necessity of a continuous search and development the most efficient and effective forms and methods of cost management is exist. Creation and development of new and innovative practice systems of obtainment of the information about the costs and results of operations, the use of new approaches and methods of planning, costing, accounting and control provide the ability to solve many problems of modern enterprise management effectively. Furthermore, the system of cost management is prominent choice of elaboration of calculations by which an entity distributes costs, analyzes their impact on the operating results, and also forms the price and determines the pricing policy of the enterprise.

First of all it is necessary to determine what a cost is. Artur Sullivan and Steven M. Sheffrin (2003) define a cost is the value of money that has been used up to produce something. This definition is suitable for such spheres as production, research, retail, and accounting. In business, on the contrary, the cost may be one of acquisition, in which case the amount of money expended to acquire it is counted as cost. In this case, money is the input that is gone in order to purchase the thing.

According to Colin Drury (2006) there are two main aspects in the accounting at the enterprise – management and financial. Therefore, Drury assigns the primarily role to the management accounting as the most important goal – providing managers and employees at all levels of the organization of information to help you make informed decisions and achieve increased efficiency and productivity of the operations .

Thus, according to the Drury it is management accounting plays a key role in the planning, management and decision-making, that is exactly on the success of management accounting in the organization is responsible for the overall success of the entire company, as well as the economy and the country as a whole.

Colin Drury (2005) considered options submission of accounting information, the process of transformation of organizational goals and objectives in certain activities and necessary for the activity resources. Furthermore, the author Colin Drury shows management control systems, measurement principles of the functioning of various parts of the organization. Moreover, in his book, Drury focuses on comprehensive cost management and, moreover, strategic management accounting.

Stark, J. (2011) defined cost management as the planning and controlling process of the budget of a business. On the opinion of Stark, the cost management is a kind of management accounting. Therefore, the main aim of cost management is an allowance for a business for predicting forthcoming expenditures to be helpful in reducing the chance of going over the budget of a company. In addition, Stark suggested that the cost management is the process by which companies control and plan the costs of doing business. Individual projects should have customized plans for this process, and companies as a whole also integrate cost management into their overall business model. There is no single accepted definition for this term, because it has such broad applications and possible strategies. When properly implemented, this process will translate into reduced costs of production for products and services, as well as increased value being delivered to the customer.

Martin Christophera and John Gattorna (2005) considered the cost reduction as a cost optimization method. They presented their article as an evidence for supporting their point of view and suggested an approach for supplying chain alignment that let the opportunities of cost reduction can be identified and increase profits from the business activity of the company, in a whole. Martin Christophera and John Gattorna thought that the cost reduction is a really helpful tool of cost optimization and provide the low-cost airlines, as an excellent example of successful reduction of cost which is the reason of low prices.

On the contrary, Barbara Gomolski and Kurt Potter (2009) had the opinion, that cost optimization is a different philosophy from cost cutting. Cost optimization is the process of finding the most cost effective solution under the given constraints. Cost optimization is about cutting overheads without affecting the performance or structure of the business Cost optimization entails a systematic and sustainable method to manage priority costs to ensure that delivering capabilities of the company is not affected or better yet, improved. Implementation of such techniques charge companies to achieve their long and short term objectives boosting their ability to grow. A company’s growth is reflected by its capability to efficiently manage costs while ensuring optimum productivity. The constraints faced by each organization are unique based on its capacity, target market demands and its objectives. Cost optimization technique by its very nature, identifies these constraints on which the costs are incurred. There is a review of the methods of optimization of cost, which Kurt Potter and Barbara Gomolski (2009) composed.

First method is the Fishbone or the Ishikawa diagram, which collect together six main elements of an organization’s function towards a common purpose of designing products, preventing defects in process and ensuring productivity.

The second 5S approach is focusing on one particular aspect of cost optimization – the reduction of waste. Waste refers to the non-value added services performed within an organization which can be avoided. By dealing with identified waste, an organization can promote workplace efficiency.         The third method of cost optimization is benchmarking, which is a powerful tool to assess the level of cost associated to a particular activity. This provides the management with an understanding of when and which cost reduction technique to apply. The technique provides cost levels of other businesses in the similar industry to assess the variance in an organization’s own cost model.

The next method is breakeven analysis mainly aids management in understanding the minimum requirement of products or customers required to cover the incurred costs. A breakeven analysis helps understand the thresholds the organization needs to maintain in order to be viable.

The fifth method is a fixed cost analysis provides management with information regarding the fixed costs already incurred such as the return on those costs, are the costs really necessary, if yes, can they be reduced by alternative sources and what are the implications of making such a change. An assessment of fixed cost can provide management with solutions and ways to reduce costs all the while enabling them to increase the productivity related to those costs.

The sixth approach is the Pareto chart is a graphical overview of the process problems, from the most frequent to the least thereby illustrating the frequency of fault types. This chart helps users identify the most serious and most frequent problems.

The last approach is an value stream mapping (VSM) is a technique which can be called as a byproduct of Lean Process Thinking. This technique identifies the activities that can be avoided in a process thereby reducing time, increasing productivity and helps overall management of the process.


References
  1. Christopher, M., & Gattorna, J. (2005). Supply chain cost management and value-based pricing. Industrial marketing management34(2), 115-121.
  2. Drury, C. (2005). ‘Management accounting for business’. Cengage Learning EMEA.
  3. Drury, C. (2006). ‘Cost and management accounting’. Thomson Learning.
  4. Gomolski B. and Potter K. (2009) ‘Balancing Short-Term and Long-Term Cost-Optimization Efforts’, Gartner.
  5. O’Sullivan, S. (2003). ‘Economics Principles in Action’ (California Edition). Prentice Hall.
  6. Stark, J. (2011). Product lifecycle management (pp. 1-16). Springer London.


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