Cost Control

2. Systematic Cost Control

2.1 Start from your business objectives.

For example, you might aim to manufacture 1,000 units per month, or to win ten new customers.

• What are your quality standards?For example, your customer service standards might require a trained employee to respond to all enquiries within a specified time.

2.2 Establish your 'standard costs' for achieving your objectives.

Standard costs are the costs you would have in an ideal world (but see 2.4).

You need to consider:

• What resources you need.
• How much of the resources you need.Standard costs assume optimum performance (eg no unnecessary wastage of raw materials or staff time).
• What the resources cost.

2.3 Establish realistic 'budgeted costs' based on your actual experience.

• Budgeted costs will usually be higher than standard costs.For example, you might expect two per cent of all production to be wastage, raising unit costs.
• Budgeted costs may sometimes be lower than standard costs.

2.4 Record your actual costs and compare them with the standard and budgeted costs.

It may be appropriate to compare unit costs (cost per unit produced) or total costs (including overheads such as premises).

• Costs that are higher than your budgeted costs may indicate opportunities to reduce costs in the short term.In general, the larger the cost overrun, the more scope there should be for savings.
• Costs that are higher than your standard costs usually indicate opportunities to reduce costs in the longer term.
• Lower costs may indicate good management, but might also reflect quality failings or impending problems.

2.5 Periodically review what you are doing and how you are doing it.

• Benchmarking yourself against other organisations may show that your performance is sub-standard.For example, if your wastage levels are higher than the industry average.
• Internal review, or input from an external consultancy, may suggest alternatives.For example, standardising components to reduce design and manufacturing costs.