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Free «Cost Control» Essay Sample

The success of an institution is almost entirely premised on how the institution manages its finances. The topic of cost control has consequently gained much potency in all organizations. Finance mangers’ have the onerous task of streamlining project’s cost, quality and performance within stipulated timelines. To achieve this end, many organizations can deploy various cost control measures. These include:

a)   Cost estimation. This involves developing estimates and measurements required to successfully execute a project. Cost estimation can be digitized or executed through simple form like spreadsheet products. Effective cost estimation must incorporate product attribute parameters including physical resource requirements.

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b)  Cost budgeting. Once the cost estimates are completed, they are incorporated into a comprehensive organizational budgeting system, often measured annually with interrogation and approval of the accounting authority. In most institutions, this is done by a board.

c)  Financial performance appraisal.   This is conducted on all ongoing projects in the organization with overall and specific selections. The overall objective of the appraisal scheme is to gauge the extent to which set objectives have been met and the universal sustainability of organizational projects

d)  Adoption of formal project management practices. This entails measures to identify, evaluate and manage risks associated with the project. while applying internally formulated policies, attention must be accorded the government regulations and standards regarding risk management. (Anthony, and Vijay. 1997: pg 29)

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Even though these cost control measures have found widespread applicability in various institutions, it is important to point out that their strengths are relative, each having its own demerits as well as merits. All the measures are designed to reduce or manage the risk of failure in a project rather than to exclusively eliminate the risk.(Shank, and John  1993: pg 13)

Through cost estimation, a firm can assess the value of a project taking into account all potential cash flows through the project. Cost estimates are however ineffective when the cash flow during a project’s lifetime is expected to change more than once.  Further weaknesses of cost estimation include potential inaccuracies in identification and quantification of overhead costs and benefits. Furthermore, it is liable to miscalculation of present value due to subjectivity for tangible costs and benefits.

 
 
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A budget effectively stratifies a business into various components with clear lines of responsibility. It also indicates the level and type of activity expected from different centers of control and responsibility, enhancing accountability. Budgets however fail to factor in quality and customer expectations. They have also been viewed as coercion tools used by the management on lower cadre employees with potential disastrous human relations in the organizations. Even more delimiting as a cost control measures, budgets can be overly inflated by the planners to cushion from repercussions of overspending. (Cooper and Robert  1998: pg 36)

Although financial appraisal is a good pointer in the effectiveness of a project, some appraisal mechanism have serious weaknesses. Payback period for instance fails to capture the effects of inflation and can therefore not be used in long life cycle projects. Risk premium cannot be used to rate mutually exclusive projects, yet this form of investment is widely practiced by organizations today.

While it is advisable that an organization adopts the formal project management standards and practices as stipulated by relevant authorities, this is impossible in some projects. Projects whose parameters cannot be quantified along conventional lines needs other ingenious management strategies beyond the norm. (Horngren, 2003: pg 31)

In conclusion, while every organization strives to craft and implement the most effective cost control measure, only wise selection and effective implementation of the options wil guarantee a greater degree of financial risk minimization. As seen above, the objective of cost control is to minimize damage and not to comprehensively eliminate the risks. Therefore, the more prudent an option, the better.

   

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