Cost Control

Most organisations assign operational responsibility to department managers and/or project leaders. Usually, department managers are partially or wholly responsible for the people that work in their department(s) and the efficiency of their operations. Project leaders are assigned responsibility to specific, periodic tasks.

Accounting systems like SAP use cost centres and internal orders to record the operational costs of organisations. Cost centres are most of the time grouped by department whereas internal orders are used to record the costs of specific project tasks (with a defined start - and end time).

The standard transactional system produces reports/lists that give department (cost centre) managers and project leaders an overview of their costs. These standard reports can be compared to the current account statements that people get from their banks.

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Two possible scenarios:-

  • Managers look at the report(s) and see that the costs are in line with their expectations - they are satisfied, so no action is necessary.
  • Managers look at the report and they see that the numbers are different from what they expected - they will look into the report to understand the variation.

Individuals can take the time to verify each line on their bank statement. However in most organisations (that use SAP) there are so many lines that make up the total cost that studying all the lines individually is not feasible.

Therefore, the costs posted on cost centres are usually aggregated for reporting purposes. The three most common aggregates are:

  • Time, e.g. month, quarter, year
  • Cost centre hierarchy, e.g. service team north, -south and -west roll up to the service teams hierarchy node
  • Cost by type, e.g. labour (headcount vs. allocated), contracted labour and services, materials, energy, other

When managing their own current accounts, many people are satisfied when the balance contains enough to meet the bills they remember they have to pay shortly. Company cost centres have no balances, they simply show an absolute number.

The expectations of department and project managers are therefore based on:

  • Trends
    people know –after a while- that the total costs of their department are 100k Euro per month of which 80k labour related and with a peak to 150k (of which 80k and 60k contracted labour) in the summer.
  • Budgets/cost planning
    people have made a detailed plan to get the project approved and the costs developed in line with these plans.

The above clearly does not help to solve the control issue in “cost control”.  What if other people than the manager responsible want to get a feeling for the cost developments of the organisation? In that case trend based analysis and variance calculations (i.e. actual costs against budgets) should be structured with drill down capabilities to the transaction detail. The Cost Control QuickStart offers that structure. Out of the box, costs can be analysed by time, using hierarchies and by type.

Smart measures are delivered, for example, measures that allow analysts to look at the costs of this year to date and to compare them to the same period the previous year. The application has been shaped so that it allows drill down paths through hierarchies as well as to the lowest level transaction detail. Last but not least, value-based alerts have been set up to highlight the situations that may require action.

An alert much appreciated by our customers highlights cost centre overspending of 10.000 euro where the variance is for an amount greater than 10%. These alerts can be configured at a relatively detailed level so that an overspend on a certain cost type (e.g. labour) is not upset by an underspend on another cost type (e.g. material).