Cost control constitutes a measure of financial bookkeeping that allows companies to closely monitor the relationship between projected cost and actual cost on projects and cost and expenditure. According to proponents of the method, it improves the decision making process for management by displaying the cost effectiveness of certain processes and procedures. Despite its widely touted benefits, cost control poses a handful of disadvantages to businesses, particularly when misused or misunderstood. Most of these problems prove easily overcome.
Disadvantages in Percentage-of-Completion
The online textbook “Project Management for Construction,” published by the department of civil engineering at Carnegie Mellon University, points to problems in the percentage-of-completion method as a distinct disadvantage of cost control. This method, used to estimate costs under cost control, uses a mathematical formula to determine how much of a project a company can finish in a period, usually a financial quarter or year. Percentage-of-completion is based entirely upon estimation, meaning gross differences may occur between projected goals and actual achievement, giving rise to misleading figures in cost control analysis. Furthermore, the government may elect to tax a company based on estimated percentage-of-completion rather than actual completion rates. If significant disparities arise between estimates and actual completion, companies suffer tax problems.
Disadvantages in Interlocking Systems
Bhabatosh Banerjee, author of “Cost Accounting Theory And Practice,” points to problems in interlocking cost control systems. These systems create cost control budget estimates and actual totals for different aspects of a company’s business and production. The disadvantage of this lies in bookkeeping methods. If a single cost or expenditure applies to two areas of a company with separate cost control budgets, that cost or expenditure appears twice in the company’s books. Recording costs or expenditures multiple times wastes considerable time and leads to misleading figures in budget estimates and totals.
Mismanagement of Cost Control
Mismanagement in cost control can lead to severe problems for companies. For instance, cost control requires the consideration of a broad palette of variables. If a company uses the wrong variables in creating estimates for cost control or when creating figures displaying total expenditure and total profit, the system produces widely inaccurate figures regarding the cost effectiveness of procedures and processes. What’s more, human error may lead to severe inaccuracies -- all employees involved in the process of calculating cost control, which includes managers, foremen and more, must understand the system and its requisite procedures. Attempting to make important management decisions based on inaccurate or misleading cost control figures can inhibit profitability.
Countering the Disadvantages
Resources from books (“Cost Accounting Theory And Practice”, “Cost Accounting”) to organizations (The Food and Agriculture Organization of the United Nations) point out the overwhelming advantages of implementing cost control methods. When used correctly, cost control helps organizations track expenditures, profits and the relationship between the two. Countering the disadvantages of cost control proves relatively simple.
The author of “Project Management for Construction” suggest balancing the percentage-of-completion method with variable control accounting methods to minimize inaccuracies, while author Bhabatosh Banerjee writes that avoiding the creation of misleading totals in interlocking systems requires little more than oversight in the accounting department and double-checking all books. A cost control training and professional development program helps organizations identify key variables and keep all employees in the loop on requisite procedures.
- Carnegie Mellon University; Project Management for Construction Chapter 12; Chris Hendrickson; 2000
- “Cost Accounting Theory and Practice”; Bhabatosh Banerjee; 2006
- “Cost Accounting”; SP Gupta et al; 2009
- Food and Agriculture Organization of the United Nations: Budgetary Control
- “Construction Jobsite Management”; William R. Minks et al; 2004