Cost Consciousness: The Missing Link

The term “Cost consciousness” is grossly mistaken to be cost cutting and hence the phrase brings in resistance. However, cost consciousness means “having an awareness of costs and benefits”.

“Knowing how much different products and services cost, and not wanting to spend more money than is necessary” is being cost conscious .

Firms which are cost conscious are mindful at all times of the costs and benefits. They make important decisions based on accurate cost estimates upfront and again whenever additional changes occur.

However, “Cost Consciousness” is poorly understood and receives little attention. It is the responsibility of everyone in an organization to be mindful of cost consciousness.

So, what do we do to be cost conscious?

To develop a habit of cost consciousness, the primary requisite is knowing what costs are attributable to a product or a service and the value of benefits derived when the cost is incurred.

We must therefore know what cost is. Cost can not only be seen as an expense but it can also be seen as an investment.

Normally, cost is understood as an amount that has to be paid or spent to buy or obtain something. But, cost is a much broader concept.

It includes “the effort, loss, or sacrifice necessary to achieve or obtain something”. Such effort ,loss or sacrifice if is to be measured, has to be quantified and such quantification can be done by classifying them into various types of costs like direct, indirect, relevant, irrelevant, opportunity cost, tangible and intangible, etc.

Let us see an example for the same.

A developer has to make a choice about buying a testing tool “X” with some specifications. He claims that he would derive great value using it.

He says:

  • It would improve productivity
  • There would be fewer errors. The process would remove redundancy.
  • It would save 15 working hours of two testers per week.
  • The employees using it should undergo training for four months.

Upon analyzing we find that

  • It has a direct cost of INR 2, 00,000 pm which is the price of the tool.
  • The employees using it need to be trained on the same by an expert from outside for 4 months.
  • This results in incurring extra cost and also those working hours being spent on such training.

But if we compare the long term benefit we see that the cost incurred is less than the value derived.

  • Enhanced quality means standardization and reduced delivered defects.
  • Improved productivity (to be quantified).
  • Improved client satisfaction

Now that we know what the actual cost of “X” is, we may decide if the value derived out of it is worth the investment done. Hence, the cost involved in a particular matter may not be just the price on its face but the various indirect cost elements associated to it. Therefore, in a cost conscious organization, the question that one should ask while making a cost decision is not “Do we have a budget for this” but “Is this investment really creating a value?”

Conclusion: Cost consciousness means “having an awareness of costs and benefits”.  Cost can not only be seen as an expense but it can also be seen as an investment.

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