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Cost Management

Cost Control

Management Cost and Control System (MCCS)

Understanding Control

Operating Cycle

Cost Account Codes


40.1 Cost Management:

It is widely used in business today and is the process whereby companies use cost accounting to

report or control various costs of doing business. Cost Management generally describes

approach and activities of managers in short range and long range planning and cost decisions

that incorporate value for customer and lower costs of product and services.

Manager make decisions on amount and kind of material used, changes of plant processes,

changes in product designs and information from accounting system helps managers make such

decisions, but information and accounting system not “cost management” project cost

management broad focus includes continuous control of costs. Planning and cost is usually

linked with revenue and profit planning.

In the context of project:

Cost management involves overall planning, co-ordination, and control and reporting of all

cost-related aspects from “project initiation” to “operation and maintenance”.

Process of identifying all costs associated with investment, making informed choices about

options that will deliver best “value for money” and managing those costs throughout life of

project. Techniques (value management) help to improve value and reduce costs.

40.2 Cost Control:

Cost control is equally important to all companies, regardless of size. Small companies

generally have tighter monetary controls, mainly because of the risk with the failure of as little

as one project, but with less sophisticated control techniques. Large companies may have the

luxury to spread project losses over several projects, whereas the small company may have few


Cost control is not only "monitoring" of costs and recording perhaps massive quantities of data,

but also analyzing of the data in order to take corrective action before it is too late. Cost control

should be performed by all personnel who incur costs, not merely the project office. Cost

control implies good cost management, which must include:

  • Cost estimating
  • Cost accounting
  • Project cash flow
  • Company cash flow
  • Direct labor costing
  • Overhead rate costing
  • Others, such as incentives, penalties, and profit-sharing

40.3 Management Cost and Control System (MCCS):

Cost control is actually a subsystem of the Management Cost and Control System (MCCS)

rather than a complete system per se. This is shown in Figure 40.1, where the Management Cost

and Control System (MCCS) is represented as a two cycle process: a planning cycle and an

operating cycle. The operating cycle is what is commonly referred to as the cost control system.

Failure of a cost control system to accurately describe the true status of a project does not

necessarily imply that the cost control system is at fault. Any cost control system is only as

good as the original plan against which performance will be measured. It is more common for

the plan to be at fault than the control system.

Figure 40.1: Phases of a Management Cost and Control System

Therefore, the designing of a company's planning system must take into account the cost control

system as well. For this reason, it is common for the planning cycle to be referred to as

planning and control, whereas the operating cycle is referred to as cost and control.

Note that the planning and control system selected must be able to satisfy management's needs

and requirements in order that they can accurately project the status toward objective

completion. The purpose of any management cost and control system is to establish policies,

procedures, and techniques that can be used in the day-to-day management and control of

projects and programs. The planning and control system must, therefore, provide information


  • Gives a picture of true work progress
  • Will relate cost and schedule performance
  • Identifies potential problems with respect to their sources.
  • Provides information to project managers with a practical level of summarization

Demonstrates that the milestones are valid, timely, and auditable

The planning and control system, in addition to being a tool by which objectives can be defined

that is hierarchy of objectives and organization accountability, exists as a tool to develop

planning, measure progress, and control change. As a tool for planning, the system must be able


  • Plan and schedule work
  • Identify those indicators that will be used for measurement
  • Establish direct labor budgets
  • Establish overhead budgets
  • Identify management reserve

The project budget that is the final result of the planning cycle of the MCCS must be

reasonable, attainable, and based on contractually negotiated costs and the statement of work.

The basis for the budget is historical cost, best estimates, or industrial engineering standards.


The budget must identify planned manpower requirements, contract-allocated funds, and

management reserve. Establishing budgets requires that the planner fully understand the

meaning of standards.

We should know that there are two categories of standards. Performance results standards are

quantitative measurements and include such items as quality of work, quantity of work, cost of

work, and time-to-complete. Process standards are qualitative, including personnel, functional,

and physical factors relationships.

Standards are advantageous in that they provide a means for unity, a basis for effective control,

and an incentive for others. The disadvantage of standards is that performance is often frozen,

and employees are quite often unable to adjust to the differences. As a tool for measuring

progress and controlling change, the systems must be able to:

  • Measure resources consumed
  • Measure status and accomplishments
  • Compare measurements to projections and standards
  • Provide the basis for diagnosis and re-planning

In using the Management Cost and Control System (MCCS), the following guidelines

usually apply:

The level of detail is specified by the project manager with approval by top management.

Centralized authority and control over each project are the responsibility of the project

management division.

For large projects, the project manager may be supported by a project team for utilization of

the Management Cost and Control System (MCCS).

Almost all project planning and control systems have identifiable design requirements.

These include:

  • A common framework from which to integrate time, cost, and technical performance
  • Ability to track progress of significant parameters
  • Quick response
  • Capability for end-value prediction
  • Accurate and appropriate data for decision making by each level of management
  • Full exception reporting with problem analysis capability
  • Immediate quantitative evaluation of alternative solutions
Management Cost and Control System (MCCS) planning activities include:
  • Contract receipt (if applicable)
  • Work authorization for project planning
  • Work breakdown structure (WBS)
  • Subdivided work description
  • Schedules
  • Planning charts
  • Budgets

Management Cost and Control System (MCCS) planning charts are worksheets used to create

the budget. These charts include planned labor in hours and material dollars. Management Cost

and Control System (MCCS) planning is accomplished in one of these ways:

  • One level below the lowest level of the Work Breakdown Structure (WBS)
  • At the lowest management level
  • By cost element or cost account

Even with a fully developed planning and control system, there are numerous benefits and costs.

The appropriate system must consider a cost-benefit analysis, and include such items as:

Project benefits:

o Planning and control techniques facilitate:

— Derivation of output specifications (project objectives)

— Delineation of required activities (work)

— Coordination and communication between organizational units

— Determination of type, amount, and timing of necessary resources

— Recognition of high-risk elements and assessment of uncertainties

— Suggestions of alternative courses of action

— Realization of effect of resource level changes on schedule and output


— Measurement and reporting of genuine progress

— Identification of potential problems

— Basis for problem solving, decision making, and corrective action

— Assurance of coupling between planning and control

Project cost:

o Planning and control techniques require:

— New forms (new systems) of information from additional sources and

incremental processing (managerial time, computer expense, etc.)

— Additional personnel or smaller span of control to free managerial time for

planning and control tasks (increased overhead)

— Training in use of techniques (time and materials)

A well-disciplined Management Cost and Control System (MCCS) will produce the

  • following results:
  • Policies and procedures that will minimize the ability to distort reporting
  • Strong management emphasis on meeting commitments
  • Weekly team meetings with a formalized agenda, action items, and minutes.
  • Top-management periodic review of the technical and financial status
  • Simplified internal audit for checking compliance with procedures

Furthermore, for Management Cost and Control System (MCCS) to be effective, both the

scheduling and budgeting systems must be disciplines and formal in order to prevent

inadvertent or arbitrary budget or schedule changes. This does not mean that the baseline budget

and schedule, once established, is static or inflexible. Rather, it means that changes must be

controlled and result only from deliberate management actions.

Disciplined use of Management Cost and Control System (MCCS) is designed to put pressure

on the project manager to perform exceptionally good project planning so that changes will be

minimized. As an example, government subcontractors may not:

  • Make retroactive changes to budgets or costs for work that has been completed.
  • Re-budget work-in-progress activities
  • Transfer work or budget independently of each other
  • Reopen closed work packages

In some industries, the Management Cost and Control System (MCCS) must be used on all

contracts of $2 million or more, including firm fixed-price efforts. The fundamental test of

whether to use the MCCS is to determine whether the contracts have established end-item

deliverables, either hardware or computer software, that must be accomplished through

measurable efforts.


Currently, two new programs are being used by the government and industry in conjunction

with the Management Cost and Control System (MCCS) as an attempt to improve effectiveness

in cost control. The zero-base budgeting program was established to provide better estimating

techniques for the verification portion of control. The design-to-cost program assists the

decision-making part of the control process by identifying a decision-making framework from

which re-planning can take place.

40.4 Understanding Control:

Effective management of a program during the operating cycle requires that a well-organized

cost and control system be designed, developed, and implemented so that immediate feedback

can be obtained, whereby the up-to-date usage or resources can be compared to target objectives

established during the planning cycle. The requirements for an effective control system (for

  • both cost and schedule/performance) should include:
  • Thorough planning of the work to be performed to complete the project
  • Good estimating of time, labor, and costs
  • Clear communication of the scope of required tasks
  • A disciplined budget and authorization of expenditures
  • Timely accounting of physical progress and cost expenditures
  • Periodic re-estimation of time and cost to complete remaining work
  • Frequent, periodic comparison of actual progress and expenditures to schedules and

budgets, both at the time of comparison and at project completion

It is essential that the management must compare the time, cost, and performance of the

program to the budgeted time, cost, and performance, not independently but in an integrated

manner. Being within one's budget at the proper time serves no useful purpose if performance is

only 75 percent. Likewise, having a production line turn out exactly 200 items, when planned,

loses its significance if a 50 percent cost overrun is incurred.

All three resource parameters (time, cost, and performance) must be analyzed as a group, or else

we might ''win the battle but lose the war." The use of the expression "management cost and

control system" is vague in that the implication is made that only costs are controlled. This is

not true— an effective control system monitors schedule and performance as well as costs by

setting budgets, measuring expenditures against budgets and identifying variances, assuring that

the expenditures are proper, and taking corrective action when required.

Previously, we defined the Work Breakdown Structure (WBS) as the element that acts as the

source from which all costs and controls must emanate. The Work Breakdown Structure (WBS)

is the total project broken down into successively lower levels until the desired control levels

are established. The Work Breakdown Structure (WBS) therefore serves as the tool from which

performance can be subdivided into objectives and sub-objectives. As work progresses, the

WBS provides the framework on which costs, time, and schedule/performance can be compared

against the budget for each level of the WBS.

The first purpose of control therefore becomes a verification process accomplished by the

comparison of actual performance to date with the predetermined plans and standards set forth

in the planning phase. The comparison serves to verify that:

The objectives have been successfully translated into performance standards.

The performance standards are, in fact, a reliable representation of program activities and


Meaningful budgets have been established such that actual versus planned comparisons can

be made.


In other words, the comparison verifies that the correct standards were selected, and that they

are properly used. The second purpose of control is that of decision making. Three useful

reports are required by management in order to make effective and timely decisions:

The project plan, schedule, and budget prepared during the planning phase.

A detailed comparison between resources expended to data and those predetermined. This

includes an estimate of the work remaining and the impact on activity completion.

A projection of resources to be expended through program completion.

Afterwards, these reports are then supplied to both the managers and the doers. Three useful

results arise through the use of these three reports, generated during a thorough decision-making

stage of control:

Feedback to management, the planners, and the doers.

Identification of any major deviations from the current program plan, schedule, or budget.

The opportunity to initiate contingency planning early enough that cost, performance, and

time requirements can undergo corrected action without loss of resources.

These reports, if properly prepared, provide management with the opportunity to minimize

downstream changes by making proper corrections here and now. As shown in Figures 40.2

and 40.3, possible cost reductions are usually available more readily in the early project

phases, but are reduced as we go further into the project life-cycle phases. Downstream the

cost for changes could easily exceed the original cost of the project. This is an example of

the "iceberg" syndrome, where problems become evident too late in the project to be solved

easily, resulting in a very high cost to correct them.

Figure 40.2: Cost Reduction Analysis

Figure 40.3: Ability to Influence Cost


40.5 Operating Cycle:

The Management Cost and Control System (MCCS) takes on paramount importance during the

operating cycle of the project. The operating cycle is composed of four phases:

  • Work authorization and release (phase II)
  • Cost data collection and reporting (phase III)
  • Cost analysis (phase IV)
  • Reporting: customer and management (phase V)

These four phases, when combined with the planning cycle (phase I), constitute a closed system

network that forms the basis for the management cost and control system.

Phase II is considered as work release. After planning is completed and a contract is received,

work is authorized via a work description document. The work description, or project work

authorization form, is a contract that contains the narrative description, organization, and time

frame for each Work Breakdown Structure (WBS) level. This multipurpose form is used to

release the contract, authorize planning, record detail description of the work outlined in the

Work Breakdown Structure (WBS), and release work to the functional departments.

Note that the contract services may require a work description form to release the contract. The

contractual work description form sets forth general contractual requirements and authorizes

program management to proceed.

Program management may then issue a subdivided work description form to the functional units

so that work can begin. The subdivided work description may also be issued through the

combined efforts of the project team, and may be revised or amended when either the scope of

time frame changes. The subdivided work description generally is not used for efforts longer

than ninety days and must be "tracked" as if a project in itself. This subdivided work description

form sets forth contractual requirements and planning guidelines for the applicable performing


Also, the subdivided work description package established during the proposal and updated

after negotiations by the program team is incrementally released by program management to the

work control centers in manufacturing engineering, publications, and program management as

the authority for release of work orders to the performing organizations. The subdivided work

description specifies how contractual requirements are to be accomplished, the functional

organizations involved, and their specific responsibilities, and authorizes the expenditure of

resources within a particular time frame.

The work control center assigns a work order number to the subdivided work description form,

if no additional instructions are required, and releases the document to the performing

organizations. If additional instructions are required, the work control center can prepare a more

detailed work release document (shop traveler, tool order, work order release), assign the

applicable work order number, and release it to the performing organization.

In addition to this, a work order number is required for all in-house direct and indirect charging.

The work order number also serves as a cross-reference number for automatic assignment of the

indentured work breakdown structure number to labor and material data records in the


In case of small companies, they can avoid this additional paperwork cost by going

directly from an awarded contract to a single work order, which may be the only work

order needed for the entire contract.

40.6 Cost Account Codes:

It must be noted that since project managers control resources through the line managers rather

than directly, project managers end up controlling direct labor costs by opening and closing

work orders. Work orders define the charge numbers for each cost account. By definition, a cost

account is an identified level at a natural intersection point of the work breakdown structure and

the Organizational Breakdown Structure (OBS) at which functional responsibility for the work

is assigned, and actual direct labor, material, and other direct costs are compared with actual

work performed for management control purposes.

Cost accounts are the focal point of the Management Cost and Control System (MCCS) and

may comprise several work packages, as shown in Figure 40.4. Work packages are detailed

short –span job or material items identified for the accomplishment of required work. To

illustrate this, consider the cost account code breakdown shown in Figure 40.5 and the work

authorization form shown in Figure 40.6. The work authorization form specifically identifies the

cost centers that are "open" for this charge number, the man-hours available for each cost

center, and the operational time period for the charge number. Because the exact dates of

operation are completely defined, the charge number can be assigned perhaps as much as a year

in advance of the work-begin date. This can be shown pictorially, as in Figure 40.7.

Figure 40.4: Cost Account Intersection

If the man-hours are assigned to cost center 2400, then any 24xx cost center can use this charge

number. If the work authorization form specifies cost center 2610, then any 261x cost center

can use the charge number.

However, if cost center 2623 is specified, then no lower cost accounts exist, and this is the only

cost center that can use this work order charge number. In other words, if a charge number is

opened up at the department level, then the department manager has the right to subdivide the

assigned man-hours among the various sections and subsections.

Company policy usually identifies the permissible cost center levels that can be assigned in the

work authorization form. These permissible levels are related to the work breakdown structure

level. For example, cost center 5000 (i.e., divisional) can be assigned at the project level of the

work breakdown structure, but only department, sectional, or sub-sectional cost accounts can be

assigned at the task level of the work breakdown structure.


If a cost center needs additional time or additional man-hours, then a cost account change notice

form must be initiated, usually by the requesting cost center, and approved by the project office.

The following Figure 40.8 shows a typical cost account change notice form.


Cost Account Change Notice (CACN)

Almost all large companies have computerized cost control and reporting systems. Small

companies have manual or partially computerized systems. The major difficulty in using the

cost account code breakdown and the work authorization form (shown in Figures 40.5 and 40.6)

is related to whether the employees fill out time cards, and frequency with which the time cards

are filled out.

Project-driven organizations fill out time cards at least once a week, and the cards are inputted

to a computerized system. Non–project-driven organizations fill out time cards on a monthly

basis, with computerization depending on the size of the company.

Cost data collection and reporting constitute the second phase of the operating cycle of the

Management Cost and Control System (MCCS). Actual cost for work performed (ACWP)and

the budgeted cost for work performed (BCWP) for each contract or in-house project are

accumulated in detailed cost accounts by cost center and cost element, and reported in

accordance with the flow charts shown in Figure 40.9. These detailed elements, for both actual

costs incurred and the budgeted cost for work performed, are usually printed out monthly for all

levels of the work breakdown structure. In addition, weekly supplemental direct labor reports

can be printed showing the actual labor charge incurred, and can be compared to the predicted


Figure 40.9: Cost Data Collection and Reporting Flow Chart

The following Table 40.1 shows a typical weekly labor report. The first column identifies the

Work Breakdown Structure (WBS) number. If more than one work order were assigned to this

Work Breakdown Structure (WBS) element, then the work order number would appear under

the WBS number. This procedure would be repeated for all work orders under the same WBS

number. The second column contains the cost centers charging to this WBS element (and

possibly work order numbers). Cost Center 41xx represents department 41 and is a rollup of

Cost Centers 4110, 4115, and 4118. Cost Center 4xxx represents the entire division and is a


rollup of all 4000-level departments. Cost Center xxxx represents the total for all divisions

charging to this Work Breakdown Structure (WBS) element. The weekly labor reports must list

all cost centers authorized to charge to this WBS element, whether or not they have incurred

any costs over the last reporting period.

Weekly Labor Report

Note that most weekly labor reports provide current month subtotals and previous month totals.

Although these also appear on the detailed monthly report, they are included in the weekly

report for a quick and dirty comparison. Year-to-date totals are usually not on the weekly report

unless the users request them for an immediate comparison to the estimate at completion (EAC)

and the work order release.

Weekly labor output is a vital tool for members of the program office in that these reports can

indicate trends in cost and performance in sufficient time for contingency plans to be

established and implemented. If these reports are not available, then cost and labor overruns

would not be apparent until the following month when the detailed monthly labor, cost, and

materials output was obtained. In Table 40.1, Cost Center 4110 has spent its entire budget. The

work appears to be completed on schedule. The responsible program office team may wish to

eliminate this cost center's authority to continue charging to this Work Breakdown Structure

(WBS) element by issuing a new SWD or work order canceling this department's efforts. Cost

Center 4115 appears to be only halfway through.

If time is becoming short, then Cost Center 4115 must add resources in order to meet

requirements. Cost Center 4443 appears to be heading for an overrun. This could also indicate a

management reserve. In this case the responsible program team member feels that the work can

be accomplished in fewer hours.

Work order releases are used to authorize certain cost centers to begin charging their time to a

specific cost reporting element. Work orders specify hours, not dollars. The hours indicate the

''targets" that the program office would like to have the department shoot for. If the program

office wished to be more specific and "compel" the departments to live within these hours, then

the budgeted cost for work scheduled (BCWS) should be changed to reflect the reduced hours.

Four categories of cost data are normally accumulated:

  • Labor
  • Material
  • Other direct charges
  • Overhead

We know that the project managers can maintain reasonable control over labor, material, and

other direct charges.

On the other hand, overhead costs are calculated yearly or monthly and applied retroactively to

all applicable programs. Management reserves are often used to counterbalance the effects of

adverse changes in overhead rates.

40.7 Budgets:

The project budget, which is the final result of the planning cycle of the Management Cost and

Control System (MCCS), must be reasonable, attainable, and based on:

Contractually negotiated costs, and

The statement of work

The basis for the budget is:

Historical cost,

Best estimates, or

Industrial engineering standards

The budget must identify:

Planned manpower requirements,

Contract allocated funds, and

Management reserve.

All budgets must be traceable through the budget "log," which includes:

Distributed budget

Management reserve

Undistributed budget

Contract changes

It is important to note that the management reserve is the dollar amount established by the

project office to budget for all categories of unforeseen problems and contingencies resulting in

out-of-scope work to the performers. Management reserve should be used for tasks or dollars,

such as rate changes, and not to cover up bad planning estimates or budget overruns. When a

significant change occurs in the rate structure, the total performance budget should be adjusted.

In addition to the "normal" performance budget and the management reserve budget, there also

exists the following:

Undistributed budget, which is that budget associated with contract changes where time

constraints prevent the necessary planning to incorporate the change into the performance

budget. (This effort may be time-constrained.)

Unallocated budget, which represents a logical grouping of contract tasks that have

not yet been identified and/or authorized.


A variance is defined as any schedule, technical performance, or cost deviation from a specific

plan. Variances are used by all levels of management to verify the budgeting system and the

scheduling system. The budgeting and scheduling system variance must be compared together


The cost variance compares deviations only from the budget and does not provide a

measure of comparison between work scheduled and work accomplished.


The scheduling variance provides a comparison between planned and actual performance

but does not include costs.

There are two primary methods of measurement:

Measurable efforts: Discrete increments of work with a definable schedule for

accomplishment, whose completion produces tangible results.

Level of effort: Work that does not lend itself to subdivision into discrete scheduled

increments of work, such as project support and project control.

Variances are used on both types of measurement:

In order to calculate variances we must define the three basic variances for budgeting and actual

costs for work scheduled and performed. Archibald defines these variables:

Budgeted cost for work scheduled (BCWS) is the budgeted amount of cost for work

scheduled to be accomplished plus the amount or level of effort or apportioned effort

scheduled to be accomplished in a given time period.

Budget cost for work performed (BCWP) is the budgeted amount of cost for completed

work, plus budgeted for level of effort or apportioned effort activity completed within a

given time period. This is sometimes referred to as "earned value."

Actual cost for work performed (ACWP) is the amount reported as actually expended in

completing the work accomplished within a given time period.

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