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Cost management ... in simple terms.

Cost managements can be defined as a monetary valuation of the resources consumed in an efficient and effective manner to achieve some goal and objective. Stephen Barth and Dawn Sedgley identify how the Army has utilized this definition of cost management to serve as the foundation for the continuous improvement of financial management.



Our ability to communicate relies heavily upon the utilization of various words and the meaning they convey. When discussing the topic of Cost Management there is often miscommunication due to different perceptions of the meaning of a simple word. A quick internet search on Cost Management illicits varying definitions and explanations; none of which suffice. For this reason, the Army initiated a very specific exercise to define the concept, the process, and the impact to those involved.

What is Cost Management--in simple terms? So that people from different backgrounds can gain some consensus on the topic? To answer that question requires the decomposition of the individual terms. Cost is the monetary value of a resource consumed (usually to produce something). (1) Easy enough. Management in business and organizations is the function that coordinates the efforts of people to accomplish goals and objectives using available resources efficiently and effectively. (2) Also simple, while addressing three key items:

1. Who--the function within business and organizations. Manager's managing the business and organizational operations exist throughout the entire entity.

2. What--using available resources efficiently and effectively.

3. Why--to accomplish goals and objectives. For the Army, the goal and objective is to provide the best value to its customers; be those external customers like the Joint Chiefs of Staff or internal such as inter-command support.

Both definitions contain the word "resource," so to be clear a resource is a supply of something that can be used in the production of an output (product or services). Typical resources that we are concerned with managing include labor, materials, supplies, land, equipment and assets. Combining "Cost" with "Management" therefore results in a monetary valuation of the resources consumed in an efficient and effective manner to achieve some goal and objective. And there you have it-simple enough.


As stewards of federal resources (taxpayer dollars) we are responsible to utilize resources as efficiently as possible regardless of our ever-changing environment. It is our responsibility to continuously improve our processes to meet all missions as efficiently and effectively as possible. Hence, for the Army, our ultimate purpose for managing cost is to ensure that we provide the most effective (ready, relevant, trained and equipped) Units to meet the mission at hand, whenever and wherever needed. This is at the very macro level, but to get to where the "tire meets the turf," continuous improvement (efficiency) happens at the ground level of our organizations. Managing cost, or the consumption of resources, can only be achieved at the operational level where the labor, materials, equipment, etc. are actually consumed. Efficiency and effectiveness only comes from managers being fully aware of their cost and actively trying to control them.

Because efficiency is focusing on least waste of effort many believe that Cost Management is cost reduction/savings (one potential result of the Cost Management process). However, cost is only one of the variables to be considered. The other variable is "output" which is where effectiveness comes into play. Managing cost is also about delivering an effective product or service. In the Army's line of business we cannot afford the lowest cost without regard to effectiveness. Therefore managing cost has to do with delivering the right product/services as efficiently as possible without risking failure of mission.

The purpose of the Cost Management process is to control the consumption of resources through cost planning, cost accounting, and cost analysis. It relies on what operations "did cost" which can be utilized to determine what operations "should cost." Should Costs are then often utilized to justify monetary requirements. The amount of money needed or planned is then further constrained by the Budget. What we are allowed to spend is a Budget, however budget and cost are definitely different.


If "Budget" is about what we are allowed to spend (resources available) within specific fiscal categories (Appropriation, Budget Activity, Program Element, Fiscal Year, etc.) and Cost is about resources consumed in producing products and services regardless of fiscal category, then they are understandably different. They often use the same language of money yet utilize the terms in very different ways. This difference is driven by the focus of each. See Table 1 which utilizes an Army Schoolhouse to see the potential for language confusion:
Table 1.

Budget versus Cost Language Confusion

Terms      Budget Focus           Example

Fixed      Fixed = Must fund      Civilian Payroll

Variable   Variable = May fund    Travel for Conference

Direct     Direct = Paid with     Contracted Instructors
           schoolhouse funds

Indirect   Indirect = Paid with   Military Instructors or Facility
           someone else's funds   Maint

Terms      Cost Management Focus         Example

Fixed      Fixed = costs which do not    Travel for Conference
           vary in proportion to the
           quantity of output

Variable   Variable = costs which vary   Civilian Payroll
           in proportion to the
           quantity of output

Direct     Direct = costs which are      Military & Contracted
           directly associated to the    Instructors
           output generated

Indirect   Indirect = costs which are    Facility Maint
           indirectly allocated to the
           output generated

Understanding the perspective of each monetary domain is key to reducing the confusion of a shared language. From this point forward, this article is referring to the Cost Management perspective.


The management process has three distinct perspectives which also apply for Cost Management: Strategic, Tactical, and Operational. Each perspective has different timelines, focuses, approaches and scope within an organization. See Table 2 Cost Perspective Comparison and example provided.

"Strategic Perspective" involves the formulation and implementation of major goals based on resources and an assessment of capability. It is longterm in nature looking into the out-years. This perspective sets overall direction, specifies the organization's objectives, develops policies and plans, and allocates resources to achieve the goals.

"Tactical perspective" translates the Strategic goals, capabilities, and resources available into specific actionable tasks, corresponding skills, and tools needed. The tactical perspective timeline is mid to short range. This perspective looks for inefficiencies, realignment of skills, agility, optimizations, etc.

"Operational Perspective" executes the day-to-day activities, with immediate impacts, and has a timeline within the year. This perspective is at the lowest level within the organization, focuses on the specific procedures, with high level of detail, to generate the outputs. This perspective looks for precision in execution, scheduling, task oriented skills, etc. It is at this level where we have the greatest opportunity to manage cost, because it is at this level that resources are consumed.


There are three key groupings of employees within an entity: Leaders, Managers and Workers (see Table 3 for Role Comparison). Workers focus on the specific tasks that are identified to generate the outputs of the various organizations. Workers have a consideration in the Cost Management processes; however, their main focus is the quality of execution of the tasks within already set paramenters. When looking at the roles that have the greatest influence for developing a culture of cost awareness, the key roles and responsibilities rests within Leadership and with Managers. Leaders focus on activities that are long-range in nature, focusing on what should be done and why. Leaders focus on doing the right thing and guide people to meeting that objective. Managers (Tactical and Operational) focus on overseeing and controlling the processes and procedures determined relevant to generate the output. Additionally they review and instruct the workers performing the specifics tasks. Managers' influence spans the resources needed, the processes executed, and the workers generating the outputs. This is why it is paramount for managers to be cost informed and accountable for efficiency and effectiveness of operations.

Managers often are split based on their focus; those that manage the flows of resources and output (Operation/Business Managers) and those that manage the monetary valuation of resources (Financial Managers.) Business Managers focus on activities such as planning, scheduling, tracking, and controlling the execution of work (schedule number of maintenance orders to be completed this week, corresponding number of materials needed and labor hours available by type of laborer). Financial Managers encompass Budget and Cost Analysts, System Accountants, Financial Accountants and others that look at the resulting financial impacts of the quantities generated and corresponding resources consumed. Leaders and Managers operate within the multiple Cost Management perspectives regularly. Exhibit 1 identifies examples of the Leadership and Managers Roles within Cost Management and example responsibilities within the Army across the various Cost Management Perspectives.


There are three primary enablers for change management: Technology, Processes, and People, all of which are currently being utilized in order for the Army to establish a culture around Cost Management.. Exhibit 2 identifies specific examples of these different types of enablers across the three Cost Management Perspectives.


The greatest impact to the ability to perform Cost Management has been technology. Over the past 25 years there has been an explosion of technological capabilities resulting in database consolidations, reduced storage costs, increased processing speeds, enhanced user interfaces, etc. The systematic ability to track the flow of business or production process facilitates the ability to control cost and optimize performance. Applying the monetary value to the quantities being tracked generated a corresponding expansion of Cost Management capabilities through cost accounting, analysis, and modeling systems. Enterprise Resource Planning (ERP) applications have now become the dominate platform of most businesses, automating the logistical flows with their corresponding financial transactions. ERPs function based on the premise that the operational non-financial quantities of the business are the backbone of the monetary valuation chain. While the primary driver of technology shifts was to garner IT savings; the capabilities of these platforms have generated far more information than previously available. The information expansion gives managers more insight to the impacts of decisions on current processes (scheduling of production orders impacts set-up and change over costs) and abilities to make cost valuated relationships to support analytical insight (e.g., cost to serve customer A versus B).

The Army is currently using and/or fielding several ERPs (GFEBS, GCSS-Army, LMP, and IPPS-A) to replace antiquated and expensive disparate legacy platforms. (3) The consolidation of hundreds of databases in functional silos has already provided greater visibility into the total costs of units and the relationships between organizations to support the generation of those units. The accessibility of a larger data set, which is more granular and real-time, is impacting the Army's cost awareness and facilitates decisions, such as how to reduce the budget while minimizing the risk to readiness.



Even with technologies in place, the culture will not take affect without implementing processes that transform the way decisions are made and business transpires. These process changes should cut across each perspective. We have already implemented a number of process changes in the Army that have created a resource-informed decision making organization (cost aware). We have an Army-wide policy of using Cost Benefit Analyses (CBA) in support of all major decisions at the Strategic level to include decisions involving materiel solutions, in-sourcing, concept plans, renewable energy, legislative proposals, stationing, etc. Policy, guidance and methodologies have been prepared for developing a CBA, Review and Approval, and Validation.

In the belief that "what gets measured gets done," metrics and measures should be addressed to fully understand if the culture is actually changing. To that end, we have develop a Cost Management Maturity Model that identifies strengths and weaknesses across the commands to determine where to focus more effort on implementation (e.g., training, leadership, personnel, etc).

Additionally, we cannot expect to fully utilize new technology or support personnel unless we provide proper training of the tools and techniques. The Army has developed training courses in numerous areas to include Cost Benefit Analysis, Cost Management Certification, and Cost courses at the Finance School, as well as many other tools that will support analytical needs. (4) This is all complemented by ERP (e.g., GFEBS) cost management training that instructs on both transactional tasks involved at every level, as well as how reporting supports the analytical needs for managing costs.


One cannot create a culture of cost management, without "people." That is, the culture requires people with the right motives, the right skills, the right training, and the right roles. The concept of managing cost does not occur in a box. It requires personnel at the strategic level to serve as the champion(s) for the cause, establish the vision and hold leaders accountable. Leaders at the tactical level must provide the oversight and ask the right "cost" probing questions. If leaders consistently ask cost questions, operational managers better realize the importance of cost and make more conscious efforts to understand costs and work to control them. Just as important, is that decision makers at every level are making cost informed decisions with accurate and relevant analysis to support them. Our ERP technology should help satisfy many of the needs we have today to reduce labor intensive efforts, such as, gathering data, preparing reports, and building charts, thus enabling more transition to analytical skills across the resource management community. These analytical skills can only be developed through training, guidance and future recruiting. This analytical void needs to be actively addressed now in preparation to meet future needs.

For people, or employees, to be motivated to manage cost they must have an incentive or be held accountable. Think of it as a "carrot" or a "stick." We believe it is not one or the other, but both. Individuals and organizations must be rewarded for being efficient and effective, and not penalized. A good cost management practice allows those whom are identifying and implementing efficiencies to be able to take advantage of them. This philosophy results in continuous improvement, and over time, the overall organization (Army) benefits from the reduced cost of requirements. However, at the same time leaders and managers should also be held accountable for achieving efficiencies or meeting cost targets. To really gain from cost management, we should establish goals for cost and output, measuring ourselves against those goals on a periodic basis and continuously working to improve. This is very similar to objectives of Lean Six Sigma operations.


Cost Management has been defined in simple terms to be the "controlling of resources consumed." Cost Management exists within the various Perspectives of management, i.e., Strategic, Tactical, and Operational. The primary roles and responsibilities are housed with operational managers. Supporting activities are facilitated by the Financial Managers and Leadership. Cost Management has been greatly enabled by technology providing greater access to data to make cost informed decision across all perspectives and areas of responsibilities. Cost Management processes have been developed to aide in control and optimization efforts. People can be enabled through organizational realignments, skills enhancements, and motivation.

For the Army, our ultimate purpose for managing cost is to ensure that we provide the most effective (ready, relevant, trained and equipped) Units to meet the mission at hand, whenever and wherever needed. As the fiscal environment changes, only through good cost management will we be able to effectively adapt through proactive vice reactive measures.


(1) The cost of resources that are available but not used is a topic for another article.

(2) Results for Management on as of April 13, 2014

(3) Acronyms spelled out are General Funds Enterprise Business System (GFEBS), Global Combat Support System- Army (GCSS-Army), Logistics Modernization Program (LMP), and Integrated Personnel and Pay System-Army (IPPS-A)

(4) Example courses provided at Army Finance School Principles of Cost Analysis and Management (PCAM) and Intermediate Cost Analysis and Management (ICAM)


Stephen is the Deputy Assistant Secretary of the Army for Cost and Economics, ASA(FM&C). He is responsible for Army policy and technical direction of all cost and economic activities. He has over 25 years of experience in Cost Analysis and Financial Management, is a Graduate of the Syracuse Defense Comptrollership Program, and is Level III Acquisition Certified.


Dawn is contract support to DASA-CF from Alta Via Consulting, LLC. Ms. Sedgley has two decades of experience deploying Cost Management in commercial and federal entities utilizing stand-alone costing applications and FRP platforms.
Table 2.

Cost Perspective Comparisons

Category   Strategic                     Tactical

Timeline   Long-range (Out-Year)         Mid-to Short Range

Focus      What and Why                  How and Who

Approach   Fundamental and Directional   Practical and Specific

Scope      Entire Business Entity        Organizations and Processes

Example    Readiness Level should be X   Optimize Training Schedule
           given fiscal environment      to Meet X Level Readiness

Category   Operational

Timeline   Day-to-Day

Focus      When and How Well

Approach   Exact Execution

Scope      Tasks and Outputs

Example    Optimal Qty of Training
           Ammo Issued at Event 1

Table 3.

Role Comparison

Category    Leaders           Managers          Workers

Timeline    Long-range        Short-range       Daily

Focus       What and Why      How and When      Individual Task

Approach    Guides or         Oversees or       Executes
            Stewards          Controls

Objective   Effective=Doing   Efficient=Doing   Produce Output
            the Right Thing   Things Right

Exhibit 1.

Cost Management Roles Across Perspectives

                              Roles within Cost Management
Cost Management
Perspectives                           Leadership

Strategic         * Establish Cost Vision & Strategy
                  * Define Requirment/Capabilites (Products/Services)
                  * Champion the Message

Tactical          * Holding Mgmt Accountable to Cost Goals
                  * Establishing Command CM Practices
                  * Assessing Periodic

Operational       * Benchmarking to Best Practices
                  * Taking Corrective Actions
                  * Adjusting Plans, Resources, and Output

                              Roles within Cost Management
Cost Management
Perspectives                       Financial Managers

Strategic         * Establish Costing Policy, Guidance and Methods
                  * Define Army-wide Cost Framework/Model
                  * Cost & Performance Reports & Metrics

Tactical          * Cost Assigments and Allocations
                  * Conduct Analysis (Variance. Plan vs Actual)
                  * Run Reports (Cost & Performance)

Operational       * Analyze Cost Reports
                  * Review and Adjust Product, Service and Activity
                  * Assess Targets (Input & Output) aid Capacity

                              Roles within Cost Management
Cost Management
Perspectives                       Business Managers

Strategic         * Determine Alternatives for Providing Products and
                    Services (make/buy)

Tactical          * Make Investment Decisions (e.g. Replace Equipment)
                  * Schedule Workload (Products/Services)
                  * Manage Capacity

Operational       * Identify Inefficiencies
                  * Implement Process Improvements
                  * Measure Effectiveness
                  * Evaluate Cost Targets

Exhibit 2.

Cost Management Enablers Across Perspectives

                         Enablers of Costs Management
Cost Management
Perspectives                        People

Strategic         * Cost Mgmt Champion
                  * Cost Proponent & Technical Advisor
                  * Functional Champions

Tactical          * Management Oversight
                  * Cost Modelers
                  * Cost Aware Managers with Analysis Skills

Operational       * Operational (Business) Managers
                  * Employees with Analysis Skills

                         Enablers of Costs Management
Cost Management
Perspectives                       Proceses

Strategic         * CM Strategic Plan
                  * Cost Benefit Analysis Policy & Guidance
                  * Cost Mgmt Maturity Model

Tactical          * Cost Mgmt Handbook
                  * Cost Benefit Analysis Review Board
                  * Periodic Cost Mgmt Reviews
                  * Lean-Six Sigma

Operational       * Cost Mgmt Training
                  * CBA Handbook
                  * ERP Controlling Model Training

                         Enablers of Costs Management
Cost Management
Perspectives                     Technologies

Strategic         * Enterprise Resource Planning (ERP) BI

Tactical          * ERP (GFEBS, GCSS-A, LMP,..) Systems
                  * CBA Workflow Tool
                  * Cost Mgmt Knowledge Center

Operational       * ERP (GFEBS. GCSS-A, LMP,..)
                  * CBA Workflow (Cost & Performance Portal)
                  * Cost Mgmt Knowledge Center
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Author:Barth, Stephen; Sedgley, Dawn
Publication:Armed Forces Comptroller
Date:Mar 22, 2014
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