Cost Management – analyzing the costs of purchased goods in order to develop strategies to lower costs while improving supplier relationships. The following table is from a paper written by Lisa Ellram entitled “A Structured Method for Applying Purchasing Cost Management Tools.” The article was published by the International Journal of Purchasing and Materials Mangement 11-19. I highly recommend reading this article.
Questions to be Addressed During Cost Analysis/Overhead Analysis
1. Which costs are necessary and legitimate?
2. Are amounts estimated for the necessary cost items reasonable?
3. Is the overhead allocation to this item potentially subsidizing another item which the organization sells?
4. Have the correct allocation bases been used? If not, is it to our benefit to challenge the allocation methods?
5. Are only those expenses which should be allocated to our purchase so allocated?
6. Are there allowances for contingencies? Do these allowances seem legitimate?
7. Are profits reasonable enough, yet not excessive, to keep the supplier motivated?
Order Cost = (Annual Demand * Order Cost)/Order Quantity in Units
Purchasing Cost = Annual Demand * Price per unit
Total cost = Ordering Cost + Carrying Cost + Purchasing Cost