What Is a Cost Trend Analysis?

In the corporate context, cost trend analysis happens against the backdrop of manufacturing evaluation and profit management. Senior leadership works in tandem with department heads to root lingering inefficiencies out of internal mechanisms, fix broken processes, find ways to save money and cut expenses without sacrificing the company’s long-term commercial goals.

Cost trend analysis incorporates various efforts a corporation spearheads to monitor how much it spends overall, identify units that bleed money and those that post rosy returns, and foresee internal resentments over budgeting unfairness that could fester over time. This might happen if the leaders of a money-making segment view as unfair top leadership's call for cost cuts across the board, particularly if these reductions would serve to prop up the operating position of cash-bleeding units, which for a long time haven't delivered positive returns for the organization. As an organization-wide initiative, cost trend analysis touches on every expense type -- running the gamut from production and shipping costs to selling, administrative and general charges.

Various personnel help department heads analyze cost trends and figure out the best and quickest way to shed expenses where needed. Cost accountants and budget managers enable a business to produce affordable products, anticipating the depth of the opposition the company might face if customers deem its merchandise too costly and not adapted to marketplace trends. Salespeople and marketing specialists translate a company's cost evaluation into revenue terms, determining the markup the business must set to derive a minimum revenue level -- or, at least, break even in its major markets. Human resources managers also weigh in on cost trend analysis, working in tandem with segment chiefs to implement top leadership's budgeting recommendations, especially with staff cost management and attrition rate monitoring.

Corporate personnel display varied skills when analyzing cost trends, calculating ratios and preparing a statement of profit and loss, or P&L. Also called an income statement, a P&L chronicles how a business fared over a given period -- telling readers whether the company made money, how much it made and what its aggregate expenses were at period-end. Skills used in cost trend analysis include mathematical dexterity, cost management flair and attention to detail. Effective communication skills also help, especially when it comes to translating the cost management patois into language that top leadership can understand and use to make strategic decisions.

A company that soundly analyzes its costs -- and cost trends, for that matter -- is more likely to understand factors that affect its bottom line. With this knowledge, the business can anticipate negative results by shedding expenses, saving enough money along the way -- a good move, because sound liquidity levels go a long way toward assuring a solid solvency situation.