© 2022 JETIR April 2022, Volume 9, Issue 4 www.jetir.

org (ISSN-2349-5162)

Emerging Strategic Cost Management Trends for

Effective Cost Management in the Present Scenario
Dr. Sadyojathappa S
Associate Professor, Department of Studies in Commerce,
Vijayanagara Sri Krishnadevaraya University, Ballari-583105

Abstract

Despite vast changes in business and technology over the past five decades, the traditional costing
practises used by most companies today have failed to evolve. Information provided by traditional costing
methods like unit costing, output costing, job costing, process costing, standard costing, marginal costing, etc.,
does not effectively support critical management decisions. In the present market scenario, mere cost control
is not enough and a company needs to concentrate on strategically managing costs. Today, companies are
facing competition not only from domestic companies but also from international companies. They need to
swim against benign winds, and offering the best quality at the lowest price is a common phenomenon among
the top leaders in the market. Market-driven strategies play a vital role, whereby a company should be capable
of launching a product that suits the target market. Product differentiation with a view to covering various
customer groups is also one of the strategies to grab the market at national and international levels.
Sustainable competitive advantage is playing a significant role. The present study throws light on various
emerging strategies for cost management techniques that not only help in reducing the cost but also improve
the overall performance of the company and simultaneously help to offer the product at a lower price with the
best quality. The researcher used secondary data for the analytical study of emerging trends in strategic cost
management.

Key words: Cost, Strategic Cost Management, Techniques, and Trends

Introduction
Strategic Cost Management (SCM) plays a significant role in managing the cost of an organization in a
systematic and logical manner. It is the application of cost management techniques that simultaneously
improve the strategic position and reduce the cost. With this approach, costs, especially overhead costs, are
analysed to a broader extent with the help of cost management techniques. It facilitates more accurate
accounting data so management can take more realistic decisions. Strategic cost management is the
implementation of cost management strategies to boost a company’s strategic position as well as control its
costs. It also deals with combining cost information with the system for decision-making to support the
organizational strategy as a whole. It is not only restricted to controlling costs but also extends its scope to the
use of cost information for decision-making purposes by the management.

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The methods of cost management should be such that they strengthen an enterprise’s strategic position
apart from concentrating on cost control. The basic goal of strategic cost management is to help the company
achieve a competitive advantage in a sustainable manner through product differentiation and cost leadership.
Strategic cost management focuses more on continuous enhancement to provide consumers with superior
quality products. Strategic cost management in India needs to be part and parcel of the value chain. This must
cover all aspects of production, procurement, design, manufacturing, distribution, and operation. Thus, in the
field of strategic cost management, most studies in the literature concentrate on the application of cost
management instruments for the overall improvement in the performance of an organisation. Indeed, it is
important to include strategic cost management at the early stages of a product development process to reduce
high failure costs.

The Objectives of the Study

 To know the emerging trends and techniques in strategic cost management

 To study and provide a basic guideline to those companies who plan to undergo cost analysis as a part
of strategic analysis.

Methodology

The present study is descriptive in nature and based on secondary data. The secondary data has been collected
from journals, periodicals, and reference books.

Scope of the study

This study will serve as a guideline for those companies who have decided to apply cost management as a part
of their strategy. It extends the discussion to cover techniques and trends in SCM that are strategically
important to improve strategic positioning by improving the overall cost. This study may be followed by
companies and other business or non-business organizations where cost and management accounting is in
practice either as a statutory obligation or to support management decision making process.

Strategic Cost Management Concept

Strategic cost management is important to organizations because it focuses more on costs than anything else.
In the successful companies of the 21st century, costs will not be the only important factor, but also value and
revenue, which are considered critical factors in the success of companies. At this point, the researcher
advocates that strategic cost management is a philosophy, an attitude, and a set of techniques to contribute in
shaping the future of the company. (See Figure 1).

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Set of
Techniques

Philosophy Attitude

Figure 1: Strategic Cost Management Concept

Philosophy: Strategic cost management is a philosophy of improving cost and revenue; strategic cost
management is not only cost management but also revenue management, therefore, it is seeking to improve
productivity, maximize profit, and improve customer satisfaction. This philosophy plays a vital role in
determining the future of the company because it promotes the idea of continually finding ways to help
organizations make the right decisions to create more customer value at lower cost.
Attitude: Strategic cost management represents a proactive attitude that all the costs of the products and
services result from management decisions within the company and with customers and suppliers.
Techniques: Strategic cost management is a set of reliable techniques. These techniques or instruments may
be used individually to support a specific goal or together to serve the overall needs of the organization. A set
of strategic cost-management techniques that function together to support the organization's goals and
activities is called a strategic cost-management system
The Defect of Traditional Costing System
• Typically used one rate to allocate overhead to products.
• This rate was often based on direct labour cost or direct labour hours or machine hours worked.
• For job order costing, overheads cost absorption rates are normally based on direct labour cost or
direct labour hours.
• For process costing, overheads cost absorption rates are normally based on machine hours worked.
• This results in over-costing or under-
Results of the defect

• Each product appeared to cost the same, as far as overhead cost is concerned.
• Products with high profit margins subsidized products with low profit margins.
• In-accurate cost accumulation led to inaccurate profit planning of products.
• A product cannot compete in the market if its cost is not accurately accumulated and reflected in
costing records.

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The following table makes a clear demarcation between traditional cost management and strategic cost
management.
Traditional Cost Management Strategic Cost Management
1. Cost Control & Cost Reduction 1. Cost Management
2. Reducing direct cost, Advertising cost, 2. Increasing performance
Marketing cost etc. - Output increasing
- Activities of no use to be stopped.
3. Focus on internal factors 3.Focus on external factors
- Suppliers
- Competitors strategy
4. Repair of machine when it breaks down 4. Continuous preventive maintenance
5. Focus on achieving Targets 5. Focus on Value Chain Analysis

Trends and Techniques of strategic cost management

The following trends and techniques need to be adopted by the manufacturing and service companies to
overall improvement. The important techniques are;
a. Activity Based Costing (ABC): ABC is a cost attribution to cost units on the basis of benefit received
from indirect activities.It has been developed in order to overcome the inadequacies of conventional
method of overhead absorption. It is an accounting methodology that focuses on activities as the
fundamental cost of a cost object rather than the products or services. It is based on two premises.
Activities consume resources and products use activities.

Need for ABC

100

50

0
1 2 3 4
As the business grows overhead takes a larger pie in the total cost of the product and hence it is important to
charge it accurately and more scientifically.
Tracing Cost to Activities

This step is to identify major activities that cause/drive overhead costs to be incurred. Some of the activities
are related to production volume (such as production runs, salary of supervisors and so on) but others are not
(such as inspection/handling of materials, setting up equipment and so on). The cost of resources consumed in
performing these activities are grouped into cost pools.

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Cost Pools & Cost Drivers

Activity Cost Pools Activity Cost Drivers

a. Production a) Number of units
b) Number of set-ups
c) Number of electricity units consumed
b. Marketing a) Number of sales personnel
b) Number of sales orders
c. Research &Development a) Number of research projects
b) Personnel hours spend on projects
c) Technical complexities of the projects
a. d. Customer Service a) Number of service calls
b) Number of products serviced
c) Hours spend on servicing products
e. Purchasing Number of purchase orders
f. Material Handling Number of material requisitions

When do we use ABC?

 Product lines differ in volume and manufacturing complexity.

 Product lines are numerous and diverse, and they require different degrees of support services.
 Overhead costs constitute a significant portion of total costs.
 The manufacturing process or number of products has changed significantly - for example, from
labour intensive to capital intensive automation.
Limitations of ABC
1. Difficult to identify the overall activities that influence costs.
2. Not easy to select the most suitable cost drives.
3. Difficult to evaluate cost on the basis of activities.
4. Not suitable for small manufacturing concerns.

b. Activity Based management: It refers to set of actions that management can take on the basis of
information provided by a ABC with a view to improve or increase the profitability.

c. Life Cycle Costing (LCC): Life Cycle Costing tracks and accumulates costs and revenues attributable to
each product over the entire product life cycle. It aims at ascertaining all costs associated with the system as
applied to the defined life cycle. The total cost of a system could be broken into four categories, (a) design and
development cost, (b) production/manufacturing cost, (c) utilization cost, and (d) retirement and disposable
cost.

Objectives of LCC

 It aims at ascertaining the total cost of a product over its life cycle.
 It identifies each element of cost of the life cycle and magnitude and timing of each element cost.
 Assists management to smartly manage total cost throughout product’s life cycle.
 To identify areas in which cost reduction efforts are likely to be more effective.
 To estimate the cost impact of various designs and support options.

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Advantages of LCC
• It results in earlier action to generate revenue or lower costs than otherwise might be considered.
• It provides an overall framework for considering total incremental costs over the entire span of a
product.
Disadvantages of LCC
 Time consuming and Costly
 Ever changing technology
 Too many tools
 Lack of expertise and awareness
d. JUST-IN-TIME (JIT): The Just-in-Time or JIT is an inventory management system wherein the material
or the products are produced and acquired just a few hours before they are put to use. The Just-in-time system
is adopted by the firms, to reduce the unnecessary burden of inventory management, in case the demand is
less than the inventory raised. In other words, JIT is an inventory management method whereby labour,
material and goods (to be used in manufacturing) are re-filled or scheduled to arrive exactly when needed in
the manufacturing process
Objectives of JIT: The philosophy of JIT is to Zero Inventory, Zero Lead Time and Zero Failure.

a. Reduce all Non-Value-Added activities –

o Process steps which are not needed

o Unnecessary movement of goods within or outside the organization
o Re-work due to defects found in products
o Re-checking of inventories
o Unnecessary storage of raw materials or finished goods
o Expensive machine or labour lying idle

b. Elimination of in-plant inventory and in-transit inventory and

c. Quality and reliability improvement.

Types and meaning of Waste under JIT

Waste Definition
1. Overproduction Manufacturing an item before it is needed.
2.Inappropriate Using expensive high precision equipment when simpler machines would
Processing suffice.
3. Waiting Wasteful time incurred when product is not being moved or processed.
4. Transportation Excessive movement and material handling of product between processes.
5. Motion Unnecessary effort related to the ergonomics of bending,
Stretching, reaching, lifting, and walking.
6. Inventory Excess inventory hides problems on the shop floor, consumes space,
increases lead times, and inhibits communication.
7. Defects Quality defects result in rework and scrap, and add wasteful costs to the
system in the form of lost capacity, rescheduling effort, increased
inspection, and loss of customer good will.
8.Underutilization Failure of the firm to learn from and capitalize on its employees’
of Employees knowledge and creativity impedes long term efforts to eliminate waste.

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Strategies for minimizing waste by using JIT

 Manufacturing in smaller lot sizes reduces excess inventory.

 Reducing inventory levels allows the problems to be uncovered … thus creating opportunities for
manufacturing process improvement

Disadvantages of JIT
 Danger of disrupted production due to non-arrival of supplies.
 Increased ordering costs and Administrative costs.
 High dependence on suppliers.
 Less time for quality control on arrival of materials.
 Price shocks and
 May lose bulk-buying discounts.
e.(i) Cost Control: Cost Control is a process which focuses on controlling the total cost through competitive
analysis. It is a practice which works to maintain the actual cost in accordance with the established norms. It
ensures that the cost incurred on an operation should not go beyond the pre-determined cost. It regulates of
cost of operation of an undertaking by executive action.
Steps in Cost control:
 Establishing norms: The first step in cost control is to set norms or standards which may serve as
yardsticks for measuring performance. These standards are set on the basis of past performance adjusted
for changes in future and on the basis of studies conducted.
 Comparison with actual: The actual costs incurred are compared with established standard costs to
know the level of achievement. The variations are analysed so as to arrive at the causes which are
controllable.
 Corrective Action: Remedial measures are taken to avoid the recurrence of variation in future and for
revision of standards wherever necessary.
Main Areas of cost control:
 Materials
 Labour
 Overheads
 Sales
 Energy
Disadvantages of cost control:
 Reduces the flexibility and process improvement in a company.
 Restriction on innovation.
 Requirement of skilful personnel to set standards.
e.(ii). Cost Reduction: It aims at lowering the unit cost of a product manufactured or service rendered
without affecting its quality by using new and improved methods and techniques. It ascertains substitute ways
to reduce the cost of a unit. It ensures savings in per unit cost and maximisation of profits of the organisation.
It is the process of identifying and eliminating unnecessary costs to improve the profitability of a business is
known as cost reduction.

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Key Differences between Cost Control and Cost Reduction:

Basis for
Cost Control Cost Reduction
Comparison
Meaning A technique used for maintaining A technique used to economize the unit
the costs as per the set standards is cost without lowering the quality of the
known as Cost Control. product is known as Cost Reduction.
Savings in Total Cost Cost Per Unit
Retention of
Quality Not Guaranteed Guaranteed
Nature Temporary Permanent
Emphasis on Past and Present Cost Present and Future Cost
Ends when The pre-determined target is
achieved. No end
Type of
Function Preventive Corrective

f. Target Costing (TC): Literally achieving a target cost over the entire life cycle of a product to compete for
the best price in a market. It is a customer-centric for a product from its market price. The purpose is to
reduce cost of a product as low as possible to arrive at a price that would be either equal to or less than that of
competitors’ product while delivering the same functionality.

Objectives of TC
 Reducing cost of a product equal to that of competitors’ product at design stage to enable the company
top stay competitive in the market in terms of price and product features.
 TC is a market-driven costing system for developing a product that is primarily and effectively used
for cost planning and controlling at allowable levels throughout the lifecycle of a product.

Features of TC

 TC is contradicts the traditional approach: It focuses on design product, determine cost and set price.
 Intense customer focus;
– What do they want?
- How much will they pay for it?
- Can we make a profit on it?
Want answers to these questions before committing to the project.
 It facilitates to control cost form the beginning at all phases of the product life cycle. i.e., Design,
Production, Delivery setup and customer’s cost of ownership.
 70-80% of costs are committed to at the design stage. Focus on product and process design to engineer
out costs from the beginning.
 Emphasizes future sales instead of current cost savings – Service and repair and Disposal and
recycling.
Applicability of TC: TC is the most effective system for planning, controlling and monitoring of cost for new
products at each state of their life cycle. However, it can also be used for existing stream of products. It is very
effective for new products, because 70% to 80% cost is planned and committed at design stages. If all focus
is placed on cost-cutting at design stages then cost managed according to the plans efficiently and effectively.

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How TC works?
• Market Survey and Research is conducted about the price and features (functions and
characteristics) of a product that is to be benchmarked by a management.
• Preparing feasibility around Target Price. Target Profit and Target cost.
• The primary focus is on the product design that could match target cost. Product design is changed
time to time and again to reduce cost. This process is repeated till the time target cost is achieved by a
design.
o At this stage the tools used are; Value Analysis, Value Engineering, Functional Analysis etc.
• Working out cost for each stage of a product’s lifecycle. This would help in achieving overall target.
• Implementing Kaizen costing for continuous improvement in cost of a product during remaining
stages of the life cycle of a product.

Limitations of TC
 It takes more time than usual to achieve a design that meets all market considerations pertaining to cost
and allows a price that is acceptable in the market. The iterative process of finding target cost is more
time consuming.
 Since team of cross-functional technicians is working together, it may have behavioural issues because
of different working background. In traditional methods, only design department supposed to finalized
the design.
 Too much cost consciousness may hamper smooth functioning between departments.
 It is relatively difficult to apply in service industries due to paucity of information and high level of
specialities.

g. Business Process Reengineering (BPR): Business Process Reengineering, when fully implemented, will
reduce a lot of clerical work and maintenance of records. Thus Purchasing, Material Receipts, Accounts
Payable procedures and documentation will be virtually eliminated. Instead annual contracts with a few
reliable suppliers to whom payments for quantities consumed in production will be made. These
improvements are made possible by the rapid strides made in Information Technology. Government support
and the attitude of Business Executives at the top level will determine the pace of acceptance of these recent
developments.

h. Benchmarking: It is the process of studying and adopting the best practices of competing organizations to
improve the firm’s own performance. It serves as a corner stone for an efficient and effective operational
performance.

i. Total Quality Management: TQM is a philosophy of management. It is a total commitment to continually

increasing value for customers, investors, supplier, employees etc. it is commitment to fundamental
improvement to work process through knowledge, skill, problem solving ability and team work.

j. Kaizen Costing: Kai means change, Zen means better. Therefore, Kaizen means making changes for the
better on a continuous basis. It is a Japanese contribution to cost accounting. It is a technique of costing that
focuses on continuous cost reduction to existing products and process.

k. Balanced Score Card: It is strategic tool for measuring and evaluating the performance of an organization.
The performance management system is also called balanced score card. It is a comprehensive strategic
planning technique. This approach advocates a top-down approach to performance management starting with
strategic intent expressed through the organization down to operationally relevant targets.
Conclusion
In the current competitive era, most companies try to sell at more or less similar prices with the least profit. It
is one of the market's myopias. So, to effectively live in the business world with a competitive advantage, one
has to use strategic cost management. It can be considered as an updated cost analysis programme that
improves the overall position of an organisation by clearly and formally placing each strategic element and
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analysing cost information to achieve a sustainable competitive advantage by developing various measures. It
offers a better understanding of an organization’s overall cost structure to gain a competitive advantage in a
market. SCM specifically governs the formulation, communication, implementation, and control stages of a
strategic management process by using cost information. It also identifies the cost relationship between value
chain activities and the process of management. Entrepreneurs in India should try to understand the emerging
trends and techniques of SCM at an early stage and imbibe them in their organisations to attain a sustainable
competitive advantage and satisfy customer needs and requirements.
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