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Strategic Cost Management

Group 1 - Strategic Cost Management & Control
Group 2 - Strategic Decision Making
Group 3 - Budgetary Control & Standard Costing
Group 4 - Process Control & Activity Based Cost
Management
Group 5 - Cost of Quality Total Quality
Management
Group 6 - Operations Research
Group 7 - Value Chain Analysis
 Strategic Cost Management
• Strategy – set of policies procedures and approaches to business that
produce long-term success
• Cost management information- critical factor in an effective
management of a firm or organization
• Cost management – practice of accounting in which accountant
develops and uses cost management information.
• Strategic Cost Management – involves the development of cost
management information to facilitate the principal management
function which is strategic management.
 Target Costing
A structured approach to determine
the cost at which a proposed product
with specified functionality and
quality must be produced, to generate
a desired level of profitability at its
anticipated-selling-price
Steps in Target Costing approach to pricing

▪ Setting of target selling price

▪ Determination of target costs
▪ Estimate the actual cost of the
product
▪ Comparison of estimated cost
with actual cost
Steps involved in implementing a Target
Costing System

❖Create a Project Charter

❖Obtain a Management
Sponsor.
❖Obtain a Budget
❖Assign a Strong Team
Manager
❖Enroll Full-time Participants
❖Use Project Management
Tools
 Advantages of Target Costing

✔ Innovation
✔ Competitive
Advantage
✔ Market Driven
Management
✔ Real Cost Reduction
Problems with Target Costing

✔ The development process can be

lengthened.
✔ A large amount of mandatory
cost cutting can result in finger-
pointing in various parts of the
company
✔ more difficult to reach a
consensus on the proper design
 Life Cycle Costing
▪ aims at cost ascertainment of a
product, project etc. over its
projected life
▪ a system that tracks and
accumulates the actual costs and
revenues attributable to cost
object from its inception to its
abandonment.
 Product life cycle
• A pattern of expenditure, sale level, revenue
and profit over the period from new idea
generation to the deletion of product from
product range.
 Features / Characteristics Of Product Life
Cycle Costing

• costing involves tracing of costs and

revenues of each product over several
calendar periods throughout their
entire life cycle
• traces research and design and
development costs, incurred to
individual products over their entire
life cycles
• ensures that costs for each individual
product can be reported and
compared with product revenues
generated in later periods
 Benefits Of Product Life Cycle Costing
• results in earlier actions to generate revenue
or to lower costs
• accurate and realistic assessment of revenues
and costs
• promote long-term rewarding in contract to
short-term profitability rewarding.
 Importance of Product Life Cycle Costing

• Time based analysis

• Overall Cost Analysis
• Pre-production Costs analysis
• Effective Pricing Decisions
• Better Decision Making
• Long Run Holistic view
• Life Cycle Budgeting
• Review
 KAIZEN COSTING
• continuous improvement program that
focuses on the reduction of waste in the
production process, thereby further lowering
costs below the initial targets specified during
the design phase
 Opportunities in Kaizen
• Kaizen Costing Process: include elimination of waste in
production, assembly and distribution processes, as well as
the elimination of work steps in any of these areas.
• Savings from Kaizen Costing: The cost reductions resulting
from kaizen costing are much smaller than those achieved
with value engineering
• Multiple Versions of Products - Continuous Kaizen Costing:
Multiple improved versions of products can be introduced to
meet the challenge of gradually reducing costs and prices.
 JIT Costing
1. Supplier Evaluation
2. Supplier Assistance
3. Supplier Information System
4. Direct Delivery
Benefits associated with JIT system
Reduction in Inventory levels
⮚ Raw materials inventory is reduced because
suppliers deliver only small quantities of parts as
and when they are needed.
⮚ Work-in-progress inventory drops because the
conversion to machine cells and the use of kanban
cards greatly reduces the need to pile up inventory
between machines.
⮚ Finished goods inventory drops because
inventories are allowed to build up only if a
company experiences high seasonal sales.
Benefits associated with JIT system
Reduction in Wastage of Time
⮚ Inspection Time
⮚ Handling Time
⮚ Queue Time
⮚ Storage Time
Benefits associated with JIT system
Reduction in Scrap Rate

Reduction in Overhead Cost

⮚ Elimination of non value-added activities and
improvement in value-added activities.
⮚ Reduction of time
⮚ Reduction in Inventory levels and associated costs
⮚ Reduction / Elimination of unnecessary cost drivers
⮚ Introduction of “Machine Cells” to identify direct costs
than overhead expenses.
Benefits associated with JIT system
Reduction in Overhead Cost
The effect of JIT philosophy on Overhead is
three-fold:
✔ Thorough reduction in Overhead Costs
✔ Shift between Overhead Costs and Direct
Costs, due to introduction of Machine Cells
✔ Scientific Allocation of common overheads
based on Machine Cells and Cost Drivers
JIT approach for reducing WIP inventory
Problems:
• Work-in-process inventory builds up in front of the slowest
machines.
• Defective parts produced by an upstream machine may not be
discovered until the next downstream
In JIT philosophy, there are two ways to resolve the above problems.
1. Kanban Card -notification card that a downstream machine
sends to each upstream machine that feeds it with parts,
authorizing the production of just enough components to fulfill
the production requirements(Pull System)
2. Working Cells - small cluster of machines, which can be run by a
single machine operator
What are the performance measures in JIT?

• Inventory turnover
• Set up time reduction
• Customer complaints
• Scrap
• Cost of quality
• Customer service
• Ideas generated
 Backflush Costing
The following issues
must be corrected
before effective
implementation:
▪ Accurate Production
reporting
▪ Proper Scrap
reporting
▪ Lot tracing
▪ Inventory accuracy
 Business process re-engineering
(Value Engineering)
• involves
examining
business
processes, current
operations of
organization and
if possible,
making
substantial
changes to
current
organizational
operations
 Issues analyzed during VE review
1. Elimination of unnecessary functions from the production process:
⮚ This involves a detailed review of the entire manufacturing
process to see if there are any steps that add no value to the
product, e.g. interim quality review before further processing and
final quality check.
⮚ By eliminating unnecessary or duplicate functions, the firm can
reduce their associated direct or overhead costs from the total
product cost.
⮚ The possible repercussions of elimination of any intermediate
production function should be carefully analyzed. The engineering
team must be careful to develop work-around steps that eliminate
the need for the original functions.
 Issues analyzed during VE review
2. Elimination of unnecessary product qualities
⮚ The product quality should be studied with reference to the
nature of its use, longevity of product’s useful life.
⮚ If some unnecessary quality e.g. excessive degree of
sturdiness in consumable item (as opposed to a durable
item) can be eliminated, it should be done in order to save
significant material and other product costs.
⮚ However, visible reduction in durability or reliability cannot
be stretched too far. Hence any designs that have had their
structural integrity reduced must be thoroughly tested to
ensure that they meet all Strategic Cost Management
 Issues analyzed during VE review
3. Design Minimization:
⮚ This involves the creation of a design that uses fewer
parts or has fewer features.
⮚ This approach is based on the assumption that a
minimal design is easier to manufacture and assemble
⮚ However, sometimes it would be less expensive to
settle for a few extra standard parts that are more
easily and cheaply obtained, rather than customized
pre-fabricated parts, which complicate the assembly
process.
 Issues analyzed during VE review
4. Better product Design to suit manufacturing process
⮚ This is also known as Design For Manufacture and
Assembly (DFMA) and involves the creation of a
product design that can be created in only a specific
manner.
⮚ When used for the assembly of an entire product,
this approach ensures that a product is not
incorrectly manufactured or assembled, which
would call for a costly disassembly or product recalls
from customers who have received defective goods
 Issues analyzed during VE review
5. Substitution of Parts
⮚ also called as Component Parts Analysis. It encourages the search
for less expensive components or materials that can replace more
expensive parts currently used in a product design.
⮚ Substitution of new parts is encouraged since new materials are
being developed every year. However parts substitution must be
accompanied by a review of related changes elsewhere in the
design and the consequent impact on total costs.
⮚ This also involves allied analysis on tracking the intentions of
suppliers to continue production of parts in the future. If parts are
not available, they must be eliminated from the product design.
 Issues analyzed during VE review
6. Combination of Steps:
⮚ Sometimes, a careful review of all processes associated
with a product reveals that some steps can be
eliminated, other steps can be consolidated, or that
several can be accomplished by one person, rather than
having people in widely disparate parts of the
production process to perform them. This is also known
as Process Centering.
⮚ By combining steps, transfer and queue time can be
eliminated from the production process, which in turn
reduces the chances of damage during transfers.
 Issues analyzed during VE review
7. Search for better way of doing things:
⮚ This seeks to answer a basic question – is there a better
way?
⮚ It strikes at the core of the cost reduction issue. It is a
more general attempt to start from scratch and build a
new product or process that is not based in any way on
pre-existing ideas. Improvements resulting from this
technique tend to have the largest favorable impact on
cost reductions but can also be the most difficult for the
organization to adopt, especially, if it has used other
designs or systems for production.
 Cost Control & Cost Reduction
❑ Cost Control involves ❑ Cost reduction is the
continuous comparisons achievement of real
of actual with the and permanent
standards or budgets to reduction in unit cost
regulate the former. of products
manufactured.
❑ technique which makes ❑ technique which we
available the necessary used to save the unit
information to the cost of the product
management that actual without
costs are aligned with the compromising its
budgeted costs or not
The major techniques which used in cost control
are standard costing and budgetary control
It involves:
• Determination of standards;
• Ascertaining actual results comparing the
standards;
• An analysis of the variances;
• Establishing the action that may be taken.
Characteristics of a Good Cost Control System

(a) Delineation of centers responsibility, i.e.,

deciding responsibility centers;
(b) The delegation of prescribed authority;
(c) Various cost standards;
(d) The relevance of controllable cost; (e) Cost
reporting; and
(f) Cost reduction
Cost Reduction aims at cutting off the unnecessary
expenses which occur during the production Process,
storage, selling and distribution of the product.

Major elements
• Savings in per unit production cost.
• The quality of the product should not be affected.
• Savings should be non-volatile in nature.
 Cost Control vs. Cost Reduction
1. It aims at achieving the 1. It aims at achieving a reduction in cost by
established cost using any suitable technique like value
standards engineering, Work Study, Standardization
2. It is a preventive and Simplification, Variety reduction
function. Costs are Quality measurement and research,
Operations research, Market research, Job
optimized before they
Evaluation and Merit Rating Improvement
are incurred.
in design, Mechanization and automation.
3. The main stress is on
2. It is a corrective function. It operates even
the present and past
when efficient cost control system exists.
behavior of costs. There is a room for reduction in achieved
4. It starts from costs
establishing cost 3. The emphasis here is partly on present
standards and cost and largely on future costs.
attempts to keep the 4. It challenges the standards forthwith and
costs of operation of a attempts to reduce cost on continuous
process in line with the basis.
Cost Control vs. Cost Reduction
5. It attempts to achieve 5. Under cost reduction, no
the best possible results at condition is considered to be
the least cost under given permanent, where a change will
conditions. secure a lowest cost figure.

6. This process undertakes

6. This process finds out the
the competitive analysis of
substitutes by finding out new
actual results with
ways and means
established norms.

7. It has limited
7. It is universally applicable to all
applicability to those items areas of business. It does not
of cost for which standards depend on standard though target
can be set amounts may be set.
Thank you for listening