5 Main Applications of Strategic Cost Management

The following points highlight the five main applications of strategic cost management. The applications are: 1. Product Costing 2. Make or Buy Decisions 3. Marketing Channel Decisions 4. Product Design 5. Activity Analysis.

Strategic Cost Management: Application # 1. Product Costing:

In many companies, product cost information available is deficient. It is important to capture the activities that are attributable to each product or to more product groups and determine the pricing and other policies of the company that are appropriate. In most of the cases product costs have turned out to be incorrect.

Strategic Cost Management: Application # 2. Make or Buy Decisions:

Make or buy decisions should be made on strategic considerations. Even so, cost considerations are important. For example, the decision to outsource a component could result in a number of activities causing additional overhead. A sophisticated understanding of costs would enable managers to outsource only parts that are not strategically significant or are easy for outsiders to manufacture.

Strategic Cost Management: Application # 3. Marketing Channel Decisions:

These decisions could benefit from the SCM approach. The decision to sell to specific customers through specific channels is one possibility.

Strategic Cost Management: Application # 4. Product Design:

Designers, generally, do not have cost information and, therefore, are likely to come up with designs that may not be cost efficient. A few companies have started forming teams consisting of designers, manufacturing engineers, cost accountants and marketing managers as part of their new product development efforts.

However, most companies do not pay attention to product design with the result that product costs are high and frequent design changes are necessary.

Strategic Cost Management: Application # 5. Activity Analysis:

It is important to identify activities that add cost but not value to the customers. Such activities are called non-valued activities and must be eliminated from the business to remain competitive. Non-value added activities include inspection, internal movements and waiting for the next operation.

Non-value added activities result in unnecessary expense and increase manufacturing or service lead time. As a result, a business that has a large number of non-value added activities would be unable to introduce new products rapidly and in time and within acceptable cost limits.

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