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1. INTRODUCTION AND
OVERVIEW OF THE
STRATEGIC COST
MANAGEMENT PROCESS

2. INTRODUCTION AND OVERVIEW OF
THE STRATEGIC COST
MANAGEMENT PROCESS
Strategic Cost Management (SCM) is a crucial aspect of corporate strategy
that involves the identification, analysis, and control of costs in order to
enhance a company's competitiveness and profitability.
It goes beyond traditional cost accounting by integrating cost management
with overall business strategy.
The SCM process aims to align cost management practices with the
strategic goals of the organization.

3. HERE IS AN OVERVIEW OF THE
STRATEGIC COST MANAGEMENT
PROCESS
Understanding Strategic Objectives
Cost Identification
Value Chain Analysis
Cost Drivers Analysis
Competitor Benchmarking
Cost Reduction and Efficiency Measures
Innovation
and Continuous Improvement
Activity-Based Costing
Performance Measurement
Risk Management
Communication and Collaboration

4. Strategic Cost Management is an ongoing and dynamic process that involves
aligning cost management practices with the strategic goals of the
organization.
It requires a holistic approach, considering both internal and external
factors, and emphasizes the importance of innovation, continuous
improvement, and risk management in achieving sustainable cost
advantages.
Understanding Strategic Objectives:
The process begins with a clear understanding of the organization's strategic
objectives. These objectives could include cost leadership, differentiation,
innovation, or a combination of these.
Cost Identification:
Identify and categorize costs associated with various business activities. This
involves distinguishing between fixed and variable costs, direct and indirect
costs, and controllable and uncontrollable costs.
Value Chain Analysis:
Conduct a value chain analysis to identify activities that create value for the
customer. This involves breaking down the organization's processes into
primary and support activities and assessing their cost implications.

5. Cost Drivers Analysis:
Identify the factors that drive costs within the organization.
This includes understanding the relationship between input factors
and the cost of producing goods or services.
Competitor Benchmarking:
Compare the cost structure of your organization with that of
competitors.
This benchmarking process helps identify areas where cost
improvements can be made to gain a competitive advantage.
Cost Reduction and Efficiency Measures:
Implement cost reduction initiatives and efficiency measures based
on the analysis conducted.
This may involve process optimization, resource reallocation,
technology adoption, or renegotiating supplier contracts.

6. Innovation and Continuous Improvement:
Encourage a culture of innovation and continuous improvement to
drive cost efficiencies.
This may involve adopting new technologies, streamlining processes,
and fostering a mindset of ongoing cost management.
Activity-Based Costing (ABC):
Implement Activity-Based Costing to allocate costs more accurately to
products, services, or customers. This helps in understanding the
true cost drivers within the organization.
Performance Measurement:
Establish key performance indicators (KPIs) to monitor and evaluate
the success of cost management initiatives. Regularly assess
performance against these benchmarks and make adjustments as
needed.

7. Risk Management:
Consider potential risks associated with cost management decisions.
Evaluate the impact of external factors such as economic changes,
regulatory shifts, or market dynamics on the cost structure.
Communication and Collaboration:
Foster communication and collaboration across different departments
within the organization.
Ensure that cost management strategies are aligned with overall
business objectives and that all stakeholders are on board.

8. COST CONCEPTS IN DECISION-
MAKING
Cost concepts play a crucial role in
decision-making within an
organization.
Various types of costs are
considered when making decisions,
and understanding these cost
concepts is essential for effective
management.
Here are some key cost concepts
relevant to decision-making
In decision-making, it's important
for managers to analyze costs in a
systematic way, considering both
quantitative and qualitative factors.
Cost concepts provide a framework
for evaluating alternatives and
making informed decisions that
contribute to the overall success of
the organization

9. Fixed Costs:
Fixed costs remain constant
regardless of the level of production
or sales.
They do not vary with changes in
activity. Examples include rent,
salaries of permanent staff, and
insurance.
Fixed costs are crucial in
determining the breakeven point
and assessing the impact of
decisions on overall profitability.
Variable Costs:
Variable costs vary proportionally
with the level of production or sales.
Examples include raw materials,
direct labor, and variable overhead.
Understanding variable costs is
essential for calculating contribution
margin and assessing the
incremental impact of production or
sales changes on profit.

10. Total Costs:
Total costs represent the sum of
fixed and variable costs.
When making decisions, managers
often analyze total costs to
understand the overall financial
implications of a particular course
of action
Marginal Cost
Marginal cost is the additional cost
incurred by producing one more
unit or serving one more customer.
It is calculated by dividing the
change in total cost by the change
in quantity.
Marginal cost is particularly relevant
in pricing decisions and determining
optimal production levels.

11. Opportunity Cost:
Opportunity cost represents the
value of the next best alternative
forgone when a decision is made.
It is not always a monetary cost but
reflects the benefits sacrificed in
choosing one option over another.
Considering opportunity costs is
crucial in resource allocation
decisions
Sunk Costs:
Sunk costs are costs that have
already been incurred and cannot be
recovered.
In decision-making, sunk costs
should not influence future choices
because they are irrelevant to future
costs and benefits

12. RELEVANT COSTS:
Relevant costs are costs that will change as a result of a decision.
When making decisions, managers focus on relevant costs to avoid
unnecessary complexity.
Avoidable costs and incremental costs are often considered relevant.
CONTRIBUTION MARGIN:
Contribution margin is the difference between total sales revenue and total
variable costs.
It represents the portion of sales revenue that contributes to covering
fixed costs and generating profit.
Contribution margin is crucial in assessing the profitability of products
and services.

13. BREAKEVEN POINT:
The breakeven point is the level of sales or production at which total
revenue equals total costs, resulting in zero profit or loss.
 Understanding the breakeven point is vital for assessing the minimum
level of activity required to cover costs.
LIFE CYCLE COSTS:
Life cycle costs consider costs associated with a product or project
throughout its entire life, from development to disposal.
This perspective helps in making decisions that maximize value over the
long term.
DIFFERENTIAL COSTS:
Differential costs are the differences in costs between two alternative
courses of action.
 Managers often focus on these costs when making decisions to assess the
financial impact of choosing one option over another.

14. Decision-Making
Cost Concepts
Identify Decision
Define
Alternatives
Identify Relevant
Costs and
Benefits
Costs
Classification
Calculate Metric
Considering
Opportunity Cost
& Life Cycle Costs
Evaluate
Alternatives
Make Informed
Decision

15. This flowchart outlines the sequential steps in the decision-making process
related to cost concepts.
It starts with identifying the decision at hand, moves on to defining
alternatives, and then delves into the key cost concepts such as identifying
relevant costs and benefits, classifying costs, and calculating various cost
metrics.
Finally, it emphasizes the importance of considering opportunity costs, life
cycle costs, and evaluating alternatives based on relevant costs and benefits
to make an informed decision.

16. OBJECTIVES OF A COSTING
SYSTEM
A costing system is a set of processes and techniques used by organizations
to track, allocate, and manage costs associated with their products, services,
or other cost objects.
The objectives of implementing a costing system are diverse and depend on
the specific needs and goals of the organization.
However, some common objectives include
Cost Control Inventory Valuation
Profitability Analysis Benchmarking
Product Pricing Regulatory Compliance
Budgeting Continuous Improvement:
Resource Allocation Customer Profitability Analysis
Decision-Making Support Strategic Planning
Performance Measurement

17. COST CONTROL:
One of the primary objectives of a costing system is to control costs
effectively.
By identifying and analyzing costs, organizations can implement
measures to manage and reduce expenses, improving overall cost
efficiency.
PROFITABILITY ANALYSIS:
Costing systems help in determining the profitability of products,
services, or business segments.
This analysis assists management in focusing on high-margin
activities and making informed decisions to enhance overall
profitability.
PRODUCT PRICING:
Costing systems provide essential information for setting product
prices. Understanding the total costs associated with producing
goods or delivering services is crucial in establishing competitive yet

18. Budgeting:
Costing systems contribute to the budgeting process by providing
accurate cost estimates.
This facilitates the development of realistic budgets, allowing
organizations to allocate resources effectively and set financial
targets.
Resource Allocation:
Effective resource allocation is a key objective of costing systems.
By identifying the costs associated with various activities and
products, organizations can allocate resources efficiently to maximize
their utility and contribute to strategic objectives.
Decision-Making Support:
Costing systems provide relevant information for decision-making.
Managers can use cost data to evaluate alternative courses of action,
make informed choices, and align decisions with the organization's
goals.
Budgeting:
Costing systems contribute to the budgeting process by providing
accurate cost estimates.
This facilitates the development of realistic budgets, allowing
organizations to allocate resources effectively and set financial
targets.
Resource Allocation:
Effective resource allocation is a key objective of costing systems.
By identifying the costs associated with various activities and
products, organizations can allocate resources efficiently to maximize
their utility and contribute to strategic objectives.
Decision-Making Support:
Costing systems provide relevant information for decision-making.
Managers can use cost data to evaluate alternative courses of action,
make informed choices, and align decisions with the organization's
goals.

19. PERFORMANCE MEASUREMENT:
Costing systems assist in evaluating the performance of departments,
products, and processes.
Performance metrics derived from cost data help management identify areas of
improvement and recognize success.
INVENTORY VALUATION:
For organizations involved in manufacturing, a costing system is crucial for
valuing inventory.
Different costing methods, such as absorption costing or variable costing,
impact how inventory is valued on financial statements.
BENCHMARKING:
Organizations use costing systems to compare their cost structures with
industry benchmarks or competitors.
Benchmarking allows companies to identify areas where they can improve
efficiency and maintain competitiveness.

20. REGULATORY COMPLIANCE:
Many industries are subject to regulatory requirements regarding cost
reporting and financial transparency.
Costing systems help organizations comply with these regulations
and provide accurate financial information to stakeholders.
CONTINUOUS IMPROVEMENT:
Costing systems support a culture of continuous improvement by
providing data for performance evaluation and identifying
opportunities for cost reduction and process optimization.
CUSTOMER PROFITABILITY ANALYSIS:
Organizations may use costing systems to analyze the profitability of
individual customers or customer segments.
This helps in tailoring marketing and sales strategies to focus on the
most profitable customer relationships.

21. Strategic Planning:
Costing systems contribute to strategic planning by providing
insights into the cost structure and helping organizations align their
activities with long-term goals.
The objectives of a costing system are multifaceted and serve the
overarching goal of enhancing an organization's financial
management, efficiency, and strategic decision-making.
The specific objectives may vary based on industry, organizational
structure, and management priorities.

22. INVENTORY VALUATION:
Inventory valuation refers to the process of assigning a monetary value to
the goods and materials held in stock by a company.
Inventory valuation is an accounting practice that is followed by companies
to find out the value of unsold inventory stock at the time they are preparing
their financial statements.
Inventory stock is an asset for an organization, and to record it in the
balance sheet, it needs to have a financial value
This valuation is important for financial reporting, tax purposes, and
assessing the overall financial health of a business.
Different methods can be used for inventory valuation, including:
FIFO (First-In-First-Out)
LIFO (Last-In-First-Out)
Weighted Average Cost

23. Assumes that the oldest items in inventory are sold first. This method
may be suitable when there are fluctuations in the costs of inventory
items.
Assumes that tFIFO (FIRST-IN-FIRST-OUT):
LIFO (LAST-IN-FIRST-OUT):
WEIGHTED AVERAGE COST:
he newest items in inventory are sold first. LIFO can be useful during
times of rising prices as it can result in lower taxable income.
Calculates the average cost of all items in inventory. This method
provides a more even and averaged cost per unit.
Accurate inventory valuation is essential for financial statements and
impacts metrics such as cost of goods sold (COGS) and gross profit

24. CREATION OF A DATABASE FOR
OPERATIONAL CONTROL:
The creation of a database for operational control involves establishing a structured system to manage
and control various aspects of day-to-day business operations.
This database can include information on inventory levels, sales data, supplier details, and other
relevant operational information.
Key components include:
Inventory Management
Supplier Information
Sales and Order Processing
Quality Control
Financial Information

25. 1. Inventory Management:
Track and manage inventory levels, including reorder points, stock turnover
rates, and storage locations.
2. Supplier Information:
Maintain a database of supplier details, including contact information, lead
times, and negotiated terms.
3. Sales and Order Processing:
Track customer orders, sales transactions, and delivery schedules. This
information is crucial for managing customer relationships and ensuring
timely order fulfillment.
4. Quality Control:
Include data related to quality control measures to ensure that products
meet the required standards.
5. Financial Information:
Integrate financial data, including costs, revenues, and expenses, to provide
a comprehensive view of operational performance.

26. PROVISION OF DATA FOR
DECISION-MAKING
The data stored in the operational control database plays a crucial
role in supporting decision-making processes.
This data provides insights that aid managers in making informed
and strategic decisions.
Key considerations include:
Data Analysis
Performance Metrics
Strategic Planning
Risk Management

27. 1. Data Analysis:
Utilize data analytics tools to extract valuable insights from the
operational database, such as trends, patterns, and correlations.
2. Performance Metrics:
Establish key performance indicators (KPIs) based on operational data
to measure and assess performance.
3. Strategic Planning:
Use data to inform strategic decisions, such as product pricing,
market expansion, and resource allocation.
4. Risk Management:
Identify potential risks by analyzing operational data, allowing for
proactive risk management strategies.

28. CONCLUSION
Integrating these components creates a symbiotic relationship between inventory valuation, operational
control, and decision-making, contributing to the overall efficiency and success of the business.
The accuracy and accessibility of data within the database are critical factors in ensuring that decisions
are based on reliable and timely information.