ppt of cost management for enginners

1. Cost management
Cost management is the process of planning and
controlling the costs associated with running a
business. It includes collecting, analyzing and
reporting cost information to more effectively
budget, forecast and monitor costs.

2. Strategic cost management
Strategic cost management is the process that
aims to strengthen a company's strategic
position by carefully controlling costs
according to the company's broader
objectives.

3. SCM
• Traditional cost management programs
primarily focus on cost reduction and cost
control by allocating production overheads
and costs. However, excessively focusing on
cost reduction has severe negative impacts on
quality, customer experience, development
and business growth, making traditional
methods unreliable.

4. cont
• Controlling cost is just not enough in this
environment. Organizations need to
concentrate on managing costs strategically if
they want to keep making profits and adding
value for their shareholders. With that in
mind, we’ll discuss strategic cost management
meaning, its importance and techniques and
some examples of strategic cost management.

5. Strategic Cost Management Meaning
• Strategic cost management (SCM) is a cost
management technique that aims to reduce
costs and boost the strategic position of an
organization. It’s the process of combining
cost information with the structure of
decision-making to reinforce the overall
business strategy. Cost is measured and
managed to align it with the organization’s
business strategy.

6. There are four stages of SCM
• Formulating The Strategies
• Communicating Strategies Across The Entire
Organization
• Planning Tactics And Executing Strategies
• Developing Controls And Implementing Them
To Track The Success

7. Importance Of Strategic Cost
Management
• SCM Can Be Considered An Updated Cost Analysis Program That
Improves The Overall Position Of An Organization By Clearly And
Formally Placing Each Strategic Element
• It Can Be Used To Analyze Cost Information And Achieve
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 Identifies The Cost Relationship Between Value Chain Activities
And The Process Of Management

8. Strategic Cost Management
Techniques
• Bundling
It’s the method of combining two or more products and offering them as a package and at the price
of one.
• Activity-Based Outsourcing (ABC)
ABC works on the principle of ‘controlling activities to control cost’. Activities and the related
expenses and cost drivers are identified before working out the cost of the product.
• Total Quality Management (TQM)
TQM emphasizes setting the highest standards and consistently tries to meet or exceed customer
expectations. It focuses on process measurement and controls for continuous improvement.
• Life Cycle Costing (LCC)
LCC considers the cost of a product over its entire life span. The analysis includes the cost of
planning, production, research and development, replacement cost and disposal.
• E-Business
E-business is fairly recent but has shown the huge scope that lies in terms of high cost-effectiveness
and working beyond boundaries.
• Managers can identify several other strategic cost management techniques for long-term
sustainability and competitive advantage.

9. Strategic Cost Management Examples
• A Manufacturing Firm Decides To Offer Better
Turnaround And Quote Reduced Delivery Time To
Customers By Tightly Controlling Bottleneck
Production Operation. To Keep The Bottleneck
Running 24X7, They Would Need To Expend Extra
Funds And Incur Extra Costs. If They Cut Costs,
The Production Capacity Will Reduce And Profit
Will Be Impacted. Strategic Cost
Management Allowed The Firm To Cut Costs In
Downstream Or Non-Bottleneck Areas Without
Affecting The Delivery Times.

10. Cont.:-
• Product A Shows An Annual Net Profit Of ₹40 Lakhs
With ₹10 Lakhs Overhead Costs, While Product B
Records A Loss Of ₹4 Lakhs And Has Overheads Costs
As High As ₹24 Lakhs. With Traditional Cost
Management, The Organization Found That If, To Save
Money, It Shuts Down The Production Of Product B,
Product A Sales Would Fall By Only 25%.
However, Strategic Cost Management Revealed That
The Business Had To Rethink Its Strategies. Since The
Loss Of 25% Sales Of A Meant A Loss Of ₹10 Lakhs,
Shutting Down The Manufacture Of B Would Result In
A Total Loss Of ₹6 Lakhs Annually Instead Of ₹4 Lakhs.

11. Cost concept in decision making
• It is based on the distinction between fixed
and variable costs. Fixed costs are ignored and
only variable costs are taken into
consideration for determining the cost of
products and value of work-in-progress and
finished goods.

12. Relevent Cost
• The relevant cost of any scarce resource (e.g.,
labour) is the direct cost of using the resource
plus any contribution earned by that resource
on the most profitable alternative use of the
resource. In this sense the relevant cost is the
opportunity cost. Generally relevant costs are
the expected future costs relevant to a
decision and they differ among different
alternatives.

13. Differential Cost
• The change in costs due to change in the level
of activity or pattern or technology or process
or method of production is known as
differential costs. If any change is proposed in
the existing level or in the existing methods of
production, the increase or decrease in total
cost as a result of this decision is known as
differential cost.

14. Cont.:-
• If the change increases the cost, it will be
called incremental cost. If there is decrease in
cost resulting from decrease in output, the
difference is known as decremental cost.

15. Opportunity cost
• It is the maximum possible alternative earning
that might have been earned if the productive
capacity or services had been put to some
alternative use. In simple words, it is the
advantage, in measurable terms, which has
been foregone due to not using the facility in
the manner originally planned.

16. Cont.:-
• It refers to the value of sacrifice made or
benefit of opportunity foregone in accepting
an alternative course of action. For example, if
an owned building is proposed to be used for
a project, the likely rent of the building is the
opportunity cost which should be taken into
consideration while evaluating the profitability
of the project.