STRATEGIC COST MANAGEMENT

PROF. C.S AMUEL JOSEPH

MCC BOYD TANDON SCHOOL OF BUSINESS
An Overview
A Cost Management System is a
Management planning and control system
with the primary objective of producing quality
goods and services at the lowest possible cost.
Cost Management is oriented towards
innovative and better management of the cost of
Men, Material and Minutes (Time).
PILLARS OF COST MANAGEMENT
•COST AWARENESS
•COST ASSESSMENT/MEASUREMENT
•COST RESPONSIBILITY
•COST IMPROVEMENT
Importance
Strategic cost management is crucial for businesses as it helps them
 Gain a competitive edge by optimizing resource allocation,
 Reducing costs, and
 Enhancing Profitability.
It involves aligning cost management with the overall strategic goals of the
organization, ensuring that cost-saving efforts contribute to sustainable
competitive advantage.
Enhanced Competitive
Advantage
Cost Leadership – Operational Excellence, TISCO
Differentiation – Product Quality, Product Performance ( Dell/Maruti)
(Understand Value Chain and differentiate themselves from rivals)
Profitability:
By effectively optimizing resources and improve their profitability and financial performance.
Prioritization in resource allocation & Value Creation
Efficiency – Focus on Operational Parameters
Risk Management – predict cost fluctuations and implement strategies to mitigate risks
Informed Choices
Dimensions of SCM
Strategic Positioning

Cost Driver Analysis

Value Chain Analysis

Strategic Positioning:

•Understanding the Business

Environment: Analyzing industry trends, competitive
landscape, and customer needs.
•Defining Competitive Advantage: Identifying how
the organization will differentiate itself from
competitors (e.g., cost leadership, differentiation,
focus).
•Choosing a Strategic Approach: Selecting the most
appropriate strategy based on the organization's
strengths and weaknesses. ( In Automobile Industry:
Digital Marketing Strategies, Building Trust &
Engagement among customers,
Examples
Coca Cola, It strategically positions itself as a global leaders. A great deal of Coca-Cola's
positioning success comes from its ability to connect with consumers on an emotional level.
They don't just sell a beverage; they sell happiness, celebration, and positive life experiences
packaged in a bottle. The company achieves this through a combination of brand
differentiation, a wide range of products, and a strong emphasis on its core brand while also
catering to local tastes and preferences.
Airtel, strategically positions itself as a customer-centric provider of connectivity and digital
services, focusing on delivering value, accessibility, and convenience. Their strategy involves
understanding diverse customer needs, building a strong brand through strategic partnerships,
and consistently evolving their offerings. Airtel's marketing efforts emphasize emotional
connections, lifestyle associations, and a "one-stop shop" approach for mobile needs.
Maruti Suzuki strategically positions itself as a provider of affordable, reliable, and fuel-efficient
vehicles in the Indian market, targeting a wide range of customers from value-conscious buyers
to those seeking feature-rich and stylish options. This positioning is built on a strong brand
image, a vast distribution network, and a customer-centric approach, including strong after-
sales service. The company also emphasizes sustainability and corporate social responsibility
Cost Driver Analysis:

•Identifying Cost Drivers: Determining the

factors that cause or influence costs (e.g.,
volume of production, complexity of products,
labor rates, Set-up time, Inspection etc.,).
•Understanding Cost Behavior: Analyzing
how costs change in response to changes in
cost drivers. (VC & FC)
•Quantifying Cost Driver Impact: Measuring
the impact of cost drivers on overall costs.
ACTIVITIES AND COST DRIVERS
Areas Activities Suitable Cost Driver
Materials Management Issue of PO [Link] Purchase orders
Inspection of Materials [Link] Inspections
Stores Management Storing of Materials Value of Materials stored
Servicing requisitions [Link] Requests
Stock Taking Value of Stock
Quality Control Testing of Samples [Link] Batches Produced

Marketing Demand Creation Increase in Sales

Dispatches [Link] Orders
HR Recruitment [Link] Employees
Production Power cost Machine hours
MEANING
A value chain is a series of activities within a company
that add value to a product or service, ultimately
increasing its worth for the customer. It encompasses
all processes from the initial receipt of raw materials
to the delivery of the finished product to the end-
user.
Understanding the value chain helps businesses
identify areas where they can improve efficiency,
reduce costs, and enhance customer satisfaction and
win competitive advantage
Value Chain Analysis:

•Mapping the Value Chain:

•Identifying all the activities involved in creating and
delivering a product or service.
•Assessing Value Added:
•Determining which activities add value to the customer and
which ones are non-value-added.
•Optimizing the Value Chain:
•Identifying opportunities to improve efficiency and reduce
costs in the value chain.
KEY CONCEPTS
• Primary Activities:
• These are the core activities directly involved in creating and delivering the product or service. They
include inbound logistics, operations, outbound logistics, marketing and sales, and service.
• Support Activities:
• These activities support the primary activities and include procurement, technology development,
human resource management, and firm infrastructure.
• Value Creation:
• The goal of the value chain is to create value for the customer at each stage, leading to a more
desirable product or service.
• Competitive Advantage:
• By analyzing and optimizing their value chain, businesses can gain a competitive advantage through
lower costs, differentiated products, or superior customer service.
Case Work
1. WRITE A CASE ON HOW YOUR COMPANY HAS
STRATEGICALLY POSITIONED ITSELF IN THE DOMESTIC OR
GLOBAL MARKET.
2. PREPARE A VALUE CHAIN FOR YOUR SUMMER
INTERNSHIP COMPANY. Present a detailed case
Deadline for submission : 18th July 2025
Throughput Accounting
Throughput accounting is a management accounting approach focused on maximizing
a company's profitability by emphasizing the rate at which it generates revenue
through sales (throughput) rather than solely focusing on minimizing costs.
Benefits
Improved Focus on activities that directly impacts profitability (Price, Quantity, VC &
FC)
Enhanced Visibility and provides insights into inventory levels and operating expenses
( demand forecasting, Inventory optimization (using EOQ, JIT etc.,, lead times, safety
stock
Better Decision Making, by focusing on constraint and lead balanced production,
pricing and resource allocation. Eg,, labour, material, machine hours, technology,
quality)
Alignment with Business Goals: Helps align production and market strategies to
maximize throughput. Eg. Establish KPI, monitor progress, foster collaboration, agility
etc.,
Core Measures of Throughput
Accounting
Example
Let's say a company has the following: Sales
Revenue: Rs.200,000, Direct Material Costs:
Rs.50,000, and Operating Expenses: Rs. 100,000.
Then: Throughput (T) = Rs. 200,000 - Rs. 50,000 =
Rs. 150,000 and Throughput Accounting Ratio (TPAR)
= Rs. 150,000 / Rs. 100,000 = 1.5.
This company has a TPAR of 1.5, indicating that it is
generating Rs. 1.50 of throughput for every Rs. 1 of
operating expense.
ENVIRONMENTAL ACCOUNTING
Environmental accounting, also known as green
accounting, integrates environmental and economic information
to assess how a business or economy impacts the environment
and how the environment affects the business or economy. It
aims to understand and manage the costs and benefits
associated with environmental factors, promoting sustainable
development

Environmental accounting involves tracking a company's

environmental impact, such as greenhouse gas emissions, water
usage, and waste management, and incorporating this
information into financial reporting. This provides a more
comprehensive view of a company's performance, beyond
traditional financial metrics
 Examples
•Corporate level:

Companies like Walmart and IKEA use environmental accounting to assess the environmental impact of
their products and operations. Refrigerators manufacturing companies now started NO CFC fridges
against the earlier one to protect global warming.
Automobiles have improved Bharat VI quality control to check carbon emissions.

•Government level:

Governments use environmental accounting to monitor the environmental impact of industries like mining
and oil and gas, and to develop policies to mitigate harm.

•National level:
The System of Environmental-Economic Accounting (SEEA) is a framework used by many countries to
integrate environmental and economic data.
Case Example
Madras Engineering Industries (MEI) employs a
comprehensive pollution control mechanism that includes
adhering to standards set by the
Tamil Nadu Pollution Control Board (TNPCB), implementing
Green initiatives, and focusing on sustainability.
They utilize in-house captive power plants, solar-powered
streetlights, and rainwater harvesting systems.
Furthermore, MEI is working towards carbon neutrality
and water neutrality by 2030
Example
Sundram Fasteners Limited (SFL) implements a
comprehensive pollution control mechanism,
adhering to stringent environmental
standards. Their facilities are
ISO 14001 certified, emphasizing their
commitment to environmental management.
SFL focuses on green technologies and
compliance with international norms for
environmentally friendly operations.