Strategic Cost Management

Section A: Objective Type & Short Questions (30 Marks)

Part One:

Multiple Choices:

1. A set of policies, procedures and approaches that helps a firm attain and retain success for long is termed as-

• Benchmarking
• Life cycle costing
• Target costing
• Strategy

2. A cost management tool that bring in its focus the activities performed to produced a product is called-

• Target costing
• Life cycle costing
• ABC
• Benchmarking

3. Cost incurred to the past that are not relevant to present decisions are-

• Fixed cost
• Sunk cost
• Opportunity cost
• Indirect costs

4. In a process costing system, when items are sold, the cost of the item are moved from-

• Work-in-progress to finished goods
• Work-in-progress to Cost of goods sold
• Cost of goods sold to finished good
• Finished goods to cost of goods sold

5. Differential costs are sometimes referred to as-

• Incremental costs
• Relevant costs
• Avoidable costs
• Both a& b

6. Customer service feature does not include-

• Warranty and repair service
• Adherence to specifications
• On-time delivery
• Follow-up with customer after the sale.

7. Product cost are function of-

• Product design
• Specific customers
• Customer characteristics
• Market segments

8. The company’s overall sales performance is influenced by factors such as-

• Sales volume
• Sales Mix
• Market size and share
• All of the above

9. Customer life cycle cost includes-

• Purchases price
• Start-up costs
• Post-purchase cost
• All of the above

10. Which stage of product life cycle is characterized by little competition and slowly increasing sales?

• Introduction
• Growth
• Maturity
• Decline
•  

Part Two:

1. List the characteristics of Balance score card.

2. What are the methods of Alternative costing?

3. Differentiate between fixed cost and variable cost.

4. Discuss the dissimilarities between job order costing & process costing systems.

Section B: Caselets (40 Marks)

Caselet 1

Vikram Ahuja was hired as assistant cost controller of chemfert Ltd., a multinational firm that processed chemical for use in fertilizers. Soon Vikram learned that the nearby residential landfill was being used to dump toxic wastes. It appeared that some members of management team were aware of this situation and may have been involved in arranging for this dumping. uncertain, how he should approach, Vikram is contemplating several alternatives courses of action , like seeking the advice of the superior, the controller or anonymously releasing the information in the national daily or discussing with an outside member of the BOD‟s

Questions:

1. Discuss why Vikram has an ethical responsibility to take some action against the MNC.

2. Which of the alternative courses would be the most appropriate in the given situation?

Caselet 2

A brilliant university is located in Mumbai. The university has four deportments- Business, humanities, fine arts and engineering. The university is headed by a president who has five presidents reporting to him, each heading auxiliary services, admission and records, academics. Financial services and maintenance. In addition, there are managers who report to these vice- presidents. These include managers for central purchasing, the university press and bookstore; all of whom report to the vice president of auxiliary services, and managers for accounting and finance report to vice president for financial services. Further, a dean who is responsible to the academic vice-president heads each department.

Questions:

1. Prepare an organizational structure of brilliant University.

2. List the name of the departments having under the university.

Section C: Long Questions (30 Marks)

1. What is “Cost management”? Explain the primary objectives of cost management?

2. Define “Target costing”; discuss the principles of target costing.

Answer:

Definition of Target Costing
Target costing is a strategic cost management technique used primarily during the product planning and design phase. It involves setting a desired cost for a product based on the market-driven selling price and the required profit margin. The target cost is calculated using the formula:

Target Cost = Target Selling Price – Desired Profit Margin

Instead of allowing cost to dictate price, target costing reverses the traditional cost-plus approach by setting the price according to customer expectations and then designing the product to meet that price (Horngren et al., 2020). It is widely used in competitive markets where cost control is essential for profitability.

Principles of Target Costing

1. Market-Oriented Pricing
   One of the fundamental principles of target costing is that the target price is determined by market conditions, customer preferences, and competitor pricing. Companies analyze what customers are willing to pay for a product and assess the value it provides. The target cost is then derived by subtracting the desired profit margin from this market-based price (Drury, 2018). This ensures that the product remains competitive in the marketplace.

2. Focus on Profit Planning and Cost Management
   Target costing integrates profit planning into the product development process. Instead of treating cost reduction as a reactive process after production begins, it emphasizes proactive cost control right from the early design stage. This allows businesses to manage costs before they are incurred, enhancing long-term profitability.

3. Cross-Functional Team Involvement
   Effective target costing requires collaboration among various departments, including engineering, marketing, production, and finance. These cross-functional teams work together to design products that meet customer expectations at the target cost. This approach enhances coordination and ensures that all aspects of product development align with cost and quality goals.

4. Customer Focus and Value Engineering
   Customer needs and value expectations are central to target costing. Value engineering is employed to analyze product functions and identify areas where cost can be reduced without compromising on quality or performance. This ensures that customers receive value for money while the company maintains cost efficiency.

5. Continuous Improvement and Cost Reduction
   Target costing promotes a culture of continuous cost improvement. Even after a product is launched, companies seek ways to reduce costs through better sourcing, process improvements, and technological innovation. This ongoing focus helps maintain profitability in dynamic and price-sensitive markets.

6. Life Cycle Cost Management
   Target costing considers the total cost of a product over its entire lifecycle—from design and development to production, use, and disposal. This holistic view ensures that cost decisions made in the early stages do not negatively affect later stages, such as maintenance or warranty costs.

Conclusion
Target costing is a forward-looking and customer-centric cost management approach that enables businesses to develop cost-effective, market-competitive products. By focusing on market-driven pricing, early-stage cost control, and cross-functional collaboration, it helps companies achieve profitability while delivering customer value. In highly competitive industries, target costing serves as a strategic tool to maintain margins and stay ahead of rivals.

References
Drury, C. (2018). Management and cost accounting (10th ed.). Cengage Learning.
Horngren, C. T., Datar, S. M., & Rajan, M. V. (2020). Cost accounting: A managerial emphasis (16th ed.). Pearson.