Strategic Cost Management December 2026
Q.1: Bharat Electronics, a diversified manufacturer, traditionally used direct labour hours to allocate overheads across its wide range of products. However, recent profitability analyses revealed that high-volume products were consistently over-costed, while low-volume, customised products appeared uncompetitive due to under-costing. The CFO believes these cost distortions have led to suboptimal pricing strategies and poor resource allocation. In response, the company wants to shift to activity-based costing (ABC) by identifying core activities such as machine setups, product inspections, and material handling, and establishing appropriate cost drivers. How should Bharat Electronics apply the ABC model to improve accuracy in product costing and pricing decisions? Describe how activity identification, cost driver selection, and cost allocation would address the identified distortions and support better managerial decision-making.
Answer:
Introduction:
Bharat Electronics has encountered a typical problem with traditional overhead costing. Previously the company used direct labour hours to allocate overhead costs to its different products. Such a method will work well in cases where all the items are resource intensive. However, Bharat Electronics makes a wide range of products including high-volume standard products and low-volume customised products. These products do not consume support activities in the same proportion. For instance, a customised product may involve several machine setups, inspections and material movements even though it is produced in small quantities. Overhead cost allocation based purely on labor hour is an approach that overlooks resource utilization. As a consequence, high-volume products may be over-costed whereas customised low-volume products may be under-costed. This can cause standard products to appear more expensive than they actually are while customised products to appear cheaper. Activity-Based Costing (ABC) can address this problem by allocating overhead costs on the basis of the activities actually driving overhead cost. This provides more accurate product costs that help in taking better pricing, product-mix and resource-allocation decisions.
This is partially solved sample answer
Buy complete NMIMS solved assignments for the December 2026 session.
General/Generic Assignment at just ₹180 per assignment.
Customized/ Unique Assignment at just ₹500 per assignment.
Contact No: +91 9741410271 (WhatsApp)
OR
Mail to: smu.assignment@gmail.com
Q.2 (A): Abhi Limited, an established consumer electronics manufacturer, struggled with inaccurately allocated overhead costs under traditional costing, leading to weak competitive performance. Facing rivals with lower prices and superior cost structures, the company adopted activity-based costing (ABC), life cycle costing (LCC), and strengthened internal value chain linkages across departments such as procurement, production, and marketing. These initiatives improved their cost allocation, supported product innovation, and helped regain market standing, but required significant investment and cultural adaptation. Evaluate how Abhi Limited’s adoption of ABC, LCC, and internal value chain linkages transformed its cost management and competitive position. Critique the strengths and potential pitfalls of this integrated approach, and justify whether such strategic costing methods are sustainable in rapidly evolving markets.
Answer:
Introduction:
Abhi Limited encountered issues associated with traditional costing methods allocating overheads on the basis of volume-based drivers, which resulted in distorting the product cost picture. Such a distortion in a competitive environment had an impact on the product prices and profit margins of the business as well as its planning process, which in turn made innovation difficult. To address this challenge, the company started using activity-based costing (ABC), life cycle costing (LCC), and enhancing the internal value chain linkages, which enabled it to obtain a detailed understanding of the cost of its products, encourage department collaboration, and intensify innovation and competitiveness.
Q.2 (B): A manufacturing firm analyses two alternative sales strategies using CVP analysis. For Strategy X, a fixed cost of Rs.4,00,000 is incurred, with a variable cost of Rs.110 per unit and a selling price of Rs.200 per unit. If the firm switches to Strategy Y, the fixed cost rises by 25%, but the variable cost per unit drops by 10%. However, market research indicates that for every Rs.10 decrease in variable cost, the sales price must be reduced by Rs.6 to maintain demand volume. Compute (a) the break-even quantity under Strategy Y, and (b) the sales quantity at which both strategies yield the same profit.
Answer:
Introduction:
The Cost-Volume-Profit (CVP) analysis aids in analyzing the effect of change in fixed cost, variable cost, selling price, and sales volume on profit. In this case, the Strategy X is compared with Strategy Y after the firm has changed its cost structure. Thus, the Strategy Y implies 25% increase in fixed cost and 10% decrease in variable cost, but at the same time the decrease in variable cost requires decreasing of selling price in order to keep demand level. Hence, there is a need to calculate break-even quantity and sales volume for which two strategies will provide equal profit.