SCM

Traditional Cost Management

Strategic Cost Management
Example
Difference
Target Costing
 Components of target costing system

• Value Analysis:
it is planned, scientific approach to cost
reduction which reviews the material
composition of a product and production design
so that modifications and improvements can be
made. Which do not reduce the value of the
product to the customer or to user
• Value Engineering:
it is the application of value analysis to new
products. Value engineering relates closely to
the target cost as it is cost avoidance or cost
reduction before production.
Some issues
difference
 example

In addition, each toy requires 0.6 kg of other material @16 per Kg.
Life cycle costing
 example
• Y-connections, china based firm, has just developed utra-thin
tablet S-5 with few new features. This tablet cost $ 5,00,000
to develop.
 Relevant and Irrelevant
Not every cost is important to every decision a
manager needs to make decisions
• Relevant costs: Costs that should be
considered and included in your analysis when
deciding on a future course of action. Relevant
costs are future costs — costs that you would
incur, or bring upon yourself, depending on
which course of action you take.
• Irrelevant (or sunk) costs: Costs that should
be disregarded when deciding on a future
course of action;
• Sunk, committed
 Cost of Quality
• Cost of quality (COQ) is defined as a methodology
that allows an organization to determine the
extent to which its resources are used for activities
that prevent poor quality, that appraise the quality
of the organization’s products or services, and that
result from internal and external failures.
• Having such information allows an organization to
determine the potential savings to be gained by
implementing process improvements.
 ABC vs. Traditional
• the costs of living in an apartment with
roommates. Two roommates in an apartment
will typically split the costs of rent, utilities and
groceries, and they have a couple of options
for doing so. They could simply total the cost
of all of the bills and divide it exactly in two.
This would be similar to traditional costing.
• The roommates also have the option of
determining who uses specific utilities and
paying only for what each one uses. They can
then create an itemized bill for each
roommate. For example, if one roommate
doesn’t use the internet and the other doesn’t
use TV, they won’t have to pay those parts of
the bill. This method is similar to activity-
based costing.
Strategic cost reduction
techniques
• Business Process Improvement
• Shutdowns, Turnarounds, and Outages (STO)
• Supply Chain Management
• Safety Performance
• Corrective & Preventive Action Management (CAPA)
• Quality Improvement
• Budgetary control, Standard costing, Marginal Costing
• Improvement in design,
• Material control, Labour control, Overhead control,
• Automation,
• Operation research,
• Market research,
• Value Chain analysis, Quality measurement and research,
• Value chain analysis (VCA) is a process where
a firm identifies its primary and support
activities that add value to its final product
and then analyze these activities to reduce
costs or increase differentiation.
• Value chain represents the internal activities a
firm engages in when transforming inputs into
outputs.
• Value chain analysis is a strategy tool used to
analyze internal firm activities. Its goal is to
recognize, which activities are the most
valuable (source of cost or differentiation advantage) to the
firm and which ones could be improved to
provide competitive advantage.