INTRODUCTION TO
STRATEGIC COST
MANAGEMENT
STMC302
WHAT IS STRATEGIC
COST MANAGEMENT?
Strategy
▪ Is a set of policies, procedure and approaches to business that produce long term
success
Cost
▪ The monetary value of expenses incurred by a business
Management
▪ process of planning, decision making, organizing, leading, motivation and controlling the
human resources, financial, physical, and information resources of an organization to reach
its goals efficiently and effectively.
Strategic Cost Management
is the use of cost
information as a tool for
decision making and
business development that
would support the strategic
placement of the company.
STRATEGIC PLACEMENT AND ITS RELATION TO COST
Cost Leadership Product
Differentiation
▪ This is the strategy in which a firm succeeds in
producing products or services at the lowest cost
in the industry. A firm that is a cost leader makes
sustainable profits at the lowest prices, thereby ▪ This strategy is implemented by creating a
limiting the growth of competition in the industry perception among consumers that the product or
through its success in price wars and undermining service is unique in some important way, usually
the profitability of the competitors which must by being of higher quality, features and
meet the firms low price innovations.
MANAGEMENT ACCOUNTANTS ROLE IN
STRATEGIC COST MANAGEMENT
Management accountants are the accounting professionals who develop and analyze
cost management information and other accounting information .
COST CONCEPTS,
CLASSIFICATION AND COST
BEHAVIOR
COST CLASSIFICATION FOR ASSIGNING TO
COST OBJECT
Direct cost
cost that are traceable to a particular product line, segment, department, division, or
branch
Indirect cost
costs that are not directly traceable to a particular product line, segment, department
division, or branch
COST CLASSIFICATION FOR
MANUFACTURING COMPANIES
Manufacturing cost
Materials, direct labor and factory overhead
Nonmanufacturing cost
Selling , general and administrative expense
COST CLASSIFICATION FOR PREPARING
FINANCIAL STATEMENT
Product cost
Inventoriable cost
Period cost
Expensed as incurred
COST CLASSIFICATION AS TO DECISION
MAKING
Opportunity cost
these are the benefits forgone in choosing one alternative over the other course of action
Differential cost
Difference of costs under alternative actions or decision
COST CLASSIFICATION AS TO DECISION
MAKING
Relevant cost
cost incurred in one alternative that will not be encountered in the other alternative
Marginal cost
extra cost incurred when one additional unit is produced. It determines the quantity
most efficient to product
COST CLASSIFICATION AS TO DECISION
MAKING
Sunk cost
Cost that has been already incurred that will not affect costs since they are already paid for
or incurred and cannot be changed by any future action
Out-of-pocket cost
cost or expenses that require a cash payment in the current period or during a project
COST CLASSIFICATION FOR PREDICTING
COST BEHAVIOR
What is Cost behavior?
Cost behavior describes how a cost behaves or
changes as the amount of cost driver changes
Why is cost behavior important?
It helps businesses
It helps businesses to It helps businesses
make informed
predict how costs will anticipate how their
decisions about
change as production decisions will impact
budgeting,
levels, sales and other costs and their
forecasting, and
metrics change financial health
strategic planning
COST BEHAVIOR ASSUMPTIONS
Relevant Range Assumption
The range of activity that presents the entity’s normal operation levels where relationships of
cost behaviors are deemed acceptable
Time Period Assumption
The cost behavior patterns identified are true only over a specific period of time, Beyond
this, the cost may show a difference behavior
Linearity Assumption
The cost assumed is to manifest a linear relationship over a relevant range despite its
tendency to show otherwise over the long term
COST CLASSIFICATION FOR PREDICTING
COST BEHAVIOR
Variable cost
Fixed cost
Mixed cost
COST CLASSIFICATION FOR PREDICTING
COST BEHAVIOR
Variable cost
▪ Costs that change as the quantity of the goods produced changes. Total amount of
variable costs is dependent to the level of production
▪ Variable cost are fixed per unit but variable in total
Variable Cost Level of Total cost
per unit production
50 1000 50,000
50 1500 75,000
50 2000 100,000
COST CLASSIFICATION FOR PREDICTING
COST BEHAVIOR
Fixed cost
▪ At whatever level of production within the relevant range, this cost does not change. It
is independent of the level of production
▪ Fixed cost are variable per unit but fixed in total
Fixed Cost per Level of Total cost
unit production
50 1000 50,000
33 1500 50,000
25 2000 50,000
YOUR company manufactures and sells a single product. A partially completed
schedule of the company’s total and per unit costs over relevant range of 60 to 100
units produced and sold each year is given below:
Units produced and sold
60 ? 100
TOTAL COSTS:
Variable costs P120 P P
Fixed costs P P P600
Total costs P P760 P
COSTS PER UNIT:
Variable costs P P P
Fixed costs P P P
YOUR company manufactures and sells a single product. A partially completed
schedule of the company’s total and per unit costs over relevant range of 60 to 100
units produced and sold each year is given below:
Units produced and sold
60 ? 100
TOTAL COSTS:
Variable costs P120 P P
Fixed costs P 600 P 600 P600
Total costs P P760 P
COSTS PER UNIT:
Variable costs P P P
Fixed costs P P P
YOUR company manufactures and sells a single product. A partially completed
schedule of the company’s total and per unit costs over relevant range of 60 to 100
units produced and sold each year is given below:
Units produced and sold
60 ? 100
TOTAL COSTS:
Variable costs P120 P P
Fixed costs P 600 P 600 P600
Total costs P P760 P
COSTS PER UNIT:
Variable costs P 2 P P
Fixed costs P P P
YOUR company manufactures and sells a single product. A partially completed
schedule of the company’s total and per unit costs over relevant range of 60 to 100
units produced and sold each year is given below:
Units produced and sold
60 ? 100
TOTAL COSTS:
Variable costs P120 P P
Fixed costs P 600 P 600 P600
Total costs P P760 P
COSTS PER UNIT:
Variable costs P 2 P2 P2
Fixed costs P P P
YOUR company manufactures and sells a single product. A partially completed
schedule of the company’s total and per unit costs over relevant range of 60 to 100
units produced and sold each year is given below:
Units produced and sold
60 ? 100
TOTAL COSTS:
Variable costs P120 P P 200
Fixed costs P 600 P 600 P600
Total costs P P760 P
COSTS PER UNIT:
Variable costs P 2 P2 P2
Fixed costs P P P
YOUR company manufactures and sells a single product. A partially completed
schedule of the company’s total and per unit costs over relevant range of 60 to 100
units produced and sold each year is given below:
Units produced and sold
60 ? 100
TOTAL COSTS:
Variable costs P120 P P 200
Fixed costs P 600 P 600 P600
Total costs P 720 P760 P 800
COSTS PER UNIT:
Variable costs P 2 P2 P2
Fixed costs P P P
YOUR company manufactures and sells a single product. A partially completed
schedule of the company’s total and per unit costs over relevant range of 60 to 100
units produced and sold each year is given below:
Units produced and sold
60 ? 100
TOTAL COSTS:
Variable costs P120 P 160 P 200
Fixed costs P 600 P 600 P600
Total costs P 720 P760 P 800
COSTS PER UNIT:
Variable costs P 2 P2 P2
Fixed costs P P P
YOUR company manufactures and sells a single product. A partially completed
schedule of the company’s total and per unit costs over relevant range of 60 to 100
units produced and sold each year is given below:
Units produced and sold
60 80 100
TOTAL COSTS:
Variable costs P120 P 160 P 200
Fixed costs P 600 P 600 P600
Total costs P 720 P760 P 800
COSTS PER UNIT:
Variable costs P 2 P2 P2
Fixed costs P P P
YOUR company manufactures and sells a single product. A partially completed
schedule of the company’s total and per unit costs over relevant range of 60 to 100
units produced and sold each year is given below:
Units produced and sold
60 80 100
TOTAL COSTS:
Variable costs P120 P 160 P 200
Fixed costs P 600 P 600 P600
Total costs P 720 P760 P 800
COSTS PER UNIT:
Variable costs P 2 P2 P2
Fixed costs P 10 P 7.5 P6
COST CLASSIFICATION FOR PREDICTING
COST BEHAVIOR
Mixed cost
▪ has both fixed and variable components
▪ This means that some costs do not change and others might
▪ Y= a + bx
Y is a total cost
a is the fixed cost per period
b is the variable rate per unit of activity
x is the number of unit of activity
COST ESTIMATION: SEGREGATION OF MIXED
COSTS INTO FIXED AND VARIABLE COST
High-Low Points Method
The fixed and variable elements of the fixed costs are computed from two sampled data
points the highest and lowest points as to activity level or cost driver
Scatter Graph Method
All observed costs at various levels are plotted on a graph. Based on sound judgment a
regression line is then fitted to the plotted points to represent the line function
Least Square Regression Method
Least square method is a statistical technique that investigates the association between
dependent and independent variable
HIGH-LOW POINTS METHOD
The controller of SUREDEAD Hospital would like to come up with a cost formula that links admitting
department cost to the number of patients admitted during a month. The admitting department’s
costs and the number of patients admitted during the past nine months are given below:
Month Number of patients Total cost
April 18 15,600
May 19 15,200
June 17 13,700
July 15 14,600
August 15 14,300
September 11 13,200 Using high low method determine:
1. Variable cost per unit
October 11 12,800 2. Monthly Fixed cost
November 48 72,500 3. Total estimated cost if the number of
December 16 14,000 patients admitted for the month is 20
HIGH-LOW POINTS METHOD
Cost at high level activity- costs at lowest level activity
1. VARIABLE COST PER UNIT =
Highest level activity- lowest level activity
2. TOTAL FIXED COST = Total mixed cost- total variable cost
3. TOTAL COST Y= a + bx
SCATTER GRAPH METHOD
▪ Company decides to use scatter graph method to split its factory overhead (FOH)
into variable and fixed components. Following is the data which is provided for the
analysis
Month Units Total cost
April 1520 36,375
May 1250 38,000
June 1750 41,750
July 1600 42,360
August 2350 55.080
September 2100 48,100
October 3000 59,000
November 2750 56,800
LEAST SQUARE REGRESSION METHOD
TOTAL COST Y= a + bx
