ACC3200 Chap.11 Strategic Cost Management
Strategic Cost Management
Redesign activities and products with ABM, target costing, life-cycle thinking and constraint management.
What this chapter covers
- 01
Value-added activities
- 02
Target-cost gaps
- 03
Bottlenecks and throughput
Worked example · free
Close a target-cost gap
- 2Derive allowable cost from price and desired profit.
- 2Assign the gap to actions preserving required function.
- 2Check throughput per constrained resource and whether savings become real.
Key terms
- Value-added activities
- Work customers require or value, separated from preventable effort.
- Target-cost gaps
- The difference between estimated cost and the allowable market-supported cost.
- Bottlenecks and throughput
- Constraints and contribution measures for prioritising scarce-resource time.
Strategic Cost Management FAQ
When does activity removal save cash?
Cash is saved when the underlying resource commitment is removed or avoided. If released capacity remains paid and unused, operational improvement has not yet produced the claimed financial saving.
Exam move
Start target costing from the market and required profit, not from current cost. Market-supported price minus desired profit equals allowable cost. Compare this with the current design estimate to obtain the cost gap. Preserve the sign and label every amount. A target is not an arbitrary percentage cut; it expresses the cost compatible with customer value and the organisation's profit objective.
Translate the gap into functions and activities. Identify what customers value, which features deliver that value and which resources the current design consumes. Value engineering seeks a lower-cost way to preserve required function, while simple cost cutting may remove capability that supports price or demand.
Record the owner and evidence for each proposed design change rather than treating the total gap as one undifferentiated problem. Distinguish value-added and non-value-added work from the customer's and process perspectives. An activity can be necessary under current regulation or technology without directly adding customer value. Removing an activity label does not save cash if the resource commitment remains.
State whether capacity can be eliminated, redeployed or remains unused, and reflect that consequence in the recommendation. For activity-based management, trace cost from resources to activities and then to cost objects using drivers that explain consumption. The model should reveal why a product, channel or process demands work, not merely redistribute overhead with more rates.
Test whether driver data is reliable and whether sustaining costs should remain outside unit decisions. Use the result to redesign activity, demand or capacity. At a bottleneck, rank products by throughput or relevant contribution per unit of the constrained resource, not by contribution per unit of product. Confirm that the resource is genuinely limiting during the decision period.
Multiply the rate by available constrained minutes or hours and keep the selected mix within capacity. Once the bottleneck moves, the old ranking may no longer be valid. Use life-cycle costing to expose commitments made before production and consequences incurred after sale. Design decisions can determine manufacturing, service, warranty and disposal cost long before those amounts appear in reports.
Compare alternatives across a consistent life span and separate cash-flow timing when discounting matters. This wider boundary can justify an early design investment that looks costly in a single-period view. Practise a sensitivity around price, desired profit and bottleneck time. Change one assumption, recompute allowable cost or product ranking and identify the reversal threshold.
This shows whether proposed savings create sufficient headroom. Keep market evidence, engineering estimates and resource constraints visible so uncertainty is not hidden inside a single target. Prepare one original target-cost case and one constrained-resource case. Award your practice marks to the equation, gap or ranking, implementation logic and behavioural safeguard.
The six-mark chapter structure is AskSia-authored and is not an official Monash marking guide. End with assigned cost-gap actions, validation milestones and a trigger to redesign or stop if customer function, market price or real resource savings fail to materialise. Combine design and capacity in one last case.
Derive the target-cost gap, assign proposed reductions to functions or activities and reject any item that removes customer value without evidence. Identify which claimed saving releases cash and which only creates spare capacity. Rank products by throughput per bottleneck minute and test whether the constraint moves after the changes.
The recommendation should name design owners, validation milestones and a stop condition if price, functionality or process evidence deteriorates. This drill prevents target costing, activity analysis and bottleneck management from becoming disconnected formulas. Validate claimed design savings against resource commitments after implementation.
If labour, equipment or supplier capacity remains paid and idle, describe the operational release honestly instead of recording immediate cash savings that the organisation has not realised.
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