Strategic Cost Management and Decision Making
What this domain tests
Strategic cost management asks you to use cost data to make decisions, not just to value inventory. The exam focuses on relevant costing, activity-based costing (ABC), target and life-cycle costing, throughput accounting and constrained-resource optimisation.
Core rules
- Relevance: a cost is relevant only if it is future, incremental and cash. Sunk costs, committed costs and allocated fixed overhead are irrelevant.
- ABC: costs are driven by activities; the hierarchy is unit, batch, product and facility. ABC is most useful where products are diverse and overheads are high.
- Target costing: target cost = competitive selling price − required profit margin. The cost gap is closed through value engineering, not by raising price.
- Throughput accounting: throughput = sales revenue − material cost; the bottleneck governs the system; rank products by throughput per bottleneck minute.
- Limiting factors: rank by contribution per unit of scarce resource, not by unit contribution.
Worked example
A machine is limited to 4,000 hours. Product A earns contribution $30 and uses 2 hours; product B earns $24 and uses 1.5 hours. Demand for B is capped at 2,000 units. Contribution per hour: A = $15, B = $16. Make B first: 2,000 units use 3,000 hours and earn $48,000. The remaining 1,000 hours make 500 units of A, earning $15,000. Total contribution = $63,000. Ranking by unit contribution would wrongly prioritise A.
Traps
Including allocated overhead in make-or-buy; ignoring the opportunity cost of scarce capacity; treating R&D already spent as relevant; confusing target cost with standard cost; and calculating throughput after deducting labour.