Strategic Management Accounting: Cost Insight and Performance
Costing for competitive advantage
Strategic management accounting shifts from scorekeeping to decision support. Know: activity-based costing and ABM (activities and cost drivers, not volume alone); target costing (price-led: target cost = competitive price − required profit margin, then close the gap by value engineering); kaizen costing (continuous incremental reduction after design); lifecycle costing (design, launch, growth, decline, disposal - most cost is committed at design); throughput accounting (bottleneck focus; throughput = sales − material cost; inventory is treated as a liability); and customer/channel profitability analysis.
Performance measurement
The Balanced Scorecard (Kaplan & Norton) has four perspectives - financial, customer, internal process, learning and growth - linked by a causal chain: learning drives process, process drives customer outcomes, which drive financials. Distinguish leading from lagging indicators.
Traps
- Target costing starts from the market price; cost-plus pricing starts from cost. Mixing them is the commonest error.
- Throughput accounting ranks products by throughput per bottleneck minute, not by unit gross margin, and treats labour as a period cost in the short run.
- ABC is not automatically superior; driver selection and maintenance cost must be justified.
- Variances mislead when the standard itself is wrong or when mix and yield effects dominate; separate planning from operational variances.
- Customer profitability must include cost-to-serve, not just gross margin.
Worked example
A product must sell at $120 and the firm requires a 25% margin on price. Target cost = 120 − (25% × 120) = $90. Current cost is $102, so a $12 gap must be closed by design and value engineering - not by raising the price.