Strategic Cost Management DEC 2025

Description

Strategic Cost Management

Dec 2025 Examination

 

 

Q1. A manufacturing company produces both high-volume and low-volume products. Historically, it has used traditional costing, allocating overheads based on direct labour hours. Recently, management discovered that high-volume products were being over-costed, while low-volume products were under-costed, leading to poor pricing decisions and declining profits. The company is considering implementing Activity-Based Costing (ABC) to gain a more accurate understanding of product costs and to improve its competitive position in the market. Based on the scenario, how should the management of a multi-product manufacturing company apply the steps of Activity-Based Costing (ABC) to address cost distortions caused by traditional costing, and what specific actions should be taken to ensure more accurate product costing and improved profitability? (10 Marks)

Ans 1.

Introduction

In today’s competitive manufacturing environment, accurate cost measurement is central to effective pricing, resource allocation, and profitability. Traditional costing systems, which allocate overheads primarily on direct labour hours, often distort product costs when companies produce both high-volume and low-volume products. This distortion arises because overheads are not consumed in proportion to labour hours alone, but rather by a wide range of activities such as setups, inspections, and material handling. As a result, high-volume products may be over-

 

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Q2 (A).  Acme Electronics, a leading UK-based consumer electronics manufacturer, is experiencing shrinking profit margins due to rising raw material costs and intense competition. The management is debating whether to continue manufacturing key components in-house, which ensures quality and shorter lead times but is becoming increasingly expensive, or to outsource production to lower-cost international suppliers, which could reduce costs but may compromise quality and introduce logistical complexities. The board is divided, with some members prioritising immediate cost savings and others concerned about long-term brand reputation and operational risks. Critically evaluate the decision faced by Acme Electronics regarding whether to continue in-house manufacturing of components or outsource production to international suppliers. Considering the trade-offs between cost savings, quality control, and logistical challenges, which option would you recommend and why? Justify your answer by weighing the long-term strategic implications for profitability and competitiveness. (5 Marks)

Ans 2a.

Introduction

Shrinking margins at Acme Electronics reflect a classic make-or-buy dilemma intensified by raw-material inflation and price pressure. In-house manufacturing preserves quality and speed but strains unit economics; outsourcing promises lower conversion costs while adding coordination, quality, and supply-chain risk. The right answer isn’t purely financial or purely reputational—it’s strategic and dynamic. The evaluation must weigh total cost of ownership, risk exposure, and the firm’s

 

Q2(B). A company operates at 60% of its total capacity, producing 12,000 units per month. The fixed cost is Rs.3,00,000 per month, and the variable cost per unit is Rs.100. The selling price per unit is Rs.180. The management is considering increasing production to 90% capacity, but this will require an additional fixed cost of Rs.1,20,000 per month and will reduce the variable cost per unit by 10% due to economies of scale. However, to sell the additional output, the company must offer a 5% discount on the selling price for all units. Should the company increase production to 90% capacity? Calculate the change in monthly profit if the proposal is implemented. (5 Marks)

Ans 2b.

Introduction

Management is weighing a capacity lift from 60% to 90%. The decision turns on contribution changes after pricing, variable-cost shifts from scale, and higher fixed costs. We must compare current profit with proposed profit using clear steps. If incremental contribution exceeds the added fixed cost and discount impact, the move improves monthly profit. The analysis