Description
Strategic Cost Management
Sep 2026 Examination
Q1 A consumer durables manufacturer produces two mixer-grinder lines: a high-volume standard model and a low-volume premium customised model. For years, the finance team has allocated overhead using a single labour-hour-based traditional costing system. Recently, management noticed that the standard product appears less profitable despite stable demand, while the premium line seems unusually profitable even though it requires more setups, inspections, and special material handling. The COO suspects that the current system is distorting product costs and affecting pricing decisions. The company now wants to examine whether overheads should be traced through activities rather than broad departmental averages to reflect actual resource consumption. Using activity-based costing, how should the company redesign its overhead allocation approach for these product lines? Apply the concepts of activities, cost pools, and cost drivers to recommend a more accurate costing structure and explain how this would improve pricing and product profitability decisions? (10 Marks)
Ans 1.
Introduction
This consumer durables manufacturer’s traditional labour-hour-based overhead allocation is distorting the true profitability of its standard and premium mixer-grinder lines, since the premium line’s disproportionate consumption of setups, inspections, and material handling is not being captured accurately. Applying activity-based costing, tracing overheads through activities, cost pools, and cost drivers rather than a single broad allocation base, would reveal the genuine cost structure behind each product line and restore management’s confidence in
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Q2. A manufacturing firm is replacing an ageing industrial machine used in a high-volume production line. The procurement team recommends a low-price imported machine because it reduces immediate capital expenditure. However, the maintenance head warns that spare parts are difficult to source, service support is limited, and energy consumption is likely to be higher over time. The finance team adds that the asset will be funded through bank credit, while the sustainability officer highlights disposal and emissions-related concerns at the end of the machine’s useful life. Senior management must decide whether lower acquisition cost truly creates value, or whether a broader life cycle perspective would reveal hidden long-term financial and operational exposure. Evaluate whether the company should approve the cheaper machine option. Justify your recommendation by assessing initial, operating, maintenance, financing, inflation, residual, external and risk costs over the asset life cycle, and explain how life cycle costing would support a more strategically sound decision than relying only on purchase price. (10 Marks)
Ans 2.
Introduction
This manufacturing firm’s machine replacement decision illustrates the danger of evaluating capital investments purely on acquisition price, since the cheaper imported machine’s apparent savings may be entirely offset by higher maintenance, energy, financing, and disposal costs over its operational life. Applying life cycle costing gives senior management the comprehensive framework needed to evaluate whether the lower purchase price truly creates value once every cost category across the asset’s full life is properly considered, resolving the disagreement currently dividing procurement, maintenance, finance, and
Q3(A) Sales-Mix Ratio: Products A and B are sold in a constant sales-mix ratio of 3:2 by units. Product Details: Product A – Selling Price Rs.1,200, Variable Manufacturing Cost Rs.620, Variable Selling Cost (6%) Rs.72. Product B – Selling Price Rs.900, Variable Manufacturing Cost Rs.510, Variable Selling Cost (6%) Rs.54. Fixed Costs: Total annual fixed cost is Rs.48,60,000. Promotional Discount: The firm plans a uniform 5% promotional discount on the listed price of only Product A. Revised Sales Mix: The expected sales mix shifts to 5:3 in favour of Product A. Operating Profit Target: Determine the minimum total number of units that must be sold to earn an operating profit of Rs.14,40,000 under the revised conditions. (5 Marks)
Ans 3A.
Introduction
Determining the minimum units required under a revised sales mix and promotional discount requires computing revised contribution per unit for each product, then applying the weighted average contribution approach to find the total units needed to cover fixed costs and achieve
Q3(B) A packaged foods company is reviewing one of its long-running snack products that has shown declining sales and weak standalone profitability for the last four quarters. Some executives want to discontinue the product and redirect marketing funds to newer, higher-margin offerings. Others argue that the snack plays an important role in attracting customers to the brand’s wider product range and supports cross-selling of premium items. Market research suggests the category is still relevant, but customer preferences are shifting and competitors are innovating rapidly. The management team must decide whether to drop the product, reposition it, or retain it as part of a broader portfolio strategy supported by careful analysis. Design an add-or-drop product evaluation framework that the management can apply to this case, ensuring that financial and non-financial factors, strategic fit, and possible contribution synergies are incorporated before the final decision is made? (5 Marks)
Ans 3B.
Introduction
Deciding whether to drop, reposition, or retain this declining snack product requires a structured add-or-drop evaluation framework that goes beyond standalone financial performance to incorporate strategic fit and potential contribution synergies across the
