Description

Strategic Cost Management

Dec 2026 Examination

 

 

Q1 Bharat Electronics, a diversified manufacturer, traditionally used direct labour hours to allocate overheads across its wide range of products. However, recent profitability analyses revealed that high-volume products were consistently over-costed, while low-volume, customised products appeared uncompetitive due to under-costing. The CFO believes these cost distortions have led to suboptimal pricing strategies and poor resource allocation. In response, the company wants to shift to activity-based costing (ABC) by identifying core activities such as machine setups, product inspections, and material handling, and establishing appropriate cost drivers. How should Bharat Electronics apply the ABC model to improve accuracy in product costing and pricing decisions? Describe how activity identification, cost driver selection, and cost allocation would address the identified distortions and support better managerial decision-making. (10 Marks)

Ans 1.

Introduction

Bharat Electronics has discovered that its traditional overhead allocation method, based purely on direct labour hours, has been distorting product costs. High-volume products appear over-costed while low-volume, customised products appear under-costed. These distortions have pushed the company toward poor pricing decisions and inefficient resource allocation. Activity-based costing offers a more accurate way to assign overhead costs by tracing them to the actual activities that drive them. Applying this model through careful activity identification, cost driver selection, and proper cost allocation can help Bharat Electronics correct these distortions and

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Q2 (A) Abhi Limited, an established consumer electronics manufacturer, struggled with inaccurately allocated overhead costs under traditional costing, leading to weak competitive performance. Facing rivals with lower prices and superior cost structures, the company adopted activity-based costing (ABC), life cycle costing (LCC), and strengthened internal value chain linkages across departments such as procurement, production, and marketing. These initiatives improved their cost allocation, supported product innovation, and helped regain market standing, but required significant investment and cultural adaptation. Evaluate how Abhi Limited’s adoption of ABC, LCC, and internal value chain linkages transformed its cost management and competitive position. Critique the strengths and potential pitfalls of this integrated approach, and justify whether such strategic costing methods are sustainable in rapidly evolving markets. (5 Marks)

Ans 2(A).

Introduction

Abhi Limited faced weak competitive performance due to inaccurately allocated overhead costs under traditional costing. Facing rivals with superior cost structures, the company adopted activity-based costing, life cycle costing, and strengthened value chain linkages across procurement, production, and marketing, helping it regain market standing. This integrated approach also required significant investment and cultural adaptation, raising genuine questions

 

Q2(B) A manufacturing firm analyses two alternative sales strategies using CVP analysis. For Strategy X, a fixed cost of Rs.4,00,000 is incurred, with a variable cost of Rs.110 per unit and a selling price of Rs.200 per unit. If the firm switches to Strategy Y, the fixed cost rises by 25%, but the variable cost per unit drops by 10%. However, market research indicates that for every Rs.10 decrease in variable cost, the sales price must be reduced by Rs.6 to maintain demand volume. Compute (a) the break-even quantity under Strategy Y, and (b) the sales quantity at which both strategies yield the same profit. (5 Marks)

Ans 2(B).

Introduction

This manufacturing firm is comparing two alternative sales strategies using cost volume profit analysis. Strategy X and Strategy Y differ in their fixed costs, variable costs, and selling prices, with Strategy Y also linked to a market relationship between price and variable cost. Finding Strategy Y’s break-even quantity, and the quantity where both strategies yield identical profit,