Decision to Use Strategic Cost Management
Describe decisions that need to be made when a business uses strategic cost management.
- Any written explanations should use complete sentences, and appropriate grammar, punctuation, spelling and word usage.
- Your initial post should be at 200-300 words, formatted and cited in current APA style with support from at least 2 academic sources. Your initial post is worth 8 points.
- You should respond to at least two of your peers by extending, refuting/correcting, or adding additional nuance to their posts. Your reply posts are worth 2 points (1 point per response.)
- All replies must be constructive and use literature where possible.
Post by classmate 1
In today’s world, the volatile and constant decline in revenue stream has led managers to think of ways to maximize profit while effectively minimizing cost (Mohan,n.d., para. 6). This cost management strategy is used by managers to help them understand their company’s advantages and disadvantages relative to their competitors and make good financial decisions (Anthony, Hawkins & Merchant,2011 p.506). Part of the strategy is to analyse the value chain in a company. This value chain includes the analysis of several activities such as designing, developing, producing, marketing, distributing and servicing a product or service allowing management to determine if the company should choose a strategy based on a position of cost leadership or a product’s quality and design (Anthony, Hawkins & Merchant,2011, p.506). By analyzing the value chain and understanding how it affects the company, management can also determine what are the comparative advantages in the value chain that can lead to the expansion of their activities by integrating them whether in a forward or backward direction or minimizing the company’s participation in the value chain by outsourcing and relying on outside suppliers. Decisions on whether to lease or buy vehicles, properties and/or equipment, or if adding a product line is needed at the moment are also decisions that derive from conducting a cost management strategy (Lohrey, 2018, para.1).
For example, companies competing in a market with high price competition, need to have information on the cost of sales to determine sales prices, justify capital investments, eliminate or open product lines and distribution centers, promote development of new products and look for cost reductions, among other activities. By doing this, it allows them to remain competitive in the market.
Those who compete for their market share based on how their product or service differentiates from others in perhaps quality and/or design of a product or the quality of service provided need to know and determine what it will cost to achieve the objective.
Anthony, R., Hawkins, D. Merchant, K. (2011) Accounting: Text and Cases. New York: McGraw-Hill Irwin
Lohrey, Jackie. (2018). Cost Management Strategies for Business Decisions.Retrieved
https://smallbusiness.chron.com/cost-management-strategies-business- (Links to an external site.)
Mohan, A. (n.d.) Strategic Cost Management: An Overview Retrieved from:
Post by classmate 2
Businesses use strategic cost management (SCM) to improve the performance of the business as a whole by incorporating cost reduction with other aspects of decision making (Business Jargons, 2018). To be effective, SCM should be established from the beginning of a company’s production and used on a consistent basis to sustain cost reduction and high quality service and production (Business Jargons, 2018). The combination of management of costs and business strategies work to create a more efficient system of operations to achieve maximum profits by lowering costs in all aspects of the company (Business Jargons, 2018). Decisions that need to be made using SCM are those related to competition, pricing, employee tasks and performance, management activities and production (Business Jargons, 2018).
The decisions related to competition are derived from analysis of the company’s strategic positioning in their market compared to competitors (Business Jargons, 2018). Another component of SCM is analysis of the cost drivers, which helps a company assess the costs to produce their products and what affects the decisions to increase or decrease them (Business Jargons, 2018). The final element of SCM is Value Chain Analysis in which each step in the process of creating the final product or service is reviewed according to how much it costs to perform the step (Business Jargons, 2018). Some examples of costs that are reviewed are the purchase or lease of vehicles, real estate or equipment and the staff used to produce a certain amount of products (Lohrey, 2017). SCM is being used when a company makes the decision to use a product or service by deciding what value it adds to the bottom line (Lohrey, 2017). The ultimate objectives of SCM are to achieve a competitive advantage at the lowest possible cost (Lohrey, 2017).
- Business Jargons. (2018, May 5). What is Strategic Cost Management (SCM)? definition, stages, needs and components. Retrieved from https://businessjargons.com/strategic-cost-management.html
- Lohrey, J. (2017, November 21). Cost Management Strategies for Business Decisions. Retrieved from https://smallbusiness.chron.com/cost-management-strategies-business-decisions-78054.html