Strategic Cost Management · Introduction to Strategic Cost Management

Tools and Techniques of Strategic Cost Management

Updated 11 October 2026 · Fact-checked

Strategic cost management tools are methods that help a firm lower cost and build competitive advantage, not just record cost. The main ones are value chain analysis, target costing, life cycle costing, Kaizen, JIT, TQM, balanced scorecard and benchmarking. To answer a question, identify the problem, match the tool, explain how it works and recommend.

Understand Strategic Cost Management Tools and Techniques

Traditional costing asks, "What did this product cost?" Strategic cost management asks, "How do we compete on cost and value, and what must we change to do it?" The tools below are the answers to that second question. Each tool attacks a different part of the problem.

Value chain analysis looks at all activities from design and supply to sales and service. It shows where value is created and where cost is wasted, including activities outside your own firm, such as suppliers and distributors.

Target costing starts from the price the market will pay. Target cost = target selling price − desired profit. If the current cost is higher, the gap must be closed during design, usually by value engineering. Life cycle costing tracks cost across the whole life of a product, from R&D to disposal. Many costs are committed at the design stage, so that is where control matters most.

Kaizen costing means continuous small cost reductions during the manufacturing stage, often against a fixed percentage target. JIT (just-in-time) produces and buys only what is needed, when it is needed, to cut inventory and waste. TQM makes quality everyone's job and aims at zero defects, lowering the cost of failure.

Balanced scorecard measures performance from four perspectives: financial, customer, internal business process, and learning and growth. Benchmarking compares your processes and costs with the best performers, inside or outside your industry, to find gaps and fix them.

A useful way to remember them: target costing and life cycle costing work at the design stage, Kaizen, JIT and TQM work at the production stage, and value chain analysis, benchmarking and the balanced scorecard work across the whole business.

Key rules to remember

Target cost: Target cost = Target selling price − Target profit; Price is fixed by the market. Cost is the variable you must manage.
Cost reduction gap: Cost gap = Current estimated cost − Target cost; A positive gap means the product is not yet viable. Close it through design changes.
Target profit from margin: Target profit = Target selling price × Required margin %; Use this when profit is given as a percentage of selling price, not of cost.
Kaizen cost reduction: Kaizen target cost = Previous period cost × (1 − Reduction %); Applied each period on the previous period's actual cost.
Life cycle cost: Life cycle cost = Pre-production cost + Production cost + Post-production cost (distribution, service, disposal); Add all costs over the life, not only manufacturing cost.

How to solve Strategic Cost Management Tools and Techniques questions

Most questions on this topic are either "explain and compare" or "apply a tool to a case". Use the same method for both.

1Read the case and name the real problem: high cost, low quality, high inventory, poor performance measurement, or a gap against competitors.
2Choose the tool that fits that problem. If the stage is design, think target costing or life cycle costing. If it is production, think Kaizen, JIT or TQM.
3Define the tool in one or two lines in your own words.
4Explain how it works in the case. Use the numbers or facts given. For numerical parts, show the formula first.
5State the benefit the firm gets, such as lower cost, less waste or better customer value.
6Mention one limitation or condition, for example JIT needs reliable suppliers.
7Close with a clear recommendation. Do not end with a definition.

Quickest way: Problem-to-tool matching

When to use it: Use it for MCQs and for short-answer parts where you must pick or compare tools within a minute.

Spot the keyword: market price, continuous improvement, whole life, inventory, defects, four perspectives, best practice, or activities.
Map it: market price → target costing; continuous small improvement → Kaizen; whole life → life cycle costing; inventory and waste → JIT; defects → TQM; four perspectives → balanced scorecard; best practice → benchmarking; activities and linkages → value chain.
For "difference" questions, compare stage, starting point and approach. For example, target costing works at design and starts from price, while Kaizen works in production and starts from current cost.
Eliminate options that describe a different tool, then confirm with the keyword.

Common mistakes in Strategic Cost Management Tools and Techniques

Treating target costing and Kaizen costing as the same thing.
Both aim to reduce cost, so they sound alike.
Fix: Remember the stage and starting point. Target costing is at design and begins from market price. Kaizen is in production and begins from current cost with small, continuous cuts.
Calculating target cost as cost plus profit.
Students carry over the cost-plus habit from traditional pricing.
Fix: Always start from selling price and deduct profit. The formula is price − profit = target cost.
Describing the balanced scorecard as only a financial measure.
Students focus on profit and forget the other three perspectives.
Fix: Name all four perspectives: financial, customer, internal business process, learning and growth. Give one measure for each.
Ignoring post-production costs in life cycle costing.
Students stop at the factory gate.
Fix: Include R&D, design, distribution, warranty, service and disposal costs along with manufacturing cost.
Writing a textbook definition with no link to the case.
Recall is easier than application.
Fix: Use the case facts in every answer and finish with a recommendation tied to those facts.
Saying JIT has no drawbacks.
Notes list only the benefits.
Fix: Always add a limitation, such as dependence on suppliers, risk of stoppage, and need for stable demand.

Worked examples

Example 1

Mehta Appliances plans a mixer-grinder. Market research shows customers will pay ₹4,000. The company wants a profit of 25% on selling price. The current estimated cost is ₹3,300. Find the target cost and the cost gap, and say what the firm should do.

Show the solution

Target profit = ₹4,000 × 25% = ₹1,000.
Target cost = ₹4,000 − ₹1,000 = ₹3,000.
Cost gap = Current estimated cost − Target cost = ₹3,300 − ₹3,000 = ₹300.
The gap is ₹300 per unit, which is 9.09% of the current cost (300 ÷ 3,300).
Since the gap is positive, the product is not viable at present cost. The firm should use value engineering, redesign components and negotiate with suppliers to close the gap before launch.

Answer: Target cost is ₹3,000 per unit and the cost gap is ₹300 per unit. The firm should close the gap through value engineering before launching the product.

Example 2

Explain how target costing differs from Kaizen costing in three points. Then state which tool you would suggest for Sundaram Auto Parts if its product is already in production and the main goal is steady cost reduction.

Show the solution

Stage: target costing is applied at the planning and design stage. Kaizen costing is applied at the manufacturing stage of an existing product.
Starting point: target costing starts from the market price and works back to an allowable cost. Kaizen starts from the current actual cost and reduces it.
Approach: target costing closes a large gap mainly through design and value engineering. Kaizen makes small, continuous improvements from worker suggestions and process refinement, often against a set percentage each period.
Application: Sundaram's product is already in production, so the design is largely fixed and the scope to change it is limited.
Kaizen costing fits because it delivers steady reductions on the existing process without a redesign. Target costing can still be used for the next model.

Answer: Target costing is a design-stage, price-led method. Kaizen costing is a production-stage, cost-led method of continuous small reductions. Sundaram Auto Parts should use Kaizen costing for its existing product and target costing for its next model.

Exam tips

Expect Section A MCQs that match a short description to a tool. Learn one keyword for each tool.
For comparison questions, use a short table-like structure in sentences: stage, starting point, approach, example. Four clear points score better than a long paragraph.
In case-based answers, name the tool, apply it using the facts, and end with a recommendation. Marks are for application.
In numerical parts, write the formula and each step. Even if the final figure is wrong, method marks are possible.
Keep a one-line limitation ready for each tool. It shows balanced judgement.

Practice questions from Introduction to Strategic Cost Management

Strategic Cost Management Tools and Techniques in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Strategic Cost Management Tools and Techniques: frequently asked questions

Which are the main tools and techniques of strategic cost management?

The main tools are value chain analysis, target costing, life cycle costing, Kaizen costing, JIT, TQM, balanced scorecard and benchmarking. Activity based costing and throughput accounting are also treated as strategic tools. Study each for its purpose, method and limitation.

What is the difference between target costing and Kaizen costing?

Target costing is used at the design stage and starts from the market price, so cost is set as price minus profit. Kaizen costing is used during production and reduces the current cost through small, continuous improvements. One closes a planned gap, the other keeps squeezing cost over time.

Is the balanced scorecard a costing technique?

It is a performance measurement tool, not a costing method. It links strategy to measures across the financial, customer, internal process, and learning and growth perspectives. It supports cost management by showing whether cost actions help the wider strategy.

How should I prepare this topic for the exam?

Make a one-page chart with each tool, its keyword, stage and one limitation. Then practise a target costing numerical and a comparison answer. Review each tool's detailed topic page after this overview.