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CMA Final · Strategic Cost Management · Introduction to Strategic Cost Management

Pragati Appliances Ltd has a strategy of differentiation through superior product features. Its management accountant proposes to cut the cost of a feature that customers rate very highly and pay a premium for, in order to meet an internal cost-reduction target of 8%. From a strategic cost management viewpoint, the most appropriate response is to:

The firm should reject the blanket cut because strategic cost management aligns cost decisions with strategy. Under differentiation, features that customers value and pay a premium for must be protected, while savings are sought from non-value-adding activities instead of uniform percentage reductions.

  1. AAccept the cut, as every cost line should be reduced uniformly to maintain profitability
  2. BReject the blanket cut, since cost management should be aligned with the differentiation strategy and protect value-adding featuresCorrect
  3. CAccept the cut, because premium prices make the feature cost irrelevant
  4. DReject the cut, because costs of product features can never be reduced under any strategy

Explanation

SCM aligns cost decisions with strategy. Under differentiation, features valued by customers are protected, and savings are sought in non-value-adding activities. Uniform cuts ignore this, and the last option is too absolute.

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