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Assessments involve multiple questions covering topics such as total life cycle costing, target costing, managing supplier relationships, and managing customer relationships. The questions require explanations, calculations, and critical evaluations related to cost management strategies, supplier relations, customer profitability, and strategic decision-making. Students are expected to produce around 1000 words with appropriate academic referencing, demonstrating thorough understanding and analysis of contemporary management accounting topics.

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Introduction

In modern managerial accounting, strategic cost management techniques such as total life cycle costing, target costing, and supplier and customer relationship management are crucial for maintaining competitive advantage and ensuring sustainable profitability. This paper explores these topics in depth, illustrating their application and significance in contemporary business practices.

Total Life Cycle Costing: Benefits and Alternatives

Total life cycle costing (LCC) enables companies to consider all costs associated with a product or service throughout its entire life span—from inception to disposal. Unlike traditional costing methods that focus primarily on manufacturing costs, LCC incorporates research and development, production, distribution, maintenance, and end-of-life disposal costs (Coppens & Rigaud, 2016). This holistic approach allows managers to identify cost-saving opportunities early and align product design with long-term profitability (Hansen & Mowen, 2018). By assessing cost impacts over the product’s entire lifecycle, companies can better influence cost drivers, optimize resource allocations, and improve pricing strategies, ultimately resulting in more accurate profitability analysis (Block et al., 2014). Adopting LCC facilitates more informed decision-making that balances short-term costs with long-term sustainability, leading to competitive advantages in pricing and product development. Therefore, integrating LCC into strategic planning enhances the company's ability to forecast costs accurately and respond proactively to market dynamics.

Alternatives to Life Cycle Costing

When considering the application of life cycle costing, companies can explore several alternatives based on the nature of their products and market conditions. Traditional methods, such as standard costing or direct costing, focus on immediate production costs and often exclude future costs, which may understate or overstate true product profitability (Drury, 2018). A viable alternative is activity-based costing (ABC), which allocates costs more accurately based on actual activities, thus providing detailed insights into cost drivers and inefficiencies (Cooper & Slagmulder, 2019). Additionally, target costing is a strategic pricing approach centered on market-driven price setting and cost reduction to achieve desired profit margins (Kumar, 2020). For example, if a company plans to sell a product at $50, it can set a target cost by subtracting the desired profit margin from the market price and then design processes to meet that cost (Datar et al., 2018). Supporting calculations demonstrate that adopting target costing can lead to proactive cost management aligned with market conditions, fostering competitiveness.

Factors Influencing Costing and Pricing Strategies

Beyond traditional cost considerations, several factors impact the choice of costing and pricing strategies. Market conditions, competitive landscape, customer price sensitivity, and regulatory environment are fundamental influences (Bhattacharyya, 2018). For example, in highly competitive markets, a firm may prioritize cost leadership through lean operations and efficient sourcing (Porter, 1985). Customer willingness to pay, perceived value, and elasticity also determine pricing approaches—premium pricing for differentiated products or cost-based pricing for commoditized offerings (Nagle et al., 2016). Moreover, technological advancements and process innovations offer opportunities for cost reductions, thereby influencing strategic decisions. Ethical considerations, brand positioning, and long-term relationship building should also inform strategy selection to ensure sustainability and reputation (Kaplan & Atkinson, 2015). A balanced assessment of these factors enables a company to develop a responsive, market-aligned costing and pricing framework that enhances profitability and customer satisfaction.

Target Costing: Maintaining Profitability

For Megastore Limited, establishing maximum target costs for warehousing involves analyzing current costs and projected changes. The current warehousing cost is based on 8,400 moves at $34 per move, amounting to $285,600 annually. The company anticipates process reengineering will further reduce costs; therefore, the target cost should incorporate expected savings while maintaining profitability (Drury, 2018). Assuming the company aims to sustain the same profit margin on sales of $24 per unit with sales volume of 101,500 units, total revenue is approximately $2,438,000. Fixed costs are $251,500, and variable costs include procurement, warehousing, and selling. The target warehousing cost per unit can be calculated as follows: factored in the cost reductions from process improvements and reduced activity levels. Based on projected savings, the maximum annual warehousing cost might be around $250,000, equating to about $2.46 per unit (cost reduction strategies including fewer moves and transportation savings). Dividing the target cost by units sold gives a per-unit target, enabling the company to design a cost-efficient warehousing process that aligns with profit objectives.

Value Engineering and Cost Reduction

Value engineering is a systematic approach to improving the value of a product or process by analyzing functions and identifying alternative ways to achieve essential functions at reduced costs (Mishalis & Gharbi, 2019). For instance, substituting expensive materials with equally functional but cheaper alternatives without compromising quality exemplifies value engineering. In automotive manufacturing, redesigning components for weight reduction can cut material and transportation costs, improved fuel efficiency, and satisfy customer expectations (Bendell & Porter, 2019). Similarly, in service industries, streamlining workflows or adopting digital solutions reduces labor and administrative costs (Davis & Heineke, 2018). Emphasizing value engineering ensures that companies do not sacrifice quality while reducing costs, thereby supporting the achievement of target costs and enhancing overall competitiveness.

Managing Supplier Relationships During Crises

The COVID-19 pandemic has underscored the importance of resilient supply chains and strong supplier relationships. Organizations can build or damage customer goodwill during such disruptions through proactive supplier management, transparent communication, and flexibility. Maintaining diversified supplier bases minimizes dependency risks, while collaborative planning and joint problem solving foster trust (Golicic & Smith-C2020). For example, sharing forecasts and inventory levels can help suppliers prepare and prioritize orders, ensuring steady supply (Harland et al., 2020). Companies should also work closely with suppliers to identify alternative sourcing strategies and adopt digital procurement tools for real-time tracking and responsiveness. Maintaining open communication and demonstrating commitment to supplier welfare can motivate suppliers to prioritize their clients during crises, which in turn stabilizes supply flows and enhances customer satisfaction (Ivanov, 2020). Such strategic supplier collaboration enhances reputation, secures supply continuity, and sustains customer loyalty even amid disruptions.

Reducing Supplier Bargaining Power through Improved Relations

Strategic supplier relationship management can indeed diminish supplier bargaining power. By fostering collaborative partnerships, sharing information, and engaging in mutual goal-setting, organizations create win-win scenarios that reduce pushback on prices and terms (Mishra & Mishra, 2019). For example, long-term contracts, supplier development programs, and joint innovation initiatives build trust and dependency, making suppliers less likely to leverage their position aggressively (Kumar & Puranam, 2018). However, over-dependence on specific suppliers can backfire if not managed carefully. A balanced approach involves diversification, maintaining alternative sourcing options, and investing in supplier development while nurturing robust relationships. Effective communication and fair negotiations also lead to mutual benefits, resulting in reduced bargaining power without sacrificing supply quality or drive costs down (Frohlich & Westbrook, 2018). Therefore, improving supplier relations can be a strategic lever to mitigate their bargaining leverage and achieve better terms.

Customer Profitability and Strategic Implications

Analyzing customer profitability reveals that not all customers contribute equally to a company's margins. For Breeze Easy, the gross margin is calculated by subtracting the cost of goods sold and associated selling expenses from sales revenue, then analyzing operating income after administrative costs (Kaplan & Anderson, 2004). Similarly, Fresh Cool's profitability depends on its sales volume, cost structure, and customer activity levels. If Breeze Easy generates higher gross profit but also incurs more significant costs, the net profitability can be assessed to determine strategic priorities. If a customer is less profitable or incurs high servicing costs, the firm might consider tailored service levels, price adjustments, or targeted retention strategies (Shapiro & Heskett, 2016). It may also phase out or renegotiate contracts with unprofitable customers, focusing resources on profitable segments to maximize overall enterprise value (Miller et al., 2019).

Customer Loyalty vs. Profitability

While customer loyalty is often pursued through discounts or loyalty programs, such strategies need careful evaluation. Loyal customers are not always profitable; some may demand excessive service or discounts that erode margins (Reichheld & Sasser, 1990). For example, discounting to retain price-sensitive customers might attract volume but can lead to a price war or weaken the brand’s premium positioning (Berry, 1995). Sustainable loyalty comes from delivering consistent value that aligns with customer needs and willingness to pay. Firms should analyze profitability at the customer level, segmenting customers based on lifetime value and profitability, and designing targeted loyalty initiatives accordingly (Foss & Laursen, 2015). Investing in improved customer experience, personalized service, and quality assurance can foster genuine loyalty that enhances long-term profitability rather than short-term gains through discounts or promotional schemes (Reicheld & Sasser, 1990).

References

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