Auto industry is moving towards stricter fuel efficiency norms, with broad agreement emerging on CAFE-III standards, pushing manufacturers to redesign cost structures and technology investments.
Tenali Explains,
“Maharaj, when rules become stricter, costs don’t rise suddenly… they were always hidden.
Automobile makers now face a silent pressure : invest in fuel-efficient technology, redesign engines, or pay penalties. But the real challenge is not compliance… it is how to allocate these rising costs wisely.
Some companies will spread costs blindly across all models. Others will think smarter.
They will identify – which car models consume more fuel compliance cost? Which segments justify premium pricing? Which products should be phased out?
How can we use Activity Based Costing in this scenario?
1. Identify cost drivers (R&D, fuel efficiency tech, testing)
2. Allocate costs to specific vehicle models
3. Avoid cross-subsidisation of inefficient products
When regulation increases, profitability depends not on avoiding cost… but on tracing it accurately.”