Cost analysis purposes, Managerial Accounting

Assignment Help:

Cost Analysis purposes

For purposes of cost analysis, the desegregation of the generic value chain into individual value activities should reflect three principles that are not mutually exclusive:

•    The size and growth of the cost symbolized by the activity costs
•    The cost behavior of the activity
•    Competitor differences in executing the activity

Activities should be separated for cost analysis if they represent a significant or rapidly growing percentage of operating costs or assets. While most firms can easily identify the large components of their cost, they frequently overlook smaller but growing value activities that can eventually change their cost structure. Activities that represent a small and stagnant percentage of costs or assets can be grouped together into broader categories.

Activities must also be separated if they have different cost drivers. Activities with similar cost drivers can be safely grouped together. For example, advertising and promotion usually belong in separate value activities because advertising cost is sensitive to scale while promotional costs are largely variable. Any activity a business unit shares with others should also be treated as a separate value activity since conditions in other business units will affect its cost behavior. The same logic applies to any activity that has important linkages with other activities. In practice, one does not always know the drivers of cost behavior at the beginning of an analysis; hence the identification of value activities tends to require several iterations. The initial breakdown of the value chain into activities will inevitably represent a best guess of important differences in cost behavior. Value activities can then be aggregated or disaggregated as further analysis exposes differences or similarities in cost behavior. Usually an aggregated value chain is analyzed first, and then particular value activities that prove to be important are investigated in greater detail.
 
A final test for separating value activities is the behavior of competitors. Significant activities should be treated separately when a competitor performs them in a different way. Differences among competitors raise the possibility that an activity is the source of a relative cost advantage or disadvantage.


Related Discussions:- Cost analysis purposes

Steady state condition, Steady state condition In many cases, the Marko...

Steady state condition In many cases, the Markov process will converge to a steady state or equilibrium. In general, as number of transitions `n' increase, the state values

Determine abc system and service organizations, ABC System and service orga...

ABC System and service organizations The ABC system has been taken up as applied to a manufacturing organizations with the same efficiency. One basic characteristic of service

Support each classification with appropriate rationale., For this assignmen...

For this assignment, please complete and submit Task 1 and Task 2 as described below. Task 1: Classifying Cash Flows The following are transactions, events, and changes in balances

What is incremental budgeting, Incremental budgeting Incremental budget...

Incremental budgeting Incremental budgeting uses a budget prepared using a last period budget or actual performance as a base with incremental amount asses for the new budget p

Quadratic loss function, Consider the following quality data for three diff...

Consider the following quality data for three different manufacturers of automobile weather-strips: Weather-strip Bulb Dimension Specification y=20 +or- 4mm

Determine the application of zero base budgeting, Application of zero base ...

Application of zero base budgeting In the following areas ZBB may be applied: 1) redundant schemes may be discontinued 2) identify the duplicate schemes and merge them in

Annual cash flows over the expected life of the equipment, The production d...

The production department has been investigating possible ways to trim total production costs. One possibility currently being examined is to make the paint cans instead of purchas

Z or t statistics, Z or t Statistics If n ≥30 we use Z, if, n Ho:  B ...

Z or t Statistics If n ≥30 we use Z, if, n Ho:  B = O that is, there is no relationship between X and Y HA:  B≠ O There is a significant relationship between X and Y The l

Determine the total labour variance, Problem: Fancy Foods Ltd uses a st...

Problem: Fancy Foods Ltd uses a standard costing system to control its material and labour costs. The standard costs for January 2007 were as follows. Standard Costs Materi

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd