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

Industrial Grinders, accepted#Regarding the Overhead costs, these are alloc...

accepted#Regarding the Overhead costs, these are allocated based on Direct Labor;

Eoq model with quantity discounts, EOQ Model with quantity discounts Ci...

EOQ Model with quantity discounts Circumstances frequently occur where firms are able to obtain quantity discounts for large purchase orders. Buying in bulkiness has some merit

International management challenges of globalization., what is the topic ab...

what is the topic about? what are the practical implications? what are the practical criticisms?

Capital investment decision, Your company is considering investing in its o...

Your company is considering investing in its own transport fleet. The presentposition is that carriage is contracted to an outside organization. The life of thetransport fleet woul

Types of non-controlled variables, Types of Non-Controlled Variables a) ...

Types of Non-Controlled Variables a) Parameters: These are input variables that for a given simulation have a constant value. They are factors which help specify the relat

Methods of cash flow budgeting, Cash budget is a detailed budget of income ...

Cash budget is a detailed budget of income and cash expenditure including both capital and revenue items. For control reasons the year's budget is usually phased in smaller periods

Importance of a budget, Importance of a budget A Budget is a plan expre...

Importance of a budget A Budget is a plan expressed in monetary terms. It is prepared prior to the budget period and may show income, expenses and the capital to be used i.e. a

Funds generated from operations, Funds produced from operations, throughout...

Funds produced from operations, throughout an accounting period, raise working capital by an equivalent amount. The two major components of funds generated from operations are depr

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