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

Standard costing in modern environment, Standard costing in modern environm...

Standard costing in modern environment Standard costing has traditionally been associated with labor-intensive operations, but it can be applied to capital-intensive production

What is the flexible budgets, What is the Flexible budgets  A flexible ...

What is the Flexible budgets  A flexible budget consists of a series of budgets for different level of activity. It therefore varies with the level of activity attained. A flex

Accounting for business enterprise, a)      Calculate  and  discuss  the ...

a)      Calculate  and  discuss  the  nature  and  role  of accounting  for  business enterprise.  b)      Determine and discuss  the desirable qualities  expected from the prep

Market value-transfer pricing methods, Market value There is universal ag...

Market value There is universal agreement that in competitive markets a market value based transfer price should achieve optimal results. In this circumstance, it can be expected

Profi t Planning, SK 2 Chapter 10: Master budgeting Objective How organisat...

SK 2 Chapter 10: Master budgeting Objective How organisations strive to achieve their financial goals by preparing a number of budgets that together form an integrated business pla

Orders per year , Lila Battle has determined that the annual demand for num...

Lila Battle has determined that the annual demand for number 6 screws is 100,000 screws. Lila, who works in her brother's hardware shop, is in charge of purchasing. She estimates t

POHR, #questioExercise 3-12 Computing Predetermined Overhead Rates and Job ...

#questioExercise 3-12 Computing Predetermined Overhead Rates and Job Costs [LO1, LO2, LO3, LO7] Kody Corporation uses a job-order costing system with a plantwide overhead rate base

Disadvantages of simulation, Disadvantages of Simulation 1) Although al...

Disadvantages of Simulation 1) Although all models are simplification of reality, they may still be complex and require a substantial amount of managerial and technical time.

Features of a queue, Features of a queue A calling population – ref...

Features of a queue A calling population – refers to the number of potential customers. This number may be considered finite or infinite. An infinite calling population is

Determine the absolute liquid ratio - liquidity ratios, Absolute liquid rat...

Absolute liquid ratio - Liquidity ratios Although receivables debtors and bills receivable are usually more liquid than inventories yet there may be doubts regarding their rea

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