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

Explain about office and administrative expenses, Explain about Office and ...

Explain about Office and administrative expenses These expenses are not related to factory but they pertain to the management and administration of the business. Such expenses

Questions., how long will it take to get answers after question are submitt...

how long will it take to get answers after question are submitted

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

Graphic analysis, Graphic Analysis Whenever you have two data points, you...

Graphic Analysis Whenever you have two data points, you should generally suppose a linear relationship. When you acquire more data, you can study the data to determine when there

Job order costing, Prepare Summary Journal Entries to record the( 1) requi...

Prepare Summary Journal Entries to record the( 1) requistion slips

Cash collection and disbursements, Once the cash budget has been arranged a...

Once the cash budget has been arranged and suitable net cash flows established the finance manager must ensure that there does not exists an important deviation in between actual a

Transfer pricing, find full-cost& variable cost using transfer pricing meth...

find full-cost& variable cost using transfer pricing method

Material storage, Material storage Sophisticated mathematical models to...

Material storage Sophisticated mathematical models to control economic buying, and systems control the flow of material may all be for naught if the obvious-efficient storekeep

Zero-base budgeting , Zero-Base Budgeting Zero-Base Budgeting (ZBB) wa...

Zero-Base Budgeting Zero-Base Budgeting (ZBB) was first developed and introduced for business by Peter A. Pyhrr. From this starting ZBB has been explored and adopted by many o

Transition probabilities, Transition probabilities These are the probab...

Transition probabilities These are the probabilities of moving from one state to another in the next time period. Usually they are written in the form of a probability matrix.

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