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

Cost concept, Cost concept . techniques of costing . absorption costing

Cost concept . techniques of costing . absorption costing

Application of transportation model, Application of Transportation Model ...

Application of Transportation Model In the direct logic, the transportation model looks for the determination of a transportation plan of a particular commodity from a number o

Decision making process, Decision Making Process Decision making is the...

Decision Making Process Decision making is the process of choosing among alternatives. There are 7 steps that should be followed as shown in figure below:   Figure:

Accounting rate of return - arr, ARR gives a fast estimate of a project's v...

ARR gives a fast estimate of a project's value over its useful life. ARR is derived by determining profits before taxes and interest.   ARR is an accounting technique used fo

Master Budget, What is a pro forma financial statement and how does it rela...

What is a pro forma financial statement and how does it relate to the master budget?

Intro to Managerial Accounting, I don''t know how to do a variable income s...

I don''t know how to do a variable income statement. Here is my assignment: The Used Books Company is a small online retailer operating out of a garage apartment. The owner buys

Assgnment, 1. Calculate the manufacturing costs for the year. 2. Prepare a ...

1. Calculate the manufacturing costs for the year. 2. Prepare a statement of cost of goods manufactured. 3. Prepare an income statement (assume an income tax 25%)

Illustration of marginal profit, Illustration of Marginal profit To ill...

Illustration of Marginal profit To illustrate the computations, suppose that the marginal profit or XE in our model is changed from 3 to 3 + δ1, where δ represents either posit

Game theory, Game Theory Game theory was developed for the purpose of a...

Game Theory Game theory was developed for the purpose of analyzing competitive situation involving conflicting interests. In game theory, there are assumed to be two or more pe

Transportation problem-solution, Transportation Problem-Solution Soluti...

Transportation Problem-Solution Solution of the Transportation Problem: The fundamental steps of the transportation method are: Step 1:       Determine a preliminary b

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