Cost analysis purposes, Managerial Accounting

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.

Posted Date: 12/8/2012 5:50:25 AM | Location : United States







Related Discussions:- Cost analysis purposes, Assignment Help, Ask Question on Cost analysis purposes, Get Answer, Expert's Help, Cost analysis purposes Discussions

Write discussion on Cost analysis purposes
Your posts are moderated
Related Questions
Creditors turnover ratio ( or payables turnover ratio) Meaning: this ratio establishes a relation ship between net credit purchases and average trade creditors. Objective

What are the Disadvantages of budgetary control 1) Uncertain future: the budgets are prepared for the future period. Despite best estimates made for the predictions may not

State the price determination under the market condition The price determination under the following market condition is as follows: 1) Pure competition: in this situation

Representation of Simplex method We shall use the example previously stated for the graphical solution. The standard form of the model is given by: Maximize :  Z = 3X E + 2

Bridge loans are obtainable from the banks and financial institutions while the source and timing of the funds to be raised is identified along with certainty. While there is a tim

Compute the ending balance in the Work in Process inventory account. Assume that this balance consists entirely of goods started during the year. If $32,200 of this balance is dire

Operating Cycle Method In this way, total operating expenses for a period are divided via the number of operating cycles in the relevant period to compute the cash need for wor

Accounts Payable Turnover Ratio is a short-term liquidity measure which is used to calculate the rate at which a company pays off its suppliers. Accounts payable turnover ratio is

Explain about Cost centre: Meaning & definition: cost centre is defined as a location, person or item of equipment (or group of them) in respect which costs may be ascertaine

Quasar Computers are the first all optical notebooks and their profit largely affects the manipulations in cost, price, total revenue and quantity changes. The market analysis show