Page 257 - DCOM206_COST_ACCOUNTING_II

Cost Accounting – II

Notes  Discuss the concept of Kaizen costing;
 Explain product life cycle.

Introduction

A strategic tool to measure the importance of the customer’s perceived value is value chain
analysis. By enabling companies to determine the strategic advantages and disadvantages of
their activities and value creating processes in the market place, value chain analysis becomes
essential for assessing competitive advantage. When a company wants to introduce a new
product, it must determine the price to be charged based on products already on the market of
similar function and quality. A target cost is the maximum manufactured cost for a product and
is calculated by subtracting required margin on sale from expected market price. Target costing
is a system under which a company plans in advance for the product price points, product costs,
and margins that it wants to achieve. If it cannot manufacture a product at these planned levels,
then it cancels the product entirely. With target costing, a management team has a powerful tool
for continually monitoring products from the moment they enter the design phase and onward
throughout their product life cycles.

14.1 Value Chain Analysis

The idea of a value chain was first suggested by Michael Porter (1985) to depict how customer
value accumulation along a chain of activities, that lead to an end product or service.

He described the value chain as the internal processes or activities a company perform “to
design, produce, market, deliver and support its product”. He further stated that “a firm’s value
chain and the way it performs individual activities are a reflection of its history, its strategy, its
approach of implementing its strategy and the underlying economics of the activities themselves”.

Porter classified business activities under two heads viz. primary activities line activities and
support activities. Primary activities are directly involved in transforming inputs into outputs
and delivery and after-sales support to output. In other words, they include material handling
and warehousing, transforming inputs into final product, order processing and distribution;
communication, pricing and channel management, and installation, repair and parts replacement.
Support activities are the activities which support primary activities. They are handled by the
organisation’s staff functions and include the following:

1. Procurement—purchasing raw materials, supplies and other consumable items as well as
assets.
2. Technology development know-how, procedures and technical inputs needed in every
value chain activity.
3. Human resource management—selection, promotion and placement, appraisal, rewards;
management development; and labour/employee relations.

4. Firm infrastructure – general management, planning, finance, accounting, legal,
government affairs and quality management.
The value chain for a typical organisation is shown in Figure 14.1.

The value chain disaggregates the firm into its distinct strategic activities. Value chain analysis
seeks to determine, within the company’s operations – from new product development to
distribution – how customer value can be enhanced or costs lowered.

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