Page 269 - DCOM206_COST_ACCOUNTING_II

Cost Accounting – II

Notes Organisational and Managerial Accounting Challenges

Value chain analysis offers an excellent opportunity to integrate strategic planning with
management accounting to guide the firm to growth and survival.
The most significant challenge for senior management and management accountants is to
recognise that the traditional, functional, internally oriented information system is inadequate
for the firm engaged in global competition.

Another challenge for management accountants is to bring the importance of customer value to
the forefront of management strategic thinking. For many managers and firms, this requires a
great deal of education and awareness.
Although value chain analysis requires expertise in internal operations and information, it
demands a great deal of external information. Management accountants must seek relevant
financial and non-financial information from sources outside the organisation.
Management accountants must integrate databases and potential sources of timely information
on competitive forces confronting the business. This calls for innovation and creativity in
gathering and analysing information for management decisions.
Designing internal and external information systems to assist managers in planning, monitoring
and improving value-creating processes is another challenge facing management accountants.
Value chain analysis requires the cooperation of all managers involved in value chain processes,
including engineers, designers, production managers, marketing managers and distribution
managers. Leadership from the CEO is vital to successful cooperation of managers. The
management accountant should ensure that the CEO is committed to value chain analysis and
the organisational changes necessary for its successful implementation.

14.4.5 Value Chain Analysis vs. Conventional Management Accounting

Information generated from the traditional management accounting systems, including cost
accounting is generally unsuitable for value chain analysis for a variety of reasons. The Box
below provides a comparison between value chain analysis and traditional management
accounting.

Table 14.3: Comparison between Value Chain and Traditional Management Accounting
Traditional Management Value Chain analysis in the strategic Framework
Accounting
Focus Internal External
Perspective Value-added Entire set of linked activities from suppliers to end-
use customers
Cost driver Single cost driver (cost is Multiple cost drivers
concept function of volume) - Structural drivers (e.g. scale, scope, experience,
technology and complexity
- Execution drivers (e.g. participative
Application at the overall management, total quality management and
firm level (cost-volume- plant layout)
profit analysis) A set of unique cost drivers for each value activity)
Cost “Across the board” cost Value cost containment as a function of the cost
containment reductions drivers regulating each value activity.
philosophy Exploit linkages with suppliers.
Exploit linkages with customers
Contd...
Exploit process linkages within the firm “Spend to
save”
Insight for Somewhat limited Identify cost drivers at the individual activity level,
strategic and develop cost/differentiation advantage either
264 LOVELY PROFESSIONAL UNIVERSITY
decisions by controlling those drivers better than competitors
by reconfiguring the value chain (e.g. Federal
Express in mail delivery and MCI in long distance
telephone)
For each value activity, ask strategic questions
pertaining to
- Make versus buy
- Forward/backward integration
Quantify and assess “supplier power” and “buyer
power” and exploit linkages with suppliers and
buyers.