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Cost Management-final                                                                                                       23

identify external prices for goods and services transferred between value chains. or intermediate products or services with no external or competitive market information, transfer prices must be estimated on the basis of the best information available.

Isolating cost drivers for each value-creating activity, identifying value chain linkages across, and computing supplier and customer profit margins present serious challenges. The use of full cost assumes that the full capacity of the value chain activity's facilities is used to derive the costs. Plant and manufacturing personnel and vendors of equipment are good sources for capacity information.

They can also be helpful in estimating the current or replacement cost of the assets. Independent companies, for valuation services for assets

Despite the calculational difficulties, experience indicates that performing value chain analysis can yield firms invaluable information for their competitive situation, cost structure, and linkages with suppliers and customers.


Value chain analysis offers an excellent opportunity to integrate strategic planning with management accounting to guide the firm to growth and survival. This change in focus for management accounting is necessary to maintain its critical role as the information profession.

The most significant challenge for senior management and management accountants is to recognise that the traditional, functional, internally oriented information system is inadequate or tire firm engaged in global competition.

Another challenge for management accountants is to bring the importance of customer value to the forefront of managements strategic thinking. For many managers and firms, this requires a great deal of education and awareness. Management accountants should take the initiative to bring the value chain message to major players in the firm. Seminars, articles, tin examples and company-specific applications are useful to illustrate the advantages of value chain analysis.

Although value chain analysis requires expertise in internal operations and inform, 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 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.

Information technology is improving daily but existing information systems are slow to change. Management accountants should solicit support from all senior managers for allocating sources to develop and improve value chain-oriented information systems.

Value chain analysis requires the cooperation of all managers involved in value chain pit processes, including engineers, designers, production managers, marketing managers and distribution managers. Leadership from the CEO is vital to successful cooperation of manager The management accountant should ensure that the CEO is committed to value chain analysis and the organisational changes necessary for its successful implementation.

For many service companies, Porter's value chain model emphasising manufacturing lira may appear inappropriate. However, every organisation (banks, hospitals, airlines, professional firms) has a variety of primary and support value-creating activities to which value chain analysis applies. For example, a publishing company might have the following primal activities; information

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