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Cost Management-final                                                                                                       24

acquisition, editorial, production, distribution, sales and service. Support activities include new product and business development, technology assessment and development, human resource management and firm infrastructure. If strategy is seen i the pursuit of competitive advantages the link between the formulation of service strategy and operational service delivery is vital.

VALUE CHAIN ANALYSIS VS. CONVENTIONAL MANAGEMES ACCOUNTING

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

Generally, traditional management accounting focuses on internal information. It often places excessive emphasis on manufacturing costs. It also assumes that cost reduction must found in the "value-added" process, i.e., selling price less the cost of raw material.

Using a value added approach can be misleading, since there are many other purchase inputs such as engineering, maintenance, distribution and service. The value-add-starts too late because it ignores linkages with suppliers, and stops too early because ignores linkages with customers.

The value chain approach encompasses external and internal data, uses appropriate a drivers for all major value-creating processes, exploits linkages throughout the value chain and provides continuous monitoring of a firm's strategic competitive advantage.

EXHIBIT 9

VALUE CHAIN VS. CONVENTIONAL MANAGEMENT ACCOUNTING

Traditional Management

Accounting

Value Chain Analysis

in the Strategic Framework

Focus

Internal

External

Perspective

Value Added

Entire set of linked activities from suppliers to end-use customres

Cost Driver

Concept

Single cost driver

(cost is function of

volume)

Application at the overall firm level (cost-volume-profit analysis)

Multiple cost drivers

- Structural drivers (e.g. scale,

scope, experience, technology and complexity)

- Executional drivers (e.g. participative management and plant layout)

A set of unique cost drivers for each value activity.

Cost Containment

Philosophy

“Across the board” cost reductions

View cost containment as a function of the cost drivers regulating each value activity.

Exploit linkages with suppliers

Exploit linkages with customers

Exploit process linkages within the firm “Spend to save”.

Insights for Strategic

Decisions

Somewhat limited

Identify cost drivers at the individual activity level, and develop cost/ differentiation advantage either by controlling those drivers better than

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