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Cost Management-final                                                                                                       25

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 by

-Forward/backward integration

Quantity and assess “supplier power” and “buyer power”, and exploit linkages with suppliers and buyers.

Limitations of value chain analysis

1.Non – availability of Data: Internal data on costs, revenues and assets used for Value Chain Analysis are derived from financial information of a single period.  For long – term strategic decision – making, changes in cost structures, market prices and capital investments etc. may not be readily available.

2.Identification of Stages: Identifying stages in an industry’s Value Chain is limited by the ability to locate at least one firm that participates in a specific stage.  Breaking a value stage into two or more stage when an outside firm does not compete in these stages is strictly judgment.

3.Ascertainment of Costs, Revenue and Assets: Finding the Costs, Revenues and Assets for each Value Chain activity poses/ gives rise to serious difficulties.  There is no scientific approach and much depends upon trial and error and experimentation methods.

4.Identification of Cost Drivers: Isolating cost Drivers for each Value – creating activity, identifying Value Chain Linkages across activities, and computing supplier and customer profit margins present serious challenges.

5.Resistance from Employees: Value Chain Analysis is not easily understandable to all employees and hence may face resistance from employees as well as managers.

6.Science Vs Art: Value: Value Chain Analysis is not an exact science.  It is more “art” than preparing precise accounting reports.  Certain Judgment and factors of analysis are purely subjective and differ from person to person.

Problem 1

ACE Ltd has applied Value Analysis during last year. The financial controller of ACE Ltd.  has prepared the  following estimates of working results after applying the benefit of vale engineering for the year ending 31st March, 2006

Direct  MaterialsRs. / units16.00

Direct Wages Rs. / units 40.00

Variable OverheadsRs. / units12.00

Selling  PriceRs. / units125.00

Fixed ExpensesRs.6,75,000per annum

SalesRs.25,00,000per annum

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