lOMoARcPSD|6536636
CPA Australia - SMA - M6
Summary
Strategic Management Accounting (Macquarie
University)
, lOMoARcPSD|6536636
Module 6TOOLS FOR CREATING AND
MANAGING VALUE
Part A: The value chain
Organisations create value by combining resources
to create desirable outcomes for stakeholders who
have diff interests:
• Employees / Wages, salaries and bonuses
• Trade unions / Workers rights, fair and
equitable employment practices
• Local community / Impact on quality of life
(eg, air quality)
• Advocacy groups / Safeguarding industry
value chain (eg, no child labour).
Michael Porter: organisational value chain -
customer are key stakeholder (because they are
source of value).
Example 6.1: value is created through primary and
support activities:
• Primary activities: required to create
product/services.
• Support activities: facilitate primary activities.
Upstream (with supplier) and downstream
(distribution channels and customer) in industry
value chain are most concern to an organisation.
1
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Part B: Strategic product costing
Product costing
The traditional approach: volume-based driver to
allocate indirect manufacturing costs and other
overheads.
Activity-based costing
ABC emerged from the work of Cooper and
Kaplan (1991). ABC draws on a hierarchy of costs:
• unit level: easily traced to an individual
product, like one ice cream9s material and
labor cost
• batch level: not as directly traced to individual
products, what drives these costs needs to be
understood
• product sustaining, costs are further removed
from an individual product type, like new
flavor ice cream design
• facility sustaining (or organisation sustaining),
like expensive factory location, fancy freezers.
Traditional method does not accurately capture
and allocate this cost to make ice cream. It
allocates a semi-related overhead that increases
the cost of making ice cream to the point that
competitors appear cheaper, and the
2
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organisation will not be in a sustainable or
value-adding position.
This is one reason why ABC is an expenditure
model4to inform strategic decision-making. The
choice to drop a product or product line needs to be
made on the basis of the strategy of the business.
For example, if org has differentiation strategy,
reducing price is not a viable strategic decision.
Value engineering
Value engineering (VE) is a customer-focused cost
management technique by examining a product9s
functions to ensure only functions of value to the
customer are included in the product offering and
minimize the cost of these functions.
Cost drivers
Traditional volume-based allocation methods use
small number of cost drivers, such as direct labour
hours, direct labour cost or machine hours. The
problem is not all costs are caused by those
measures4that is, they do not drive the costs.
ABC separates different types of costs into
different cost groups or pools with activity actually
causes or drives this cost. This is more accurate
especially when there are complex products with
various different activities.
3
CPA Australia - SMA - M6
Summary
Strategic Management Accounting (Macquarie
University)
, lOMoARcPSD|6536636
Module 6TOOLS FOR CREATING AND
MANAGING VALUE
Part A: The value chain
Organisations create value by combining resources
to create desirable outcomes for stakeholders who
have diff interests:
• Employees / Wages, salaries and bonuses
• Trade unions / Workers rights, fair and
equitable employment practices
• Local community / Impact on quality of life
(eg, air quality)
• Advocacy groups / Safeguarding industry
value chain (eg, no child labour).
Michael Porter: organisational value chain -
customer are key stakeholder (because they are
source of value).
Example 6.1: value is created through primary and
support activities:
• Primary activities: required to create
product/services.
• Support activities: facilitate primary activities.
Upstream (with supplier) and downstream
(distribution channels and customer) in industry
value chain are most concern to an organisation.
1
, lOMoARcPSD|6536636
Part B: Strategic product costing
Product costing
The traditional approach: volume-based driver to
allocate indirect manufacturing costs and other
overheads.
Activity-based costing
ABC emerged from the work of Cooper and
Kaplan (1991). ABC draws on a hierarchy of costs:
• unit level: easily traced to an individual
product, like one ice cream9s material and
labor cost
• batch level: not as directly traced to individual
products, what drives these costs needs to be
understood
• product sustaining, costs are further removed
from an individual product type, like new
flavor ice cream design
• facility sustaining (or organisation sustaining),
like expensive factory location, fancy freezers.
Traditional method does not accurately capture
and allocate this cost to make ice cream. It
allocates a semi-related overhead that increases
the cost of making ice cream to the point that
competitors appear cheaper, and the
2
, lOMoARcPSD|6536636
organisation will not be in a sustainable or
value-adding position.
This is one reason why ABC is an expenditure
model4to inform strategic decision-making. The
choice to drop a product or product line needs to be
made on the basis of the strategy of the business.
For example, if org has differentiation strategy,
reducing price is not a viable strategic decision.
Value engineering
Value engineering (VE) is a customer-focused cost
management technique by examining a product9s
functions to ensure only functions of value to the
customer are included in the product offering and
minimize the cost of these functions.
Cost drivers
Traditional volume-based allocation methods use
small number of cost drivers, such as direct labour
hours, direct labour cost or machine hours. The
problem is not all costs are caused by those
measures4that is, they do not drive the costs.
ABC separates different types of costs into
different cost groups or pools with activity actually
causes or drives this cost. This is more accurate
especially when there are complex products with
various different activities.
3
