Analyzing The Relationship Between Costing And Value Chain
In context to present business environment scenario, it can be seen that managing costs within the business is a significant attribute of work executed by managers as well as accountants. Costs are assigned to every area for figuring out pricing of the products as well as profitability of certain product or service lines alongside helps to control the spending. Each of the process involved in value chain would include costs that are further required to be incorporated within the product or service prices. It can be said that as an integral part of managerial accounting, costing as well as value chain process highly relates to each other. And, it is exhibited when value chain process is subjected to increase production efficiency, so business would be able to provide maximum value for least cost possible.
This article will depict the relationship between the costing and value chain, therefore through this article individual would be able to identify whether there could be any connection or association between value chain and costing or not. However, before analysing costing system and its relationship with value chain, this is important to discuss about the costing system in management accounting (Areena, 2019). This can be stated that cost accounting could be considered as one of the important forms of management accounting. The total cost of production could be captured through assessing the variable costs as well as fixed costs in each production step. For example, lease expenses could be perfect example in this situation. This cost accounting system therefore could be used by the management of the organisation for making any kinds of business decisions properly. Following this discussion, it can be found out that costing system in management accounting could flexible as per the needs or demand of management of the organisation.
Hence, both fixed as well as variable costs could be identified through this system which further could be associated with the process of production. Costing system therefore could be associated with certain steps where at the first step costs will be identified and measured individually and their comparison among the input costs as well as output result could be accomplished (MAKING, 2020). However, in management accounting there could be several types of costs which needs to be considered while doing the analysis of costing systems under different circumstances. These several costing systems in this context could be, namely, fixed costs, variable costs, operating costs, direct costs as well as indirect costs. Following this entire discussion, it can be identified that costing system in managerial accounting always differ from financial accounting. Cost accounting is mostly used by the inner management bodies of the company while financial accounting could be used by the outside users, like investors or creditors of the organisation. Get to know about costing system in management accounting take assistance from SourceEssayexperts online.
On the other side, financial costing system could help the organisation with their financial positions as well as financial statements, but costing systems in management accounting helps or provide benefits to the budgetary system of the organisation (Brown et al. 2019). Now this is also important to get a sound idea about the types of costing systems which further could help to accomplish this study properly. These different costing systems could be, such as, standard costing, activity-based costing, marginal costing as well as lean accounting. Following this discussion, this can be known that cost accounting system could be totally differed from the traditional costing system. In comparison to the traditional costing system, modern costing system or cost accounting method is mostly firm-specific system, internally focused and used strategic method for cost controlling (BÜYÜKİPEKCİ, 2019). Therefore, modern costing system is more beneficial and flexible in today’s world for proper operations under different circumstances. To know more about Costing System take help fromexperts from SourceEssay.
Value Chain Analysis
The term value chain refers to several business processes as well as activities that are included in developing a product or delivering a service. Significantly, a value chain might include multiple stages of product and service life cycle, from research and development to sales. Therefore, it can be said that value chain analysis is a mean of assessing every activity in company’s value chain for understanding where opportunities are underlying for improvement (Purcell et al. 2017). Significantly, conducting certain value chain analysis would prompt business managers in considering how every step would add or deduct value from final product or services. This as a result might help in realising following aspects of competitive advantages;
- Decrease in cost by making every operation within value chain process more effective and less expensive
- Differentiation in product by investing majority of time and resources into operations like research and development, marketing and product design that would help in standing out of the product.
On the other hand, as per Porter’s description, each and every activity that make upof a firm could be divided into two major divisions that would contribute towards its margin. These two divisions are; primary activities as well as secondary activities (Simatupang et al. 2017). Significantly, primary activities are those that would directly go into product development as well as service executions. And, these would involve inbound logistics, operations, outbound logistics as well as sales and marketing and after-sales services. The activities are defined below in detail:
Inbound Logistics: in context to inbound logistics, it can be said that this would involve activities regarding to receive, warehousing as well as managing inventory of source materials and components.
Operations: activities under operations would relate to making raw materials and inventories as well as its component into finished products.
Outbound Logistics: activities in outbound logistics would relate to distribution as well as sorting, packaging and shipping processes (Benito et al. 2019).
Sales and Marketing: activities in relation to sales and marketing of any product and service would involve advertising, promotion as well as pricing strategy.
After Sales Services: activities in after-sales services would take place after completion of the selling of the product or services. And, it would include installation, training as well as the assurance of quality and customer services alongside repairing and replacement services.
On the other hand, secondary activities as the major component of value chain analysis would be highly attributable in making primary activities to become more efficient. And, it would also help in creating competitive advantages in terms of procurement, technological development as well as infrastructure and human resource management. These are defined below in detail:
Procurement: activities related to procurement would involve raw materials sourcing alongside its equipment, components and services (Findlay and Hoekman, 2021).
Technological Development: activities related to technological development would involve research and development concerning the design of the product, market research, and development of the process.
Infrastructure: activities involving infrastructure would relate to overhead and management of the company, which would further include planning and financing as well.
Therefore, by assessing each of the components of value chain analysis and process, it can be said that each of these components altogether would help in generating value for products developed and services delivered (Ye et al. 2020). And, the maximum focus would be on cost reduction and product differentiation to offer the best value possible to the customers. To know more about value chain analysis take help fromexperts.
Steps Of Conducting Value Chain Analysis
Based on the above discussion it can be stated that managing costs properly could become a complex process as this is not an easy task for the organisation. For management of cost this is important to identify the process through which costs could be budgeted or allocated to each activity. This is because in every organisation there could be different divisions and each division consists of several activities. These activities therefore associated with costs and these costs therefore could be either direct costs or indirect costs. Following this discussion, it can be stated that value chain analysis could be considered as the process through which customer value could be added for a definite product or service (Chen et al. 2018). Now, this entire process therefore could be consisted of several processes and these processes again are associated with the costs. According toexperts these costs therefore need to be incorporated with the product or service prices. Considering this overall situation, it is important to identify steps through which value chain analysis could be conducted. These steps in this context are as follows, such as,
Separation of organisation’s operations into primary as well as support activities: This needs to be remembered that every activity across the organisations could be consisted of either primary activities or support activities. Primary activities, therefore, consist of processes through which product could be physically created along with product marketing, product delivering to the customers or provide any kinds of after-sales support. On the other side, support activities could be considered as those facilities or activities which further can facilitate the primary activities.
Cost allocation to each activity: This is another important step as in this step costs should be allocated for each activity (Bush et al. 2019). In this way managers could be provided with the information of those activity costs along with the proper and valuable insights for the organisational procedures or capabilities.
Identification of critical activities to market success and customer satisfaction: Here, the management of the organisation needs to consider several important considerations to evaluate the roles of every activity in this context. Firstly, they need to consider company mission, secondly, industry types through which importance of the relative activities could be influenced, and thirdly, value system which consists of the value chain of upstream and downstream partners of the company.
Identification of opportunities to value increase: Lastly, each sub activities should be reviewed and if any changes are necessary, those changes should be made to enhance the value of the products or services towards the customers (Nagy et al. 2018).
Advantages Of Value Chain And Improvement Process Of Value Chain
Advantages Of Value Chain
In context to the critical discussion and evaluation above, there can be seen significant advantages of Value Chain analysis and process. These are such as;
- Analysis of Value Chain enhances quality by adding better understanding of customer preferences at the time of product assembling from sources of several inputs.
- Moreover, value chain is also advantageous because; it gives certain way for assessing position of competitive costs and as a result, it would improve strategic positioning.
- Additionally, value chain analysis and its process are observed to decrease time when there can be seen significant deal of interdependency among the participants within value chain process (Petit et al. 2018).
- Furthermore, it is also to be observed that another foremost advantage of value chain is cost reduction through the focused attention on aspects that are required costs to be decreased by configuring the process of value chain.
Therefore, based on some of the identified advantages of value chain, it can be said that value chain analysis aims at improving a firm’s competitive advantages. Hence, it would create a certain situation where business is allowed to produce services and products of equal value, however at lower price or cost and in desirable way. It can be said that both cost advantage and differentiation advantages altogether create competitive advantages in value chain process.
Improvement Process of Value Chain
Significantly, it can be found that when a company takes it value chain into account, it highly requires to consider its proposition of value and attributes that makes the firm differentiated from its competitors. It is said that value chain analysis is designed for improving profits by generating products and services that would be highly superior. And, consumers would wilfully pay more than the cost for developing the product or service (Rhemann, 2017). However, improving a value chain for the purpose of enhancement must not be the end goal for any business. Rather than that, a firm needs to decide the reason that it would require to improve its value chain in correspondence with its competitive advantages for differentiating itself between the competitors in market.
According totwo common strategies for competitive advantages would involve low-cost provider as well as differentiation or specialisation of product and services. In terms of low-cost providers, value chain analysis needs to focus on costs and the way firm can decrease it (Tian et al. 2019). On the other hand, in terms of specialisation, value chain analysis is required to focus on activities, which would help in developing any unique products or services. Hence, by considering these two approaches, the overall value chain process can be improved.
Process of Cost Advantages in Value Chain Analysis
Every step in the process could add value for the customers and this managerial costing system could be considered as a part of these steps. Hence in this situation it can be stated that without determination of the development or design costs and incorporate those costs within the production process, no activity could be possible. Thus, it can be easily stated that there is a positive relationship among the costing system and value chain (Eling and Lehmann, 2018). On the other side, this is also important for the organisation to gain several cost advantages through which their organisational value could be enhanced. This is important to evaluate these steps for costs advantages for the organisation to properly analyse value chain in this context, such as,
- At first this is important to identify primary as well as support activities of the organisation as these activities needs to be acknowledged and should be separated from each other. This entire process requires proper knowledge regarding the operations of the organisations because value chain analysis activities are totally separate from the company’s activities. Hence for delivering customer value managers need to effectively identify these activities
- Secondly, it is essential to establish and identify every activity’s importance within the product’s total costs (Xing and Luo, 2018). It is necessary to note that total costs should be broken down and allocated to each activity. In accordance to this ABC or Activity-based costing could used for calculation of each activity’s costs. For take assistance from SourceEssay experts.
- Thirdly, managers should identify cost drivers for each activity as this can improve the whole systems and enhance the value. It needs to be remembered that different activities should be associated with different costs drivers
- This can be found out that cost reduction in one activity process also could lead to the cost reduction in subsequent activities. Hence this is important to identify links among different activities for better understanding regarding cost improvements that could affect the entire value chain of the organisation (Safi et al. 2018)
- Lastly, company after analysing overall process would be able to identify inefficient activities as well as costs drivers and based on that they also can enhance the overall value by improving those activities
Thus, based on the above discussion it can be stated that there is a proper relationship among value chain and costing as allocation of costing is essential in each activity or the production process for enhancing the value of the products as well as organisations.
Relationship Among Traditional Costing System And Value Chain Costing
In context to the above discussion, it can be certainly said that there is significant relationship that is existing in between costing and value chain process. And, the relationship is exhibited through consideration of traditional costing system and value chain costing. It is seen that traditional costing system is an internal approach that would seek for reduction of costs within the process of value adding or value chain (Hernández and Pedersen, 2017). On the other hand, value chain costing particularly an external approach. It would seek competitive advantage based on overall set of linked activities from suppliers to customers as end user. Moreover, costing is related to value chain process through its particular way of cost analysis. In this regard, it can be found that analysis of costing is done in terms of product, customers and function while having strong internal focus by keeping value-adding purpose at the focal point. This would further result in adding cost benefit to value chain process. Henceforth, as a whole, it can be said that considering the cost containment philosophy where cost drive would regulate each of the value chain activity would further helps in developing an integrated outlook on costing and its relationship with value chain analysis and process (Lee et al. 2017).
Issues In Value Chain Costing
Though costing along with managerial accounting could be a part of value chain analysis of the organisation, still there are certain problems regarding value chain analysis in accordance to the costing under different circumstances. These issues are as follows, such as,
- There are several costs which could be very complex in nature for allocation to different individual products or services, but those costs are also important and significant for each of the activities as these are important for managing total quality and avail competitive advantages (Lee et al. 2017)
- In a view of ,each organisation needs to adopt entire philosophy of the value chain otherwise several strategies could be overlooked while making any decisions, hence it can be stated this overall situation is therefore long as well as time-consuming process
- Development of value chain could be complex one as the information related to product lines, structure as well as competitions might not be available sometimes
- Overall cost analysing in value chain could depend on several assumptions and supposition because of absent of information in different situations (Kousar et al. 2019)
In accordance with the critical discussions throughout the study, it is seen that value chain is certain business process function. It further adds value to customer who is the user of the product. Significantly, value chain is observed to be an industry-specific complex phenomenon that has evolved over time. Moreover, the process of value chain has the prime focus of reducing costs and generating value by providing the product of services in best and unique way possible. Therefore, it can be said that cost is a significant attribute for value chain process and generating value for each product and services produced, costing plays significant role to contribute advantages in the process of value chain. With the objectivity of cost analysis and benefit, value chain analysis fundamentally reflects cost containment. It is the function of cost drivers involved in value chain process to regulate each value adding activity.
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