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7/27/2019 costdriver-12896481245552-phpapp02

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Strategic Positioning analysis

&

Cost Driver analysis


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Strategic Cost Managementis a way to address

cost concern while preserving the key parts of the

business

Strategic cost managementis the use of cost data to

develop and identify superior strategies that will

produce a sustainablecompetitive advantage.

Akuntansi - FE UAJY 2


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Strategic decision making is choosing

among alternative strategies with the goal of

selecting a strategy, or strategies, that

provides a company with reasonableassurance of long-term growth and survival

The key to achieving this goal is to gain a

competitive advantage.



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Competitive advantageis the process of creating better

customer value for the same or lower cost than that of

competitors or creating equivalent value for lower cost

than that of competitors.

Customer valueis the difference between what a

customer receives (customer realization) and what the

customer gives up (customer sacrifice). customer

satisfaction

The total productis the complete range of tangible and

intangible benefits that a customer receives from a

purchasedproduct.



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Value - chain Analysis

Strategic Positioning Analysis

Cost Driver Analysis

5


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There are three general strategies that have

been identified:

cost leadership

product differentiation focusing


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Economies of scale

Learning Curve benefits

learning refers to increase in efficiency that is possible at

a given level of scale through having performed the

necessary tasks. Experience can be brought into thecompany by hiring experienced staff and enhanced through

training.

Cost control

Process innovation

Reduce manufacturing time and cost

Reengineering activities



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Strives to increase customer value by

increasing what the customer receives

(customer realization). Implemented effectively when the business

provide unique or superior value to customer

Higher price

Uniqueness: product quality, features, aftersales support



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It happens when a firm selects or emphasizes a market

or customer segment in which to compete.

By operating in a niche markets not attractive to larger

competitors

Example: Paging Network, Inc., a paging services

provider, has targeted particular kinds

of customers and is in the process of

weeding out the nontargeted

customers.



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Source: Adopted from Porter's 5 force model (Competitive Advantage (1980).

Rivalryamongcurrent

competitors

NewEntrants

Buyers

Substitutes

Suppliers


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Differentiation

Differentiationwith costadvantage

Stuck in themiddle

Low costadvantage

Inferior Superior

Relative cost position

Rel

ativ

e

Diff

ere

ntia

tion

pos

itio

n


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An activity which generates cost

A factor such as the level of activity or volume that

causally affects cost.

Existence of a cause-and-effect relationshipbetween a change in the level of activity or volume

and change in the level of total costs of that cost

object.

Thus cost drivers signify factors, forces or eventsthat determine the costs of activities


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Direct costs do not need cost drivers

They are themselves cost drivers since they

can be traced directly to a product.

All other factory or manufacturing costsneed cost drivers.


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They are the links between a pool of costs in

an activity centre and the product

Therefore in order to trace overhead costs to

products, appropriate cost drivers should be

identified.

A poolof costs

COSTDRIVERS

Product


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There are two categories of cost driver:

Resource Cost Driver: A measure of the

quantity of resources consumed by an

activity. Used to assign the cost of a resourceto an activity or cost pool.

Activity Cost Driver: Measure of the

frequency and intensity of demand, placed

on activities by cost objects. Used to assignactivity costs to cost objects.


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Organizational activities are of two types:structural and

executional.

Structural activities are activities that determine the

underlying economic structure of the organization.Executional activities are activities that define the

processes and capabilities of an organization and

thus are directly related to the ability of an

organization to execute successfully.



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Structural Activities Structural Cost DriversBuilding plants Number of plants, scale, degree of

centralizationManagement structuring Management style and philosophyGrouping employees Number and type of work unitsComplexity Number of product lines, number of

unique processes, number ofunique parts

Selecting and using process Types of process technologies,technologies experience



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Executional Activities Executional Cost Drivers

Using employees Degree of

involvement

Providing quality Quality

management approach

Providing plant layout Plant layout efficiency

Designing and producing products Product configuration

Providing capacity Capacity utilization



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One of the keys to strategic cost management is the

determination of the appropriate cost drivers. Byidentifying the key cost drivers, or the cause of the cost,

strategic cost management not only tells managers where

to start, but also what to start on.

First, examining the basic economics of activity;

Examining the internal experience of the company

The third way to identify cost drivers is interviews

The final method for determining cost drivers is

competitive cost analysis


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Examining the internal experience of the

company is the second way to identify cost

drivers. This way is more useful especially if

the events within the company have changed

over the time because of new method of

production, new design of product, operate

multiple units, change of product mix, etc.


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The third way to identify cost drivers is

interviews. Cost drivers can be also

determined from interviews with experts.

Workers or managers who have extensive

knowledge of a value activity can be asked

"what if" questions about the effects of

chaining various parameters on the cost


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The final method for determining cost drivers

is competitive cost analysis. By calculating

competitors relative costs of value chain

activities, and pinpointing their specific cost

drivers, managers and accountants can

understand why a company does or does not

possess competitive advantage, and

recommend to management opportunities to

improve the firms competitive positioning


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Thank you


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Activity Based Costing


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Activity based costing is an approach for allocating overhead

costs.

An activity is an event that incurs costs.

According to Sundem and Strotton , Activity Based Costing isdefines as

A system that first accumulates overhead costs for each of the

activites of an organisation and then assigns the costs of activities

of the products, services or other cost objects causing the

activity.


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Basics of A B C

Cost of a product is the sum of the

costs of all activities required to

manufacture and deliver the product. Products do not consume costs

directly

Money is spent on activities Activities are consumed by

product/services


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Basics of A B C (contd.)

ABC assigns Costs to Products by tracing

expenses to activities. Each Product is

charged based on the extent to which itused an activity

The primary objective of ABC is to assign

costs to activities.


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ABC is a methodology that measures the

performance of

resources,

activities, and cost objects

assigns resources to activities and activities to

cost objects based on their use, and

incorporates causal relationships betweencost objects and activities as well as

between activities and resources


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Conventional Costing

Expenses

Cost Objects

AB Costing

Resources

Activities

Cost Objects

Economic

Element

WorkPerformed

Product or

service


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1. Identifying the major activities that take

place in an organization

2. Assigning costs to cost pools/cost centres for

each activity3. Determining the cost driver for each major

activity

4. Assigning the cost of activities to cost

objects


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Activities are identified by carrying out an activity analysis. Activity

analysis includes gathering data from existing documents and records,and using survey, questionnaires, observation, and ongoing interviews

etc.

What work or activities do you do?

How much time do you spend performing the activities?

What resources are required to perform the activities?

What value does the activity have for the organization?


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Once activities are identified and described, the next task is

determining how much it costs to perform each activity. Thisrequires identification of the resources being consumed by each

activity.

Activities consume resources such as labor, materials, energy, and

capital.

(Although the companys general ledger is a good starting point tofind information about the cost of resources used to perform

activities, most general ledger systems report the costs of different

resources such as indirect labor, electricity, equipment, and

supplies, but do not report the cost of activities performed)


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In order to assign the costs attached to each activity cost

center to products or other cost objects, a cost driver

must be selected for each activity center, such cost drivers

used at this stage are called activity cost drivers.

Three types of activity cost drivers:

transaction( number of setups, receipts, and products

supported, count how often an activity is performed)

Duration (Duration drivers represent the amount of time

required to perform an activity, setup hours and inspection

hours )and

intensity (Intensity drivers directly charge for the

resources used each time an activity is performed)


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In manufacturing organizations, activities are

grouped on the basis of different levels at

which activities are performed and hence are

identified and classified into broadly four

different categories:

UnitLevel

Activities

BatchLevel

Activities

ProductLevel

Activities

FacilityLevel

Activities


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Activities performed each time a unit is produced.

Unit level costs arise from the activities that are

performed atleast once for each unit of product.

Example: Direct labour hours, Machine hours, Power

are used each time a unit is produced

Costs of unit level activities vary with the number of

units produced


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Activities performed each time a batch of goods or

products is produced

Batch level costs arise the cost for each batch or lot of

products is produced

Costs of batch level activities vary with the number of

batches but are fixed with respect to the number of

units in each batch

Example: No. of (Machine setups, inspections,

production scheduling, materials handling, purchase

orders) etc..


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Activities performed to support the production of eachdifferent type or model of product.

These costs arise activities performed to support the

production of products.

Example: Product modifications, product design,product specification, Maintenance of equipment,

engineering charges, testing routines, maintaining bills

of materials


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Activities needed to sustain a factorys general

manufacturing process

These costs arise from all remaining activities required

to sustain the overall operation of the manufacturing

organisation.

Examples: Security, maintance insurance,

administration Factory management, plant

depreciation etc.


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Examples of costs driven by activities at each level:

ACTIVITY LEVEL EXAMPLES OF ACTIVITY COST

1. Unit Level Cost of raw materials

Cost of inserting a component

Utilities cost of operating equipment Some costs of packaging

Sales Commissions

2. Batch Level Cost of processing sales order

Cost of issuing and tracking work order

Cost of equipment setup Cost of moving batch between workstations

Cost of inspection (assuming same number of

units inspected in each batch)


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ACTIVITY LEVEL EXAMPLES OF ACTIVITY COST

3. Product Level Cost of Product Development

Cost of Product marketing such as advertising

Cost of specialized equipment

Cost of maintaining specialized equipment

4. Facility Level Cost of maintaining general facilities such as

buildings and grounds

Cost of non-specialized equipment

Cost of maintaining non-specialized equipment

Cost of real property taxes

Cost of general advertising Cost of general administration such as the plant

managers salary


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After cost pool is defined and cost drivers identified, per unit cost of

the cost driver is calculated. This is called the Pool rate or activity cost driver base rate . It links costs and cost drivers with

the resources used symbolically

Cost per unit = u+ b+p+S

u = Total unit level costs

Total units

b = Total Batch level costs

Number of units

p = Total product level costNumber of units

S = Total cost of other remaining activities

Number of units produced


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Thus, at the final stage, the cost pool, cost driver and the pool rate

combine to determine, how much cost should be assigned to each

product/Unit

The cost function assumed is stated as follows

C = Vu + bB + pP +S

V = Per unit variable cost

B = Per batch variable cost

P = Per product line variable cost


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FUNCTIONAL

AREAS

ACTIVITIES SUITABLE COST

DRIVERS

Materials

Management

Issue of purchase orders Number of purchase orders

Inspection of materials Number of purchase orders

Stores

Management

Storing of materials Value of materials stored

Servicing of requisitions Number of requisitions

Inspection & Verification Number of times inspected

Stock Taking Value of stock

Quality Control Testing of Samples Number of batches produced

Marketing Demand Creation Increase in sales

Advertising Increase in sales

Despatches Number of orders


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FUNCTIONAL

AREAS

ACTIVITIES SUITABLE COST

DRIVERS

Personnel

Management

Recruitment of

employees

Number of employees

recruited

Maintenance of leave

records & attendance

Number of employees

Research &

Development

Research Number of research Projects

Machining

Setup Cost

Number of production runs Power cost Machine hours


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Salaries 313,000

Depreciation 155,000

Electric ity 132,000

Supplies 25,000

Travel 100,000

Total 725,000

Accounting RecordsAct ivities Salaries Deprec iat i Elect ric ity Supplies Travel Total

Business Development 20,000 25000 5000 5000 55,000

Maintianing Present Business 80,000 60000 50000 5000 10000 205,000

Purhcasing Material 125,000 50000 20000 20000 60000 275,000

Set up Machines 25,000 10000 2000 37,000

Running Machines 50,000 10000 50000 110,000

Resolve Quality Problems 13,000 5000 25000 43,000

Total 313,000 155000 132000 25000 100000 725,000

ABC Records

Mapping


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Activities Drivers

Unit Level

Acquire and Use material for containers No. of Containers

Acquire and Use material for baby-care p No. of products

Batch Level

Set up manually controlled machines No. of batches of con

Set up computer controlled machines No. of batches of B.

Product Level

Design and manufacture moulds No.of moulds require

Use manually controlled machines Product type (contain

Use conputer controlled machines Product type (B.Prod

Customer Level

Consult customers No. of consultations

Provide warehousing for customers No. of cubit feet

Faciltiy Level

Manage workers Salaries


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Activities Drivers Activity Cost Activity Volum Activity R

Unit Level

Acquire and Use material for containers No. of Containers 40,000 1,000,000 0.04

cquire and Use material for baby-care products No. of products 80,000 8,000 10

Batch Level

Set up manually controlled machines No. of batches of containers 3,000 10 300

Set up computer controlled machines No. of batches of B. Produst 12,000 20 600

Product LevelDesign and manufacture moulds No.of moulds required 5,000 5 1000

Use manually controlled machines Product type (containers) 15,000 1 15000

Use conputer controlled machines Product type (B.Products) 40,000 1 40000

Customer Level

Consult customers No. of consultations 4,000 40 100

Provide warehousing for customers No. of cubit feet 2,000 10,000 0.2

Faciltiy Level

Manage workers Salaries 3,000 15,000 0.2

Use main building Square feet 48,000 16,000 3

A t i i C t


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Ascertaining CostActivities A. Rate A.Volume Containers Baby Product

Unit Level

Acquire and Use material for containers 0.04 1,200,000 48,000

cquire and Use material for baby-care products 10 7,000 70000

Batch Level

Set up manually controlled machines 300 12 3,600

Set up computer controlled machines 600 16 9600

Product Level

Design and manufacture moulds 1000

1 1,000

4 4000

Use manually controlled machines 15000 1 15,000Use conputer controlled machines 40000 1 40000

Customer Level

Consult customers 100

Containers 2 200

B.products 40 4000

Provide warehousing for customers 0.2

Containers 8,000 1,600

B.products 2,000 400Faciltiy Level

Manage workers 0.2

Containers 4,000 800

B.products 10,000 2000

Use main building 3

Containers 5,000 15,000

B.products 7,000 21000

Total Cost 85,200 151,000


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Building an ABC Model

Identify

Resources

Identify

Activities

Identify

Cost Objects

Define

Resource

Drivers

Define

Activity

Drivers

Enter

Resource

Costs

Enter

Resource

Driver Qty.

Enter

Activity

Driver Qty.

Calculate

Costs


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Thank you

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