This article by John K. Shank and Vijay Govindarajan discuss in depth on the Strategic Cost Management (SCG) and the Value Chain concept applied in real world situation from the airline industry. The Value Chain concept is divided into two (2) main strategies which are the Low-Cost Strategy and Differentiation Strategy. From the article also, Shank and Govindasamy stated that the primary focus of a low cost strategy is to achieve the lowest cost comparative to competitors while the main focus of the differentiation strategy is to create something that customers perceive as being unique. Furthermore, the framework of the value chain is for breaking down the chain into strategically relevant activities.
There are two (2) main steps involved in the Value Chain which are to identify the value chain in the industry’s value chain, while the second step in constructing and using a value chain is to diagnose the cost drivers that explain variations in costs in each value activity. It is an interrelated chain of activities production line.
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In the value of chain framework, multiple cost drivers are usually at work, where output per se is seen to capture little of the richness of cost behavior. Two (2) categories of cost drivers are the Structural and Executional Cost Drivers. Structural Cost Drivers derive from a company’s choices about its underlying economic structure; whereas Executional Cost Drivers are those determinants of a firm’s cost position that is the turning point on its ability to ‘execute’ successfully. Life-cycle costing is a costing concept that argues for including all the costs incurred for a product as part of the product cost. It deals explicitly with the relationship between what a customer pays for a product and the total cost that the customer incurs over the life of the product. The power of the value chain analysis is described by Shank and Govindarajan via two (2) particular case studies – Ajax Airlines situation to illustrate the concept.
The Value Chain Analysis in the SCM Framework is more of an external focus compared to traditional management accounting. The perspective is of the entire set of linked activities from suppliers to end use customers whereby multiple cost drivers; compared to the traditional management accounting’s perspective which is value added and the only driven by single-driver (“volume”).
2.2 Activities: The Focal Point of Total Cost Management
Success depends on the firm’s ability to managed activities
This article provides information on the activities or events that can consume resources when managing a business or companies. It is one of the focal points on the philosophy of Total Cost Management (TCM) as cited in the article by Micheal R.Ostrenga based on Ernst & Young’s experience with large and small company. The purpose of using this business philosophy can reflect product cost, process value analysis, cost reduction, improved performance management, responsibility accounting and product line profitability.
TCM is grounded in process value analysis (PVA), which is the basis of developing performance measures; activity based costing (ABC), responsibility accounting, and the framework for investment management. PVA is an analytical method of identifying all activities and relating them to the event that cause or drive the need for the activities and resources consumed. The purposed is to lead an improvement of products and lower the cost. Activity-based cost (ABC) systems estimate the cost of the resources used in organizational processes to produce products or services.. Measurement of unused capacity through the application of the ABC model provides the critical link between the costs of resources used and the costs of resources supplied or available. ABC able to provide more...