Strategic management accounting is a recently developed branch in management accounting. It helps management in developing required estimates for various proposed strategies based on accounting information. The main job of management accountant is to provide accounting statements that have the relevant information of use in developing estimates of the results.
Company can pursue cost leadership strategy or differentiation strategy in the product and target markets it is operating. The accounts of two years can be compared and the growth, product differentiation and cost leadership components of the increase in operating income can be determined.
Growth component
The growth component measures change in revenue and costs based on changes in units sold or produced, with all other variables being the same as the previous year. By isolating the change in units, the analysis looks at the impact of the change in growth on revenue.
Revenue effect of growth
Revenue effect of
growth component = (Actual units of output sold in the current period – Actual units of output
sold in the last period) × Selling price in the last period.
Maintaining the selling price of the last period isolates the increase in revenue resulting from the change in units sold.
Cost effect of growth
Cost effect of growth component = (Actual units of input or capacity that would have
used to produce current period output assuming the same input-output relationship that existed in the last period – Actual units of input or capacity to produce the last period output) × Input prices
in the last period
Maintaining the input-output relationship in the last period input prices isolates the increase in cost resulting from the growth in sales between the last period and the current period. Since fixed costs do not change, variable direct-material costs are isolated from fixed costs (including conversion and R&D costs). This approach assumes that the company is still operating within its relevant range.
Price-recovery component
The price-recovery component of operating income measures the change in revenues and the change in costs to produce the given level of current output resulting from the change, assuming the relationship of input output remains constant. This isolates the change in revenue due solely to the change in selling price.
Revenue effect of price recovery
Revenue effect of product
differentiation component = (Selling price in the current period – Selling price in the last period) ×
Actual units of output sold in the current period
Cost effect of price recovery
This component focuses on the effect of changes in prices of input and also incorporates changes in fixed costs or conversion costs.
Cost effect of product differentiation component
= (Input prices in the current period – Input prices in the last period) ×
(Actual units of inputs or capacity that would have been used to produce in the current period output
assuming the same input-output relationship that existed in the last period)
Productivity component
The productivity component analysis uses current-year prices to isolate the change in costs between the current and past year caused solely by the changes in quantities, mix, and capacity of inputs.
Productivity/cost leadership component =
(Actual units of input or capacity to produce the current period input
– Actual units of inputs or capacity that would have been used to produce the current period output assuming the same input-output relationship that existed in the last period)
× (Current period prices)
Conclusion
Companies that have chosen a cost-leadership strategy would be more likely to focus on productivity and growth components, while companies following a differentiation strategy would see more changes in price recovery and growth components.
Strategic Analysis of Operating Income - Part 1
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Startup Tech Asia
Strategic Analysis of Operating Income - Part 2
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Startup Tech Asia
Cost Information for Zero-Based Productivity Management of Supply Chain - McKinsey Way Supply Chain Industrial Engineering
https://nraomtr.blogspot.com/2019/04/zero-based-productivity-management-of.html
McKinsey consultants recommend start by breaking costs into four crucial categories—direct labor (including equipment), indirect labor (including equipment), warehouse and logistics, and materials (including conversion yields)—and building a bottom-up view on the existing cost base. The category which may have the highest opportunity varies by industry and type of manufacturing. In more automated settings or continuous manufacturing, equipment category may have higher opportunity. Direct-labor may be more important in manual assembly to find savings opportunities.
Establishing granular transparency
Companies have to seek granularity into costs. This visibility of lower and lower level costs, gained by aggregating ledger account data from internal sources and benchmarking data from external sources, enables organizations to establish relevant benchmarks across spending categories. Data is collected from existing recorded data and is augmented by specially made cost studies using observations and targeted sampling where data is lacking. The data has to point out regulatory and customer special requirements, which act as constraints in the problem.
Updated 2 May 2019, 2 May 2016, 8 Dec 2011
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