Solutions manual for Management Accounting 5th Edition by Leslie G. Eldenburg ch1 -21
Chapter 1: The role of accounting information in management decision making
Questions
1.1 Explain the value chain and list ways that value chain analysis benefits organisations.
(LO4)
A value chain can be described as the key activities engaged in by the organisation or industry. We can view the value chain on two levels: at the industry level, and at the (more common) organisational level. Refer to figure 1.5 for a sample industry value chain and to figure 1.6 for a sample internal value chain. Value chain analysis may benefit an organisation in a number of ways including:
Focuses on activities. The central feature of the value chain is its focus on activities and processes rather than functions or departments. This makes identification of improvements across segments more likely.
Encourages a broader organisational view. This is particularly so for management accounting staff and business unit managers. Management accounting staff are more likely to take a broader perspective if using a value chain framework when considering the consequences of decisions.
Breaks down more traditional representations of organisational activity. A value chain framework encourages higher levels of cross-fertilisation and communication between business segments, so that decisions are not confined by the traditional boundaries of functional areas.
Externalises thinking by incorporating suppliers and customers. An organisation‘s value chain encompasses not only customers and suppliers, but in some cases extends to the customers‘ customers and the suppliers‘ suppliers. Analysis of the value chain leads to improved relationships between the organisation and others in the value chain, creating an extended organisation that can respond flexibly to dynamic and competitive environments. In other words, value chains explicitly recognise that no organisation operates in isolation from suppliers and customers.
Reinforces other initiatives such as activity-based costing (ABC). With the focus on activities, a value chain framework provides a sound foundation for exploring activity-based costing (which is covered in chapter 4). ABC uses activities as the foundation of product and service costing. Moreover, a value chain framework complements other recent initiatives like strategic cost management, which refers to the simultaneous focus on reducing costs and strengthening an organisation‘s strategic position. This commonly involves taking a longer-term view of cost management and decision-making.
Provides a foundation for outsourcing and strategic alliance decisions. A value chain framework serves as the foundation for considering decisions such as outsourcing of particular parts of the value chain and for considering the
formation of strategic alliances with say a distributor. In this way, the value chain serves as a strategic tool.
Supports initiatives like supply chain analysis. As organisations work to increase profitability, improving their relationships with suppliers becomes a priority. Improvements can be identified through supply chain analysis. The supply chain is the flow of resources from the initial suppliers through the delivery of goods and services to customers and clients. The initial suppliers may be inside or outside the organisation. Negotiating lower costs with suppliers is a straightforward way to reduce costs. Suppliers may be willing to reduce prices, particularly for organisations willing to sign long-term purchase commitments. Occasionally, organisations work with suppliers to help them reduce their costs so that the savings can be passed along.
