Module 6 quick reference: tools for creating and managing value

Accounting Ahead | Original study resource | accountingahead.com.au

Module 6 quick reference: tools for

creating and managing value

SMA EXAM REFERENCE PACK | MODULE 6 | PRINT AND KEEP WITH YOUR NOTES

Exam technique: name the tool the question needs (costing, pricing, cost management, supplier, quality or customer

analysis), state the formula, set out workings in a table, then interpret - what the number means for strategy - and

finish with the qualitative factors and limitations.

Value and the value chain

Topic Remember

Value Revenue less costs; two levers - strategic revenue management and strategic cost

management (they interact)

Stakeholder value Each group defines value differently (money and quality of life); customer revenue funds

most of it

Porter's value chain Primary: inbound logistics, operations, outbound logistics, marketing and sales, service.

Support: firm infrastructure, HR, technology development, procurement

Margin Value added less the cost of creating it

Value system Supplier - organisation - channel - customer value chains; upstream links drive cost

management, downstream links drive revenue management

ABC vs ABM ABC costs products and other cost objects through activities; ABM manages activities to

cut cost and add customer value

Activity-based costing (ABC)

Topic Formula or rule

Why Volume-based rates (labour or machine hours) distort costs when overheads are driven by

complexity and diversity - cross-subsidies

Cost hierarchy Unit level; batch level; product-sustaining; facility-sustaining (no cause-and-effect link -

avoid arbitrary allocation)

Seven steps 1 activity analysis; 2 cost pools; 3 cost drivers; 4 driver transactions; 5 rate; 6 allocate; 7

cost per unit

Pool rate Cost pool / total cost driver transactions

Allocation Product's driver transactions x pool rate; then allocated overhead / units produced

Value engineering Keep only functions customers value; minimise their cost

Fits best High overheads, diverse and complex products, customers or channels; implementation

can take over a year

STRATEGIC MANAGEMENT ACCOUNTING | EXAM REFERENCE | MODULE 6

1

Accounting Ahead | Original study resource | accountingahead.com.au

Time-driven ABC (TDABC)

Item Formula or rule

Inputs Cost per time unit of capacity; unit time of each activity (Kaplan and Anderson)

Theoretical capacity All paid time, e.g. staff x days x hours x 60 minutes

Practical capacity Theoretical less breaks, meetings, training (often estimated at 80-85%)

Capacity cost rate Cost of capacity supplied / practical capacity

Activity cost Unit time x capacity cost rate

Unused capacity (Practical capacity - time used) x rate - shown separately, not buried in product costs

Time equation Complex activity time = standard time + each variation time that applies (variations are

added)

Strategic revenue management

Topic Remember

Hard functions Technical and economic use: performance, life, running costs, ease of use - easier to price

Soft functions Image: appearance, aesthetics, prestige - support premium positioning

Features and pricing Generic - cost plus (reduce cost); specified - competitive parity (estimate rivals' prices);

augmented - value to customer (estimate value)

Surplus value Value to the customer - price; maximum profit = upper limit of willingness to pay - cost

Pricing map Rapid skimming (high price, high promotion); slow skimming (high, low); rapid penetration

(low, high - price-sensitive, rivals, scale); slow penetration (low, low - long life cycle)

Legal Price fixing, market sharing and bid rigging are cartel conduct under the Competition and

Consumer Act - informal understandings count

Strategic cost management

Topic Remember

Lasting savings Across-the-board cuts erode; focus on how to cut, not how much

Five questions Non-value-adding? Cheaper resource? Less time and effort? Under-utilised? Can it be

shared?

Spare capacity dilemma Efficiency gains create unused capacity - savings are real only when capacity is used or

removed

Cost drivers Structural (scale, scope, technology, complexity, structure) vs executional (workforce,

quality, utilisation, layout, linkages)

Life cycle costing Product as an investment over its whole life; cash curve dips then rises; most costs

committed at design, incurred later

STRATEGIC MANAGEMENT ACCOUNTING | EXAM REFERENCE | MODULE 6

2

Accounting Ahead | Original study resource | accountingahead.com.au

Topic Remember

Reverse flows Returns, warranty, recalls, take-back; re-use, remanufacture, recycle, dispose - design for

end of life

Target costing Target cost = target price - target profit; gap = estimated life cycle cost - target cost

If cost > target Accept lower margin; reduce cost (redesign, process, inputs); add valued functionality; or

don't proceed

Kaizen costing Small continuous reductions during production: resource use, waste, productivity,

outsourcing (e.g. x% a year)

ABM steps Activity analysis and map (inputs, drivers, outputs); focus on outputs; improve activities and

the map

ABM factors Scale, scope, experience, technology, complexity, channels, quality of operational

management

BPM Radical redesign from the customer's viewpoint with the best technology; may restructure

around processes

Value-adding test External customer value? Required by rules? Sound practice? Internal customer value?

Waste? - else eliminate

Continuous improvement Teams and empowerment; gainsharing; productivity ratio = output / input (higher is better)

Upstream: suppliers, quality and outsourcing

Topic Formula or rule

Supplier-related costs Purchasing; holding inventory; poor quality; delivery failure - usually hidden in overheads

Supplier cost performance

ratio

Supplier-related costs / invoice cost

Total procurement cost Invoice cost + supplier-related costs

Supply chain risk Macro (disasters, war, downturns, regulation) and micro (demand, manufacturing, supply,

infrastructure, financial)

Global sourcing Cheaper labour, taxes, commodities, skills vs freight, lead times, exchange rates, customs,

political, cultural risk

Codes of conduct Hiring, hours, pay, WHS, environment - monitor with audits; Modern Slavery Act 2018 (Cth)

reports from $100m revenue

JIT and VMI Less inventory and working capital; needs reliable suppliers; disruptions raise safety stock

needs

Supplier choice Single (trust, innovation) vs multiple (competition, back-up); track on-time, in-full, to-spec;

behavioural to attitudinal compliance

Quality costs Prevention and appraisal (controlling) vs internal and external failure (failing to control);

classify by nature

Rework Non-value-adding but can be economic (resale value - rework cost vs scrap cost)

STRATEGIC MANAGEMENT ACCOUNTING | EXAM REFERENCE | MODULE 6

3

Accounting Ahead | Original study resource | accountingahead.com.au

Topic Formula or rule

Outsourcing Compare avoidable costs only; include redundancy, contract management, dependence,

security, knowledge, labour issues

Outsourcing pyramid Never: strategic direction; tight control: audit, HR, legal; SLAs: logistics, call centres, data

centres; low risk: payroll, security, catering

Downstream: customer profitability

Topic Formula or rule

Gross margin Sales - cost of goods sold

Net margin Net price (after discounts and allowances) - cost of goods - customer-related costs (cost to

serve)

Cost to serve Customer's driver transactions x ABC rates (orders, deliveries, service hours, returns)

Whale curve Top 20% of customers often earn 150-300% of profit (Kaplan and Narayanan)

Customer map High margin, low cost: protect; high margin, high cost: price for service; low margin, low

cost: serve efficiently; low margin, high cost: change behaviour or charge

Menu-based pricing Price varies with product and service level chosen

Keep unprofitable? New and growing; qualitative benefits; reputation (Kaplan)

Six steps Identify; measure revenue; measure cost to serve; determine profit; evaluate; act and

monitor

Limitations Arbitrary common costs (advertising); committed costs still need recovering

STRATEGIC MANAGEMENT ACCOUNTING | EXAM REFERENCE | MODULE 6

4