Value Chain and its Importance in Business

This article discusses the concept of value chain and its significance in creating a sustainable business framework. It explains how value chain helps in optimizing resources, reducing bottlenecks, and improving efficiency. The article also highlights the importance of underlying management accounting issues in implementing an effective value chain.

Answer to Question 1:
To understand how value chain helps create sustainable framework for business, let us
understand what value chain is. A value chain can be defined broadly as a model that
describes the business framework of the company using the complete range of activities that
the company use or adhere to for producing the products/services. This starts from the idea of
a product to be manufactured and ends at distribution of the final product to the consumers.
(Tardi, 2019)
I am closely associated with a courier agency and there I understand why value chain is laid
great emphasis now. The logistics industry involves a lot more number of internal
stakeholders or the participants in the value chain who ranges from the final recipient of the
post to the transport partners, truck partners, transit partners insurances, collection, packing,
sorting and distribution. The value chain in the logistics industry helps in optimization of the
resources and time. It exists both ways from company to recipient and sender to company and
consists of similar participants both sides. (Zhou, 2019)
The value chain helps the firm identify the weak links so that they could be worked upon to
reduce bottlenecks and make the system more robust and sustainable. The involvement of so
many intermediaries requires greater attention to detail and the logistics model can hardly
bear any delay in shipments. Thus focusing on the value chain is imperative.
The use of value chain comes with its own set of priorities wherein the focus should also be
in underlying management accounting issues which includes a robust ERP system to account
properly for the transactions and activities, a highly reliable connectivity as a large number of
users across globe uses the same platform for updation of records, efficient tracking system,
automated and systematic warehouse control system are some of the bare minimum
requirements.
All put together value chain analysis helps the company remove lacunas; identify ways of
shortening the cycle thus reducing turnaround time and improving efficiency.

Answer to Question 2:
1. The cost of goods manufactured statement for the company is as below:
2. The cost of sales of the company for the year ended 31 December, 2018 is $918,766.
3. The gross profit of the company for the year ended 31 December, 2018 is $481,234.
4. The net profit of the company for the year ended 31 December, 2018 is $190,554.

Workings:
The Net Income statement for the company is computed as below:

Answer to Question 3: Part 1
The first step is to compute the total machine and labour hours for both the department as
below:
Basis Moulding Assembly
Machine Hrs Labour Hrs
No. of Machine/Labour (A) 20 80
Hours Per Year (B) 2,000 2,000
Total Hours (A*B) 40,000 1,60,000
We will now allocate the cost of the support department using the direct method as below:
Allocation of Support Costs - Direct Method
Particulars Moulding Assembly
Repair Hours Used 3,000 15,000
Cost Allocated
- $1,00,000 / 18000 *3000 $16,667
- $1,00,000 / 18000 *15000 $83,333
Engineering Hours Used 8,50,000 1,50,000
Cost Allocated
- $5,80,000 / 10,00,000 *8,50,000 $4,93,000
- $5,80,000 / 10,00,000 *1,50,000 $87,000
Total Allocated Costs (Repair + Engineering) $5,09,667 $1,70,333
The overhead rates for moulding and assembly departments are computed as below:
Particulars Moulding Assembly Repairs Engineering
Total Budgeted Cost $5,00,000 $7,40,000 $1,00,000 $5,80,000
Allocation of Support Cost $5,09,667 $1,70,333 -$1,00,000 -$5,80,000
Total Cost After Allocation $10,09,667 $9,10,333
Overhead Allocation Basis 40,000 1,60,000
Overhead Rate $25.24 $5.69
Part 2
The overhead cost for thingamabob as per rates above is computed as below:
Particulars
Mouldin
g
Assembl
y Total
Overhead Rate $25.24 $5.69
Multiply: No. of Hours 3 5
Overhead Cost Allocated $75.73 $28.45 $104.17

Part 3
Here, we will allocate the cost of the support department using the step down method
allocating the repair cost first as below:
Allocation of Support Costs - Step Down Method
Particulars Moulding Assembly Engineering
Repair Hours Used 3,000 15,000 2,000
Cost Allocated
- $1,00,000 / 20000 *3000 $15,000
- $1,00,000 / 20000 *15000 $75,000
- $1,00,000 / 20000 *2000 $10,000
Cost of Engineering Department $5,80,000
Total Cost of Engineering Department $5,90,000
Engineering Hours Used 8,50,000 1,50,000
Cost Allocated
- $5,90,000 / 10,00,000 *8,50,000 $5,01,500 $88,500
- $5,90,000 / 10,00,000 *1,50,000
Total Allocated Costs (Repair + Engineering) $5,16,500 $1,63,500
The revised overhead rates for moulding and assembly departments are computed as below:
Particulars Moulding Assembly Repairs Engineering
Total Budgeted Cost $5,00,000 $7,40,000 $1,00,000 $5,80,000
Allocation of Support Cost $5,16,500 $1,63,500 -$1,00,000 -$5,80,000
Total Cost After Allocation $10,16,500 $9,03,500
Overhead Allocation Basis 40,000 1,60,000
Overhead Rate $25.41 $5.65
Part 4
The overhead cost for thingamabob as per rates above is computed as below:
Particulars
Mouldin
g
Assembl
y Total
Overhead Rate $25.41 $5.65
Multiply: No. of Hours 3 5
Overhead Cost Allocated $76.24 $28.23 $104.47

Part 5
Here, we will allocate the cost of the support department using the step down method
allocating the repair cost first as below
Allocation of Support Costs -Reciprocal Method
Particulars Moulding Assembly Engineering Repair
Repair Hours Used 3,000 15,000 2,000 0
Engineering Hours Used 8,50,000 1,50,000 0 2,50,000
Budgeted Costs $5,00,000 $7,40,000 $5,80,000 $1,00,000
Allocation of Repair Cost -$1,00,000
- $1,00,000 / 20000 *3000 $15,000
- $1,00,000 / 20000 *15000 $75,000
- $1,00,000 / 20000 *2000 $10,000
Total Cost to be allocated further $5,15,000 $8,15,000 $5,90,000 $0
Allocation of Engineering Cost -$5,90,000
- $5,90,000 / 12,50,000 *8,50,000 $4,01,200
- $5,90,000 / 12,50,000 *1,50,000 $70,800
- $5,90,000 / 12,50,000 *2,50,000 $1,18,000
Total Cost to be allocated further $9,16,200 $8,85,800 $0 $1,18,000
Allocation of Repair Cost -$1,18,000
- $1,18,000 / 20000 *3000 $17,700
- $1,18,000 / 20000 *15000 $88,500
- $1,18,000 / 20000 *2000 $11,800
Total Cost to be allocated further $9,33,900 $9,74,300 $11,800 $0
Allocation of Engineering Cost -$11,800
- $11,800 / 12,50,000 *8,50,000 $8,024
- $11,800 / 12,50,000 *1,50,000 $1,416
- $11,800 / 12,50,000 *2,50,000 $2,360
Total Cost to be allocated further $9,41,924 $9,75,716 $0 $2,360
Allocation of Repair Cost -$2,360
- $2,360 / 20000 *3000 $354 $0
- $2,360 / 20000 *15000 $1,770
- $2,360 / 20000 *2000 $236
Total Cost to be allocated further $9,42,278 $9,77,486 $236 $0
Allocation of Engineering Cost -$236
- $236/ 12,50,000 *8,50,000 $160
- $236/ 12,50,000 *1,50,000 $28
- $236 / 12,50,000 *2,50,000 $47
Total Cost to be allocated further $9,42,438 $9,77,514 $0 $47

The revised overhead rates for moulding and assembly departments are computed as below:
Particulars Moulding Assembly Repairs Engineering
Total Budgeted Cost $5,00,000 $7,40,000 $1,00,000 $5,80,000
Allocation of Support Cost $9,42,438 $9,77,514 -$1,00,000 -$5,80,000
Total Cost After Allocation $14,42,438 $17,17,514
Overhead Allocation Basis 40,000 1,60,000
Overhead Rate $36.06 $10.73
Part 6
The overhead cost for thingamabob as per rates above is computed as below:
Particulars
Mouldin
g
Assembl
y Total
Overhead Rate $36.06 $10.73
Multiply: No. of Hours 3 5
Overhead Cost Allocated $108.18 $53.67 $161.86
Part 7
To,
The Chief Financial Officer
Bezos Ltd.
Sub: Allocation of Overhead
Dear Sir,
The cost of the service departments have been allocated to the production using three
different methods which are Direct, Step Down and Reciprocal Method and the results of all
three varies noticeable. Under the direct method, the cost of the thingamabob is computed at
$104.17, it is $104.47 under step-down method and $161.86 under reciprocal method.
It is noticed that the reciprocal method is a more accurate method of allocating costs as the
service departments uses their services interchangeably and thus there costs should also be
apportioned between them. We see that under direct method no costs between services
departments are allocated while in step down, only costs of repair are allocated. It is only
under reciprocal method that costs of both the departments are allocated to them and thus an
appropriate measurement of the cost is arrived at.

Accuracy of estimation of costs leads to proper pricing and thus better estimation of prices to
be quoted. It is recommended that we use reciprocal method for our purpose.
Thanks
Answer to Question 4:
1. The pre-determined overhead rate for each of the department is computed as below:
Computation of Pre-Determined Overhead Rate
Particulars
Preparatio
n Fishing
Manufacturing Overhead $2,85,600
$6,84,00
0
Machine Hours 6,800 9,000
Labour Cost $2,40,000
$3,80,00
0
Overhead Rate $42 $1.80
The overhead rate for preparation department is computed on the basis of total
machine hours used and for fishing it is based on total labour cost.
2. The total cost for Job 842 is computed as below:
Job Cost Sheet for Job 842
Particulars Preparation
Fishin
g
Direct Materials $1,300 $1,420
Direct Labours cost $1,640 $1,800
Manufacturing Overhead
- 40 Mc Hrs * $42/Hr $1,680
- $1,800 * 1.80 $3,240
Total Cost $4,620 $6,460
Thus, the total cost for the Job 842 combining the costs of both the dept. is $11,080.
3. The total overhead is under applied as the actual costs exceed the budgeted costs of
the company as illustrated below:
Departments Budgeted Costs Actual Costs Remark
Preparation $2,85,600 $6,82,500 Under Applied
Fishing $6,84,000 $3,75,800 Over Applied
Total Costs $9,69,600 $10,58,300 Under Applied

Answer to Question 5: Part 1
Under the weighted average method, we will first compute the cost per equivalent unit as
below:
Computation of Cost Per Equivalent unit for the weaving department
Particulars Direct Material Conversion Total
WIP - March 1 $1,88,000 $88,000 $2,76,000
Cost Incurred during the month $3,28,000 $5,45,600 $8,73,600
Total Cost $5,16,000 $6,33,600 $11,49,600
Equivalent Units 60,000 52,000
Cost per Equivalent Unit $8.60 $12.18
Based on this, the cost of goods completed and transferred out and WIP is as below:
Part 2
Under the FIFO method, we will first compute the cost per equivalent unit as below:
Computation of Cost Per Equivalent unit for the weaving department
Particulars Direct Material Conversion Total
WIP - March 1 $1,88,000 $88,000 $2,76,000
Cost Incurred during the month $3,28,000 $5,45,600 $8,73,600
Total Cost $5,16,000 $6,33,600 $11,49,600
Equivalent Units 40,000 44,000
Cost per Equivalent Unit $12.90 $14.40

Based on this, the cost of goods completed and transferred out and WIP is as below:

References
Tardi, C. (2019). How Value Chains Work. [online] Investopedia. Retrieved from
https://www.investopedia.com/terms/v/valuechain..asp on 11 Apr. 2019.
Zhou, X. (2019). [online] File.scirp.org. Retrieved from
https://file.scirp.org/pdf/AJIBM_2013041710325632.pdf on 11 Apr. 2019.