Value Chain Analysis and Cost Estimation for Natural Pulp Ltd and Austal Ships

This article discusses the trading account of Natural Pulp Ltd and the value chain analysis for Austal Ships. It explains the five segments of the value chain and the major purposes of the value chain. The article also highlights the process of the value chain in Austal Ships.

Management accounting
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Part 1
Trading Account of Natural Pulp Ltd as on 30 June 2014
Particulars Amount ($) Particulars Amount ($)
Opening Stock Sales Revenue 420000
Work In Progress 35000 Closing Stock
Finished Goods 55000 Work In Progress 67667
Direct Material Used 80000 Finished Goods 106333
Direct Labour Cost 160000
Manufacturing Overhead 96000
Gross Profit 168000
594000 594000
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Cost of WIP = 67667
Cost of Finished Goods = 106333
Working Notes
1. Manufacturing overhead is 40% of manufacturing cost and manufacturing cost includes
direct material used and labour cost.
Part 2
1. The value chain is a central which helps in identifying the areas of cost savings. By adding
value in the different process the cost can be saved. The value chain is made by every
company to increase the efficiency. The overall goal of the value chain analysis is to give
maximum value for the least possible cost (Gereffi, et. al., 2010). Value chain analysis breaks
down the flow of production into five categories. The reason behind the break down is to
increase the efficiency in production by creating a competitive advantage. There are five
primary activities which are essential in adding value.
2. Value chain estimates cost by using the internal cost analysis which is as follows:
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 Identify the firm’s value-creating processes: It is the first step to identify the value-
creating process of the business. In a business, the main things are the different costs, revenue
and profit centres. The reason behind the identification of value-creating process is to
understand the competitive advantage of the business.
 Determine the portion of total cost of the product: The Company uses estimates to
assign costs to the value-creating activities (Neilson and Pritchard, 2011). The cost associated
with the support activities needs to be transferred to derive the total cost.
 Identify the cost drivers of each process: The next thing management needs to do is
to identify the factors which derive the costs. If there is any change in the cost drivers then it
may lead to change in the overall cost of the company. Cost drivers are the essential part of
determining the overall cost. The company also uses activity-based costing to correctly
allocated the cost of the activity and determine the correct value of the cost.
 Identify the links between processes: One of the main features of the value chain
analysis is to consider individual value activities as separate and discrete (Van Weele, 2010).
The total cost affected by the activities in the value chain is interdependent. The company has
to find the link between the processes to reduce the impact of activities on the total cost.
 Evaluate the opportunities for achieving relative cost advantage: In past, business
adopted broad cost reduction where the cost of all the heads reduces by the same percentage.
The reduction of cost in all the heads does not solve the problem as costs are not reduced
strategically. This affects the sales as the forceful reduction in cost affects the marketing.
3. Segments of Value chain
The value chain is the foundation of good operating model work. Segmentation is the tricky
part of the value chain analysis (Wake, 2013). Each segment needs to be served for an
effective value chain analysis. The five segments of value chain analysis are as follows:
 Inbound logistics: Logistics are always treated as an important part of the
organization as many activities are related to inbound logistics (Bolwig, et. al., 2010). There
are several costs associated with inbound logistics. Inbound logistics includes receiving,
storing, inventory control, transportation scheduling, etc. The storage of goods is an
important aspect of the carrying cost of inventory needs to be controlled by the management
in order to make an effective value chain in inbound logistics.
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 Operations: The Company earns money from its operations and the operations
include machining, packaging, etc. The testing of equipment along with assembling is the
major parts of the operations. These are used for converting the input into the final products.
Different cost arises in the operations which are the cost of packaging, cost of testing of
equipment, cost of assembly, etc.
 Outbound logistics: The outbound logistics are used as a way to deliver the goods to
the consumers. Distribution forms a major part of the outbound logistics. The cost incurred in
the outbound logistics is the cost of warehousing, transportation, order fulfilment
(Macfadyen, et. al., 2012). The goods need to be a store somewhere before it delivered to end
consumers and it is stored in the warehouses of the company.
 Marketing and Sales: Marketing is necessary to sell the product. It is the strategy to
attract the buyers to buy the product of the company. Marketing is the process which helps in
deciding the selling price of the product. Different cost is associated with marketing which is
the cost of advertising, selling and promotional expenses, retail management, etc.
 Service: Selling of goods to the consumer is not the final task that is done by the
company. To maintain the value of the product, the company needs to give different services
which are customer support, repairing and maintenance services, installation services of the
product, upgrading of the product. The cost associated with some of the services is bear by
the company as it is already included in the sale of the product (Rieple and Singh, 2010).
After sell, services give satisfaction to the customer and it helps in increasing the value of the
product of the company.
The main task of the manager apart from his usual activities is to develop a plan that helps
him in reducing the cost of the goods and services by using the value chain analysis. The
different segments of the value chain are analysed by the manager to reduce the overall cost.
The effective value chain analysis describes the cost of each segment and helps in deciding
where the cost can be controlled (Fearne, et. al., 2012). Operations are the important aspect
of the business and it is an important aspect of the value chain as it helps in building a
competitive advantage. The management has to thoroughly analyse the different cost in the
operations and decide that how to reduce these costs.
4. Major purposes of the value chain and the process of the value chain in Austal Ships
The main purpose of the value chain is to analyse the competitive advantage by disintegrating
an organization into discrete activities or progress and examine how each activity contributes
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to the organization’s relative cost position or the customer’s comparative willingness to pay.
The use of value chain is to determine the cost advantage which can be gain by either
reducing the cost of individual chain activities or changing the whole segmentation of value
chain (Soosay, et. al., 2012). Value chain analysis applied at almost in all the business as it
helps in building a competitive advantage on the others. Cost advantage can be built on a
better understanding of the costs.
Austal Ships is a worldwide shipbuilding organization in Australia alongside the prime
barrier temporary worker that can develop the safeguard vessels alongside the business
vessels (Slocombe, 2017). The main item sold by the company is naval vessels, offshore
wind farm, vehicle ferries.
Austal ships have begun its business in the year 1988 and the company listed its share on
Australian stock exchange after some years of its establishment. The registered office of the
organization is in Henderson, Western Australia. The chairman of the organization is John
Rothwell and the present CEO of the organization is David Singleton. The organization has
three noteworthy shipbuilding offices, the defence vessels are made in Henderson, Western
Australia, commercial vessels are built in Cebu in the Philippines, and the vessel bolster is
made in Darwin, Cairns (Gereffi and Fernandez-Stark, 2016). The main client of the Austal
Ships is Australian Border Force, Condor Ferries, The United States NAVY, The Royal Navy
of OMAN, and so on. The record appears at the beginning of 2017 the organization has
developed 260 vessels. The organization has in excess of 100 administrators and deals its
items in excess of 44 nations.
The company implement value chain analysis to build a competitive advantage by reducing
the cost of the products. The CEO of the company decides that the value of the support
activities in the USA and Australian defence needs to be increased by 20%. The inventory of
the company includes different types of vessels and both inbound logistics and outbound
logistics is used for the safe warehousing and transportation of the goods of the company
(Wiggins, et. al., 2010). The company wants to increase its distribution channels in order to
ship more goods.
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