APR+ HA2011 Management Accounting Value Chain Analysis

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APR+ HA2011 MANAGEMENT ACCOUNTING -LAKSHYA
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Table of Contents
Introduction................................................................................................................. 3
Question 1...................................................................................................................3
a) Define value chain concept and discuss two benefits of value chain concept to
companies................................................................................................................3
b) Evaluation of value chain concepts for AGL Energy............................................4
i) State the company’s vision and mission...............................................................4
ii) Briefly, describe the competitive strategy of AGL Energy....................................4
iii) Diagrammatical explain AGL’s operations, value-adding processes and support
departments using value chain concept...................................................................5
iv) Select any two processes of AGL’s value chain model and explain them. Give
specific examples of how these services contribute to the company’s products and
services....................................................................................................................6
v) Usefulness and relevance of value chain concept through theoretical knowledge
................................................................................................................................. 7
Question 2...................................................................................................................8
a) Calculate the estimated fixed and variable allocation overhead rates for the
current period...........................................................................................................8
b) Calculate the total overhead cost for Job 20 in October......................................8
c) Calculate the total cost of Job 20.........................................................................8
d) Calculate the fixed and variable overhead allocated in October..........................8
e) Explain why the accountant will use two different cost pool instead of one.
Discuss whether such a method will make any difference in the invoice when low
labour cost is attributed than equipment..................................................................9
Question 3...................................................................................................................9
a) Evaluate cost pool and attach a cost to each one of them..................................9
b) Determine the cost driver for each cost pool.......................................................9
c) Calculate the allocation rate of each cost pool.....................................................9
Conclusion................................................................................................................ 10
References................................................................................................................11
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Introduction
Management accounting is a subsection of financial accounting that includes a list of
subsequent procedure such as identification, measurement, analysis, interpretation
and communication of vital information to the managerial executives of the company
generated from financial accounting for the purpose of achieving organisational
objectives (White et al., 2018). In this assignment, the strategic management of an
Australian company that is AGL Energy has been chosen and how the company can
effectively use the concept of value chain analysis within its operational framework.
In addition to this, the application of fixed and variable overhead as well as cost
drivers have been used in this assignment.
Question 1
a) Define value chain concept and discuss two benefits of value chain concept
to companies
Value chain concept is the strategic and managerial tool that is used as a medium of
analysing of organisational activities performed internally. The main objectives of the
value chain concept are to identify which of the organisational activities are most
valuable to the company in terms of cost advantage or differentiation benefits as well
which of the activities has a scope of improvement to bring in a competitive
advantage to the organisation (von Geibler et al., 2016). The value chain was
conceptualised by Michael Porter in the year 1985 that states a list of activities that a
company needs to carry forward to add value to its products and services for its
consumers. The ultimate goals of value chain analysis are to offer maximum value-
added goods and services to the customer’s at least possible prices and incurring
low cost.
There are certain inherent advantages of value chain analysis that bring in an overall
development or benefit to all types of companies in terms of understanding an
organisation’s potential and optimising its activities that will predominantly focus on
competitive advantage or pave the way to gain a competitive edge as well as earning
higher profits. The following are the two advantages that benefit a company in using
value chain analysis:
Creating more value as compared to cost: As propounded by Porter in his value
chain analysis, there are in total of five primary activities that fall under the category
of the value chain concept. The five value chain activities are inbound logistics,
Operations, Outbound Logistics, Sales and Marketing and Service. Using these
activities a company can effectively analyse and ensure to create a significant
amount of value-added products or services that would exceed the total cost
incurred in the producing the product or rendering services thus creating value chain
concept (Spiegler et al., 2016).
Achieve competitive advantage and gain profitability:
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Competitive advantage and higher profitability can be achieved if a company can
successfully create incentive or advantage over one of the five primary value chain
activities. For the purpose of bringing forth competitive advantage, the company
needs to prioritise its specific and unique activities from the five primary activities and
look out for avenues in creating more effectiveness and efficiencies.
b) Evaluation of value chain concepts for AGL Energy
AGL Energy is a listed company in Australia that is engaged in the business of both
generations of gas and electricity as well as retail supply to residential customers
and for commercial use. AGL Energy has been able to successfully establish itself
as the largest energy and utilities private company in Australia who is operating,
developing and owner of the renewable source of energy (Agl.com, 2019).
i) State the company’s vision and mission
The vision of AGL Energy says that it wants to create sustainable energy solutions
for the present generation as well as for the future generation to come. In order to
fulfil this goal, AGL Energy requires an equitable balance of righty and competent
type of people with required and necessary skills that are essential in establishing
AGL Energy to be a successful one. In addition to this, the vision of AGL Energy
includes
● Concentration on employee engagement for the purpose of attracting new
talents and retaining the skilled employees of the company
● Ensuring to provide a safe, secure and healthy working environment to all the
employees of AGL
● Understanding and incorporating a diversity of work and sustenance of non-
renewable resources.
The mission of AGL Energy includes integrating and maximising the quality and
value of exiting activities of supplying and generating electricity and gas to
commercial and domestic users as well as to trading portfolios (export to foreign
countries). IT has the mission to develop long term strategic goals in supplying gas
through pipelines and improve and strengthen its existing lines of business. The
company has a future mission of diversifying its investment portfolio to a different
sector in order to earn profits all around the year. Lastly, increasing its retail revenue
and profit margin in terms of market share, market capitalisation and customer
satisfaction would encourage the company to survive longer in its own industry.
ii) Briefly, describe the competitive strategy of AGL Energy
Competitive strategy of AGL Energy means in comparison to the rival companies
such as Delta Electricity, Origin Electricity and Integral Energy the operating cost of
AGL will be lower or offering premium prices or both. There are three types of
competitive strategies that a company can achieve that is cost leadership,
differentiation and focus (Ahmed et al., 2016). Out of these three, AGL follows cost
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leadership strategy. Under the cost leadership, strategy companies try to reduce its
production cost as compared to industry standards; Cost leadership of AGL is
derived in terms of its effectiveness, efficiency level, size of business, learning curve
and scale of business. As AGL Energy is a 175 years old company and largest
public company generating and supplying electricity and gas all across Australia, it
has been able to sustain and enjoy profits for a long period of time. Due to its mass
customer base, the company follows a low-cost structure where all types of
customers can avail their services of electricity and gas. Implementation of cost
advantage strategy has allowed AGL Energy to gain more customers than its rivals
are offering the essential and utility services of survival.
iii) Diagrammatical explain AGL’s operations, value-adding processes and
support departments using value chain concept
The value chain analysis of AGL Energy includes a magnified version of value chain
analysis along with the industry that includes either the suppliers of AGL or selling
and distribution channel of AGL or both. In the words of Collins et al. (2016), a value
system can either include stream channel or downstream channel or both to bring in
a competitive advantage for itself. The management of AGL needs to critically
identify each of its process and activities that are included within the primary
activities as well as support activities forming a value chain system. Thus, a
combination of these activities either increasing or decreasing creates a significant
impact on the AGL’s value chain system.
As per the analysis made by Michael Porter, he has broken down the entire value
chain analysis system into two parts namely primary activities and support activities.
The aim of primary activities is to create value for the company in terms of product
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and services in such a way that it exceeds the total cost incurred and thereby
generating greater profitability for the company. On the contrary, secondary or
support activities are used to enhance the level of efficiency of the primary activities
within the value chain analysis (Johnson, 2016). The secondary activities play the
role of support the primary in each of its functions. For instance, the human resource
department acts in assistance to operations, sales and marketing to improve these
services.
The above value chain analysis for AGL Energy includes two segments of activities
namely primary activities and support activities. Within the support activities, it
includes Administration and Infrastructure, Human Resource Management, Product
or Technology or Development Activities and Procurement. On the other hand, within
primary activities, it includes Inbound Logistics, Outbound Logistics, Operations,
Sales and Marketing and Services. From the viewpoint of AGL Energy, the inbound
logistics activities include data collection about its industrial and commercial
customers, access to different types of customers, storage of material information
and service facilities. In the operation primary service of AGL Energy, it includes
operations taken place in its different branch and assembling of its various
components fabrication. Outbound Logistics of AGL Energy are the method of order
processing and preparation of warehouse report. The marketing and sales function
of AGL is its promotional techniques, mass advertisement strategy, sales force,
outlining the posed website for enhancing marketing and sales. Lastly, the after-
sales services of AGL are its installation facilities provided to household and
commercial customers, the support given to customers, redressed of complaints,
mitigation of resolutions and repairs and maintenance services.
The supporting activities of AGL Energy include firm infrastructure that caters to
finance department, planning process and healthy relationship with stakeholders and
investors. The human resource management is entrusted with the work of
recruitment, selection of prospective employees for AGL Energy, providing training,
development and induction sessions, performance appraisal and global
compensation packages. The research and development (R&D) look after new or
existing product design, improvement in process design and marketing research.
Lastly, procurement includes gathering up of machines, discharge of services,
featuring advertisement in mass scale and data interpretation.
iv) Select any two processes of AGL’s value chain model and explain them.
Give specific examples of how these services contribute to the company’s
products and services
Out of the nine activities of AGL Energy’s value chain model, the two processes that
have been selected are firm infrastructure and human resource management.
Firm infrastructure is one the support activities within the value chain analysis of AGL
Energy includes functions such as quality management process, legal and advisory
services, operation management, general management, planning department,
finance and accounting department. The firm infrastructure forms the backbone of
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AGL Energy that extends support to the entire department exiting within AGL. It is
done to the extent of different scope and requirement for the different department for
making AGL Energy a unique and diversified energy company in Australia. For
instance, the accounting, financial and planning department of AGL Energy is
managed and governed by the top management whereas the quality control
department, the legal department is management by the middle-level managerial
executives or business unit level.
The human resource management division is an essential component of all type of
businesses. It acts as a key to success in the present time when the business
environment has become extremely competitive and dynamic in nature and all
companies want to become a leading organisation in its own industry (Fu et al.,
2016). The activities performed by the human resource department of AGL Energy
are recruitment, selection, skill training and examination, training and development
function, hiring of people, human resource planning function and compensation
packages to middle-level management as well as top level management. The
functions discharged by human resource management greatly impact in drawing
competitive advantage for companies and for few industries it acts as a deciding
factor too. For example, in the case of AGL Energy, the advertisement and
consulting firms with whom AGL has contracts to reach electricity supply in the
remote parts of Australia has been considered as the main source of competitive
advantage for AGL.
v) Usefulness and relevance of value chain concept through theoretical
knowledge
The usefulness and relevance of value chain analysis are that is it reduces the
delivery duration. In other words, value chain analysis reduces a considerable period
of time in the delivery of goods to wholesalers or retailers. Thereby, it builds up a
stronger relationship between the wholesaler and company in reselling the products
to the same retailers and wholesalers with better coordination and selling advantage.
Ultimately, the customers will be benefitted in having faster access to the company’s
products to a large section of society. Correct record and optimisation of stock is
another relevant factor of value added analysis that creates usefulness to the stock
manager in decreasing the delivery time to reach out goods and services to the
individual retailers who have entered into business contracts with suppliers for
placing and processing small order size. As stated by Stow et al. (2016), using the
theoretical knowledge of value chain analysis it eliminates ordering of excess
inventory for production process that is not a cost effective strategy and causes
stressful situation among the managerial executives. The value chain analysis gives
a vivid idea about the demand and supply pattern of a company’s goods and
services and thereby production volume for the future years can be effectively
determined. Furthermore, it improves the relationship with the investors and clients
for improving tits inbound and outbound logistic services as well as its operational
performance on a long term basis.
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Question 2
a) Calculate the estimated fixed and variable allocation overhead rates for the
current period
Fixed Allocation Overhead Rate = Fixed overhead cost / Direct labour hour
= $ 120000 / 3000 hours
= $ 40 per direct labour hour
Variable Allocation Overhead Rate = Variable overhead cost / Direct labour cost
= $ 150000 / $ 75000
= $ 2
b) Calculate the total overhead cost for Job 20 in October
Total overhead cost = Fixed overhead cost + Variable overhead cost
Fixed overhead cost = 10 hours * $ 40
= $ 400
Variable overhead cost = $ 250 * $ 2
= $ 500
Therefore, total overhead allocated to Job 20 in the month of October = $ 400 + $
500 = $ 900
c) Calculate the total cost of Job 20
The total cost incurred in October for Job 20:
Direct labour cost $ 250
Variable overhead cost allocated $ 500
Fixed overhead cost allocated $ 400
Equipment and supplies $ 1000
Opening Work in progress $ 3500
Total cost $ 5650
d) Calculate the fixed and variable overhead allocated in October
Apportionment of fixed overhead allocated in October
= Direct labour hours * Fixed Overhead allocation cost per direct labour hour
= 229 hours * $ 40
= $ 9160
Apportionment of variable overhead allocated in October
= Direct labour cost * Variable Overhead allocation cost
= $ 5725 * 2
= $ 11450
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e) Explain why the accountant will use two different cost pool instead of one.
Discuss whether such a method will make any difference in the invoice when
low labour cost is attributed than equipment
The accountants of Prime Personal Trainers use separate overhead cost into two
different pools as a few of the overhead cost varies with labour hours that are being
used. Segregation of overhead cost will showcase better transparency of variable
overhead resources flowing into the company. In situations, where variable overhead
cost and fixed overhead cost are combined together into a single pool, it includes a
higher proportion of equipment and supplies and other fixed overhead costs than
labour cost or another variable overhead cost. The company Prime Personal trainers
would receive more cost allocation under the methodology of the single pool as
compared to two pool method.
Question 3
a) Evaluate cost pool and attach a cost to each one of them
Cost pool is a collection of singular costs that are associated with departmental cost
or service cost. Cost pool is used in cost accounting techniques of activity based
costing for the purpose of allocating cost to activities (Stow et al., 2017).
Cost pool for Malekula Council are purchasing of houses for stray and unwanted
animals, arranging for experts in veterinarian services and dog trainers. The cost so
assigned for these cost pools are cost relating to building $ 200000, Animal trainers
$ 40000. Veterinarians and technicians cost recorded as $ 150000.
b) Determine the cost driver for each cost pool
A cost driver is an individual cost units associated with individual activities of the
company that are likely to cause changes in the cost of activity. The cost drivers for
Malekula Council are direct labour worked for determining salaries of director, staffs,
and employee salaries. Number of Veterinarians and technicians who has worked in
Malekula Council is the cost driver for determining their fees. Square Feet are the
cost driver for calculating the building costs which is a cost pool. Number of classes
conducted by animals trainers in a year.
c) Calculate the allocation rate of each cost pool
Directors and staff salaries allocation rates = $ 60000 / 3000 sq feet = $ 2 sq feet
Animal shelter salaries = $ 100000 / 5000 sq feet = $ 20 sq feet
Veterinary clinic = $ 150000 / 2000 sq feet = $ 75 sq feet
Number of classes offered to training = 125 classes * 30 weeks = 3750 classes
Percentage of trainer time used = 50 / 100 * 3750 = 1875 classes.
In the traditional method of cost, allocation rates are calculated depending upon the
proportion of expenses incurred in each department. However, in case of ABC
costing only those activities of the company where resources have been consumed
are the only activities where costs are assigned. In this case only three activities of
Malekula Council that is salaries of directors and staffs, salaries for animal shelter
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and veterinary clinics have used the resources and therefore cost have been
assigned to each of the activities
Conclusion
From the above analysis, it can be concluded that the application of value chain
analysis increased the effectiveness and efficiency of the company in terms of
achieving competitive advantage for itself and becoming standing out as a unique
company within its own industry. AGL Energy has been able to successfully use the
system of value chain analysis become a leading company in the energy industry of
Australia. The allocation of overhead cost into variable cost overhead and fixed cost
overhead has helped companies to differentiate between cost and frame out a
realistic and profitable cost structure for the company. Moreover, analysis of ABC
into business assists in having a better understanding cost accounting, cost structure
and profitability at large. Thus, achieving competitive edge is an important task for all
organsiation rendering retail and customers services or producing consumer goods
like AGL Energy.
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References
Agl.com (2019), All About AGL Energy, Available from https://www.agl.com.au
Accessed on 15th May, 2019
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