1.

Management Accounting and Value Chain (VC)

• Value: is the usefulness a customer gains from a company’s
product or service.

• Value Chain: is the sequence of business functions in which

customer usefulness is added to products or services. The
Value-Chain consists of 6 phases (6 business functions):
1. Research& Development (R&D).
2. Design.
3. Production.
4. Marketing.
5. Distribution.
6. Customer Service.
The Value Chain Illustrated

© 2012 Pearson Education. All rights reserved.

 Example (1):
A Pharmaceutical Company incurs the following costs:
• Cost of redesigning packs to make drug containers more efficient.
• Cost of videos sent to doctors to promote sales of a new drug.
• Cost of a free telephone line used for customer inquiries about drug
usage, side effects, and so on.
• Equipment purchased to conduct experiments on drugs yet to be
approved by the government.
• Payment to actors for a television infomercial promoting a new hair-
growth product for balding men.
• Labor costs of workers in the packaging area of a production facility.
• Bonus paid to a salesperson for exceeding a monthly sales quota.
• Cost of federal express courier service to deliver drugs to hospitals.
Required: Classify in a table form each of the above cost items
as one of the business functions of the value chain.
 Sol.
Business
Cost item
Function
Cost of redesigning packs to make drug containers more
Design
efficient
Cost of videos sent to doctors to promote sales of a new drug Marketing

Cost of a free telephone line used for customer inquiries

Customer Service
about drug usage, side effects, and so on
Equipment purchased to conduct experiments on drugs yet to
R&D
be approved by the government
Payment to actors for a television infomercial promoting a
Marketing
new hair-growth product for balding men
Labor costs of workers in the packaging area of a production
Production
facility
Bonus paid to a salesperson for exceeding a monthly sales
Marketing
quota
Cost of federal express courier service to deliver drugs to
Distribution
hospitals
Example (2):
Compaq Computers incurs the following costs:
• Electricity cost for the plant assembling the computer line of products.
• Transportation costs for shipping the products to retail chain.
• Payment to David Kelley Designer for design of the Armada Notebook.
• Salary of computer scientist working on the next generation of
minicomputers.
• Cost of employees’ visit to a major customer to demonstrate Compaq’s
ability to interconnect with other computers.
• Purchases of competitors’ products for testing against potential Compaq
products.
• Payment to television network for running Compaq advertisements.
• Costs of Cables purchased from outside to be used with Compaq
printers.
Required: Classify in a table form each of the above cost items
as one of the business functions of the value chain.
 Sol.
Business
Cost item
function
Electricity cost for the plant assembling computer line of products Production

Transportation costs for shipping the products to retail chain Distribution

Payment to David Kelley Designer for design of the Armada
Design
Notebook
Salary of computer scientist working on the next generation of
R&D
minicomputers
Cost of Compaq employees’ visit to a major customer to demonstrate
Customer Service
Compaq’s ability to interconnect with other computers
Purchases of competitors’ products for testing against potential Compaq
R&D
products

Payment to television network for running Compaq advertisements Marketing

Costs of Cables purchased from outside to be used with Compaq printers Production
Example (3):
Wilson Manufacturing Company, incurs the following costs:
• $5,000 Cost of redesigning decorative grills to make the product more
appealing to customers.
• $7,500 Cost of DVDs sent to department stores to promote sales of a new
model.
• $7,500 Cost of free telephone line used for customer inquires about product
usage and potential hazards.
• $25,000 Cost of equipment purchased to test the attributes of material being
considered to replace the existing products material.
• $5,000 Payments to actors for a television infomercial promoting a new
model.
• $15,000 Labor cost for workers in the packing area of a production facility.
• $10,000 Bonus paid to product line manager for obtaining a new contract.
• $2,000 Cost of UPS courier service to deliver a replacement part to a
customer having problems.
Required: Classify each of the above cost items as one of the
business functions of the value chain and calculate the total costs
for Wilson Manufacturing Company.
 Amounts
Cost item
Sub. Total
1. R & D Costs:
Equipment purchased to test the attributes of material 25000
2. Design Costs:
Cost of redesigning decorative grills 5000
3. Production Costs:
Labor cost for workers in the packing area of a production facility 15000
4. Marketing Costs:
Cost of DVDs sent to department stores 7500
Payment to actors for a television infomercial promoting a new model 5000
Bonus paid to product line manager for obtaining a lucrative contract 10000 22500
5. Distribution Costs:
Cost of UPS courier service to deliver a replacement part to a customer 2000
6. Customer Service Costs:
Cost of a free telephone line used for customer inquires 7500
Total Costs for Wilson Manufacturing Company 77000