Value Chain Analysis And Supply Chain Management For KVK Industries

Definition of Value Chain Analysis and Supply Chain Management

In The process of Value Chain Analysis firms identify the primary activities and their secondary activities that add value to the final product. Firms analyses those activities to increase differentiation or reduce costs. All the activities that a firm undertakes from procuring inputs to converting them into output are a part of value chain analysis. It’s a strategic tool that a firm uses to analyze its internal activities. The main goal is to identify the most valuable activities (i.e. activities that can provide firm a cost or differentiation advantage over its competitors). If a firm enjoys a competitive advantage then the firm is more likely to enjoy a better reputation in the market, more trust of customers by performing those activities in a better manner than the competitors. Whereas if a firm enjoys a cost advantage then, firm would be able to produce the goods at lower cost than others and earn higher profits. (Jurevicius, 2018)

 The techniques, tools and concepts of value chain applies to all the organizations that produce or sell a product or provides any service.

As per Porter, for Value Chain analysis, business activities can be classified under two categories:

1. Primary Activities.
2. Inbound Logistics, it includes warehousing and handling of materials.
3. Operations; conversion of inputs to final products.
4. Outbound Logistics; distribution and processing of order.
5. Sales and Marketing; pricing, channel management and communication.
6. Service; installation and repairs

1. Support Activities.
2. Firm Infrastructure; includes, general management, finance, planning, legal and accounting.
3. Human Resource Management; recruitment of employees, rewards and promotions of staff.
4. Procurement; purchasing of supplies, raw materials, assets and other consumables.
5. Technology Development; Research and developments and know how.

Primary activities are incidental in the production of goods and providing services whereas, support activities are indirectly linked to production but are necessary for a smooth functioning.

The entire connected network of people, resources, organization, technologies and activities involved in the sale and manufacture of a product or service is known as supply chain. It starts from delivering raw materials to a manufacture from the supplier and ends with delivery of final product/service to the customer. Supply Chain management includes management of flow of services and goods and all processes that convert raw materials to final products. Proper SCM can decrease costs and increase the revenue.

KVK industries is a leading manufacturer of the product that it exports which provides KVK industries a competitive advantage over others. But due to the lack of proper supply chain management and value chain analysis the industry is losing a lot of money, which it needs to investigate to reduce its costs. KVK has only created a proper network with its suppliers’ company but not with the distributors, which indicates that KVK is only focusing on one of its supply chain management part and ignoring the other end of the chain. Which has led to increase in the costs. KVK needs to implement a complete value chain analysis so that the firm can analyze its most valuable activity. Firms should follow the following steps :

1. Identify the activities of the firm as Primary and Support.
2. Identify the importance of every activity in total production cost.
3. Cost drivers of all the activities should be identified.
4. Links between all the activities should be identified.
5. Opportunities that reduce cost should be identified.

(2) (i)   Schedule for Cost of Goods Manufactured

Particulars		Amount($)
Direct Materials
Beginning Raw Materials Inventory	a	26,000
Add: Purchases of raw materials	b	140,000
Deduct: Ending Raw Materials Inventory	c	12,000
Direct Materials used in production	d = a+b-c	154,000
Direct Labor	e	154,000
Manufacturing Overhead	f	25,000
(Indirect labour + Factory Insurance + Depreciation on Machinery + Machinery Repairs + Factory Utilities + Misc. Manufacturing overheads)
Total Manufacturing costs	g = d+e+f	333,000
Add: Beginning WIP Inventory	h	16,000
Deduct: Ending WIP Inventory	I	18,000
Cost of Goods Manufactured for the Year	j = g+h-i	331,000
Add: Beginning Finished Goods Inventory	K	40,000
Deduct: Ending Finished Goods Inventory	L	28,000
Cost of Goods Sold	m = j+k-l	343,000

(2) (ii)

Income Statement for KVK Industries

Particulars		Amount($)
Sales		398,000
Less: Cost of Goods Sold		343,000
Gross Profit		55,000
Less: Selling and Administrative Expenses
Selling Expenses	15,450
Administrative Expenses	9,560	25,010
Operating Profit (EBIT)		29,990
Interest		–
Earnings Before Taxes		29,990
Taxes		–
Earnings available to Common Shareholders		29,990
Dividends		–
Net Income		29,990

(3) (i) & (ii)	Total cost for product M
	Period	Expected units to be produced (units)	Variable cost per unit ($)	Total Variable Cost (Units*Variable cost p.u.)	Fixed Cost (To be divided equally)	Total Cost ($)	Total Cost ($) (per unit)
	First quarter	100,000	30	3,000,000	200,000	3,200,000	32
	Second Quarter	200,000	30	6,000,000	200,000	6,200,000	31
	Third Quarter	500,000	30	15,000,000	200,000	15,200,000	30.4
	Fourth Quarter	400,000	30	12,000,000	200,000	12,200,000	30.5
				Total	36,800,000

(4)	Calculation of Operating Income
	Number of products produced and sold(units)	1,200	1,500
	Information	Existing situation	After promotional activities undertaken
	Sales Revenue	$240,000	$300,000
	(Selling Price p.u. x No. of Units)
	Less: Variable Cost	$57,600	$72,000
	Gross Profit	$182,400	$228,000
	Less: Fixed Cost	$40,000	$50,000
	Operating Profit	$142,400	$178,000

 Decision: Since, Incremental Profit after promotional activities is $35,600. Therefore, company      should opt for promotional activities. 

PART B

(1)	Computation of Overhead Rate
		Particulars	Assembly department	Finishing department
	a	Direct labor	105,000	75,000
	b	Manufacturing overhead	135,000	103,000
	c	Machine-hours	4,500	475
	d	Direct labor hours	7,000	6,250
		Labor cost (a/d) per hour	15	12
		Manufacturing overhead per Machine hours (b/c)	3	216.84
		Overhead Rate for Assembly department is $3 per machine hour
		Overhead Rate for Finishing department is $12 per labor hour

(2)	Computation of Job Costing
		Job No. 555 (500 Chairs)
		Particulars	Assembly department	Finishing department	Total
		Cost of materials used on job	1,700	1,125	2,825
		Direct labor cost	2,025	1,800	3,825
		Direct labor hours	135	150	–
		Machine-hours	63	25	–
		Overhead Cost	188	1,800	1,988
			(62.5*3)	(150*12)
		Grand Total			8,638
		*Note – Overhead rate is used from part (1) above.
		Total Cost for Job No. 555 is $8,638
		Cost per unit ($8,638/500) is $17.276

(3) Activity Based Costing

Under the Activity Based Costing methodology costs are assigned to the activities contrary to assigning the costs to services or products. This is a different method form traditional absorption method which used to allocate the costs on products/services based on machine hours or labor hours. ABC is a more modern absorption costing method that provides an accurate method of costing.

	Advantages
	· Accurate Costing of Product – ABC brings reliability and accuracy in product costing by focusing on cause and effect relationship. It recognizes that costs are caused by activities and not by products.
	· Unit cost utilization rather than total cost
	· Facilitates Benchmarking
	· Supports scorecards and performance management.
	· Enables supply chains, costing of processes.
	· Makes visible non-value added and waste – ABC helps in cost reduction and identifies the activities that does not add any value to product/service.
	· Makes decision making better – ABC improves decision making process as a more reliable data of product costing is used.
	Disadvantages
	· ABC is a complex and expensive method as compared to the traditional methods of Costing.
	· Cost driver selection is a difficult task
	· Not suitable method of costing for a smaller firm.
	· Difficulties in measurement.

References

AccountingCoach.com. (2018). Manufacturing Overhead Costs | Explanation | AccountingCoach. [online] Available at: https://www.accountingcoach.com/manufacturing-overhead/explanation [Accessed 23 Nov. 2018].

Corporate Finance Institute. (2018). Cost of Goods Manufactured (COGM) – How to Calculate COGM. [online] Available at: https://corporatefinanceinstitute.com/resources/knowledge/accounting/cost-of-goods-manufactured-cogm/ [Accessed 23 Nov. 2018].

En.wikipedia.org. (2018). Supply chain. [online] Available at: https://en.wikipedia.org/wiki/Supply_chain [Accessed 23 Nov. 2018].

Investopedia.(2018). Supply Chain Management (SCM). [online] Available at: https://www.investopedia.com/terms/s/scm.asp [Accessed 23 Nov. 2018].

Jurevicius, O. (2018). Looking at your Value Chain will make you Smarter. [online] Strategic Management Insight. Available at: https://www.strategicmanagementinsight.com/tools/value-chain-analysis.html [Accessed 23 Nov. 2018].

Resource.cdn.icai.org.(2018).[online]Available at: https://resource.cdn.icai.org/18905sm_finalnew_cp1a.pdf [Accessed 23 Nov. 2018].

Your Article Library. (2018). Advantages and Demerits of Activity Based Costing (ABC). [online] Available at:https://www.yourarticlelibrary.com/accounting/costing/advantages-and-demerits-of-activity-based-costing-abc/52617 [Accessed 23 Nov. 2018]