CA Megh Raj Aryal Gurukul CA

CHAPTER 21 VALUE CHAIN ANALYSIS

Q.1. What is the concept of Value Chain? Explain the classification of business activities for VCA purpose as per
porters view?
Ans:
1. The value chain analysis is a business management concept that was developed by Michael Porter. in his
book Competitive Advantage (1985).
2. VCA is a strategy to gain competitive advantage. By gaining competitive advantage we mean to be and stay ahead of
your competitors.
3. Value means the amount the customer is willing to pay for the product. A value chain is a collection of activities that
are performed by a company to create value for its customers.
Porters definition: Value chain is the series of internal processes or activities a company performs, “ to design,
produce, market, deliver and supports its products”.
4. Porter suggests that the activities of a business could be grouped under two headings.
Classification Primary activities Support activities

Meaning Activities directly involved in transforming Activities that support primary activities
inputs into outputs, delivery and after sales
support
Activities a) Inbound logistics- material transportation, a) Firm Infrastructure : General
covered material handling, material warehousing: management, , Accounts, finance, legal,
b) Operations: Transforming inputs into final government affairs and Quality
products management
c) Outbound logistics: Order processing and b) Human resource management:
distribution Selection, promotion and placement,
d) Marketing and Sales: Customer appraisal, rewards, labour/employee
solicitation, communication, pricing and relations
channel management and c) Technology development: Research and
e) Post sales service: Installation, repair and development, IT, software and
parts replacement technological knowledge, product and
process development.
d) Procurement: Purchasing raw material,
supplies and other consumable items as
well as assets

For gaining competitive advantage, all the business activities should be efficiently operated. Any non value added
activities should be eliminated or reduced to the extent possible.

PORTER VALUE CHAIN MODEL

Value added-
Cost = Margin

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Q.2. In Value Chain analysis, business activities are classified into primary activities and support activities. Classify the
following under the more appropriate activity.
(i) Order processing and distribution
(ii) Installation, repair and parts replacement
(iii) Purchase of raw material and other consumable stores
(iv) Transforming inputs into final products
(v) Selection, promotion, appraisal and employee relations
(vi) Material handling and warehousing
(vii) General management, planning, finance, accounting
(viii) Communication, pricing and channel management
Ans:
Activity Primary Activity/Support Activity
(i) Order processing and distribution Primary Activity
(ii) Installation, repair and parts replacement Primary Activity
(iii) Purchase of raw material and other consumable stores Support Activity
(iv) Transforming inputs into final products Primary Activity
(v) Selection promotion, appraisal and employee relations Support Activity
(vi) Material handling and warehousing Primary Activity
(vii) General management, planning, finance, accounting Support Activity
(vii) Communication, pricing and channel management Primary Activity

Q.3. Write short notes on business functions in value chain analysis

Ans:
A value chain is a collection of activities that are performed by a company to create value for its customers. There are
following six primary business functions in value chain analysis:
i) Research and development (R&D)
ii) Design of products and processes
iii) Production
iv) Marketing (including sales)
v) Distribution
vi) Customer service
For gaining competitive advantage, all the business activities should be efficiently operated. Any non value added
activities should be eliminated or reduced to the extent possible. A firm which performs value chain activities more
efficiently and at a lower cost than its competitors will be able to gain competitive advantage.

Q.4. Define the term value chain. Mention the three useful strategic framework for value chain analysis.
Ans:
A value chain is a collection of activities that are performed by a company to create value for its customers.

Three useful strategic framework identified for value chain analysis are as follows:
1. Industry Structure analysis: Identify entire industry structure and value chain analysis should be done of each area.
2. Core Competencies analysis: Identify your core competencies area in entire value chain and promote same to the
customer to gain competitive advantage.
3. Segmentation Analysis: Analyze each and every product, segment value chain analysis separately.

Q.5. Explain how Value chain approach helps an organization to assess its competitive advantages
Or what steps are involved in value chain analysis approach for assessing competitive advantages?
Ans:
1. A value chain is a collection of activities that are performed by a company to create value for its customers
2. Use of VCA to assess competitive advantage involves the following analysis:-
a) Internal cost analysis:- Analyze the cost benefit of each activities. To gain competitive advantage benfit of
each value added activities should exceed its cost.
b) Internal Differentiation analysis: A firms needs to identify the process that distinguish its products or
services form that of its competitors.
c) Vertical linkage Analysis:- A firm needs to understand the relationships and associated costs among
external supplier and customers in order to minimize cost.
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Q.6. What is the concept of value chain? Why is it important for cost management?
Ans:
A value chain is a collection of activities that are performed by a company to create value for its customers.

It is important for cost management due to following reasons:

1. Helps to control and lower the cost.
2. Helps to understand the process and activities and focus on value added activities.
3. Helps to eliminate non value added activities.
4. Helps to improve the profits by achieving competitive advantage through cost leadership and product differentiation
way.

Q.7. How can value analysis achieve cost reduction?

Ans:
Value analysis can do cost reduction in the following manner:
a) By identifying and removing unnecessary components in a product which had utility earlier but now the customer is
not using that components any more.
b) By introducing component substitution at a lesser cost without affecting the quality of the product.
c) By simplifying the product design.
d) By introducing alternative methods with less cost but improved efficiency.

Q.8. Explain the Limitations of VCA

Ans:
Value Chain Analysis is not free from criticism and may have several limitations as:
1. Non-availability of data : There may not be sufficient data available for value chain analysis.
2. Difficulty to Identify different value creating activities.
3. Difficult to find the costs, revenues and assets for each value chain activity.
4. Difficulty to identify multiple cost dirver for each value creating activity.
5. Resistance from employees: Value chain analysis is not easily understandable to all employees and hence they may
resist to apply this technique.

Q.9. Compare Value chain analysis from conventional management accounting.

Ans:
Basis of Distinction Traditional Management Accounting Value Chain Analysis
Focus It focuses on internal information’s. It focuses on external information’s, competitors
Cost preferences Focus on cost control and cost reduction Focus on gaining cost advantages, and not only
on cost control and reduction.
Cost information Internal Internal and external both
No of cost drivers Single cost driver Application of multiple cost drivers
Benchmarking Internal benchmarking Bench marking with competitors
Orientation Short term Long term

Q.10. Describe the role of management accountant in value chain analysis.

Ans:
The Management Accountant’s role in value chain analysis can be in the following areas:
i. Management Accountants should bring the importance of customer value to the forefront of management strategic
thinking.
ii. Management accountants must seek relevant financial and non-financial information from sources outside and
inside the organization.
iii. The management accountant should design internal and external system design to improve value-creating processes.
iv. The management accountant should ensure that the top management is committed to value chain analysis

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CHAPTER 22 BENCHMARKING
Q.1. What do you understand by Benchmarking?
Ans:
1. Bench marking is the process of identifying , understanding and adopting best practices anywhere in the world.
2. It is the process of identifying “best practice” in relation to both (i) products, and (ii) the processes by which those
products are created and delivered.
3. The search for “best practice” can take place both inside a particular industry and also other industry.
4. Hence the objective of benchmarking is to understand and evaluate the current position of our organization in relation to
“best practice” and to identify areas and means of performance improvement.
5. In simple words, we can say that Benchmarking aims at learning from those who are best in their field. The philosophy
of benchmarking is “Look at what everybody else does, take the best of it and make it better”.

Q.2. What are the stages in the process of Benchmarking?

Ans:
Application of Benchmarking involves following stages:
1. Understand in details existing business processes, identify the problem areas.
2. Identify those who are leaders in the areas.
3. Survey these leaders and visit them if permissible, analyze their business processes.
4. Compare own business performance with that of other analyzed.
5. Implement the steps necessary to close the performance gap.

Q.3. What are the pre-requisites for successful Benchmarking?

Ans:
The perquisites for effective Benchmarking are as under:
1. Clarity of objectives:- The objectives of bench marking should be clearly defined.
2. Leadership commitment:- Senior managers should be committed to change and adapt the benchmarking based
findings. The initial hurdles should not upset them.
3. Culture experience with continuous quality improvement: The people should not be satisified with status quo.
4. Preparation of the organization: Aims and objectives of the benchmarking should be communicated to all the
stakeholders and the entire procedure should be transparent.
5. Training to Staff:- Ensure that the staff people fully understand what the benchmarking is , what its benefits are and
how it is to be implemented.
6. Benchmarking partner: In case of external benchmarking the selection and willingness of the other partner are quite
important prerequisites.
7. Continuous process: Benchmarking is a continuous process as the road to improvement is never ending.
8. Willingness to share information with other partners particularly the external partners.

Q.4. What are different types of Benchmarking of critical success factors?

Ans:
1. Strategic Benchmarking: Studying the strategies of different best practice companies that help them to succeed.
2. Competitive Benchmarking: Comparison with competitive companies from the same sector.
3. Process Benchmarking: Comparison for improving specific key processes.
4. Internal Benchmarking; Comparison with own units or branches or comparison of one period with another period of
same unit.
5. External Benchmarking: Comparison with outside companies.
6. International Benchmarking: Comparison with companies outside the country.

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Q.5. Write short notes on Benchmarking code of conduct?

Or What is the code of conduct suggested for ethical and effective Benchmarking?
Ans:
1. Principle of Exchange: Be willing to give in exchange of what you get.
2. Principle of confidentiality: The information obtained under benchmarking process should be treated as confidential
and it should not be passed on to other people.
3. Principle of use: The information obtained under benchmarking process should be used only for improvement of
processes. Never use the information to harm the benchmarking partner.
4. Principle of legality: Do not ask the other partner for sensitive data.
5. Follow through with each commitment made to your benchmarking partner in a timely manner.
6. Do not waste the time of benchmarking partner.

Q.6. Explain the role of benchmarking within the cost management framework.

Ans:
Benchmarking involves comparing key activities with world class best practices. In benchmarking, the activity that needs
to be improved is identified followed by the identification of non-rival organization which is considered to represent a
world-class best practice for the activity and making a comprehensive study on how the organization performs the activity.
The objective of such a study is to establish how the activity can be improved and ensure that the improvements are
implemented in practice. Benchmarking is cost beneficial to an organization since it can help to save time and money by
avoiding mistakes that other companies have made in the past. Thus, benchmarking can help the organization to reduce
costs for an activity or process or to perform the activity more effectively which in turn could lead to the increased
customer satisfaction

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CHAPTER 23 MATERIAL REQUIREMENT PLANNING

Q.1. What do you mean by Material Requirement Planning? Outline the objectives of MRP.
Ans:
1. MRP is a computerized production scheduling system.
2. MRP Progressively translates the forward schedule of final product requirements (the master production
schedule) into the number of assemblies , components and raw material required at each stage of manufacturing
cycle.

Aims, Objectives or Advantages or Purposes of MRP

1) To determine the quantity and time of different Finished goods to be produced.
2) To determine the required quantity of subassemblies, components and raw material for each of the FG.
3) To calculate the Finished goods, WIP, Raw material , packaging lead time.
4) To forecast the inventory position period by period in future.

Q.2. Mention the data required to operate MRP System

Ans:
1) Master production schedule :-This schedule specifies quantity and time of different Finished goods to be
produced.
2) Bill of Material File:- The bill of material file specifies required quantity of subassemblies, components and
raw material for each of the FG.
3) The Inventory File:- This file maintains the details of items (units) in hand of each sub assemblies,
components and raw material.
4) The Routing File:- This file specifies the sequence of operations required to manufacture subassemblies ,
components and Finished goods.
5) Master Parts File- This file specifies the production time of sub assemblies, components produced internally
and Lead time for externally acquired items.

Q.3. Explain the method of operation of MRP System.

Ans:
Material Requirement Planning (MRP) is a push through system that manufactures finished goods for inventory
on the basis of demand forecasts.. Like all computer based information system, MRP System can be divided into
following:-
1) Prerequisite information and System Input
All the Data requirement, Master production schedule, Bill of Material, Inventory File, Routing file, Master parts
file are made available and entered into the system.
2) System Processing and System output:-
From the data input, the MRP system knows what it is expected to produce (through the MPS File), how it
should produce it (through the BOM File), and how much it has to produce (through the Inventory record file).
The system then arithmetically combines the information of lead time to determine when the production should
take place in the future planning period. This process is called requirement explosion.

Q.4. Explain the Pre-Requisites for successful operation of MRP

Ans:
Write data required to operate MRP + In addition write following points.
1) Strict Adherence to the schedule:- The successful operation of MRP requires a strict adherence to the
production and purchasing schedule.
2) Accurate Data base:- Data should be accurate. If the plan is based on inaccurate data it will be difficult to
comply the schedule.

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Q.5. Difference between MRP and JIT?

Ans:

MRP and JIT (materials resource planning and just in time processing) are two methods of controlling production
and inventory levels for manufacturers. Both MRP and JIT rely heavily on computerized information processing.

There are certain differences as explained below:

Basis of Difference MRP JIT
Inventory and carrying cost Carry substantial inventory and Zero Inventory or reduced
thus high carrying cost inventory and thus low carrying
cost
Production Forecast based production [Push Demand based production [Pull
through System that manufactures through system that
on the basis of demand forecasts] manufactures on the basis of
demand of customer]
Focus Focus on resource planning. Focus on waste reduction
Stock out Stock out low ie MRP is more Stock out high. ie JIT is less
responsive to fluctuations in responsive to fluctuations in
demand. demand.

Q.6. How MRP II differs from MRP I?

Ans:
MRP I
Material Requirement Planning (all so called MRP I) is a push through system that manufactures f inished goods for
inventory on the basis of demand forecasts.
MRP uses
a) Demand forecasts for the final products •
b) A bill of materials outlining the materials, components, finished products, and product inventories to
predetermine the necessary outputs at each stage of production.

Taking into account the lead time required to purchase materials and manufactures components and finished products
,a master production schedules specifies the quantity and timing of each item to be produced.

MRP II
After the introduction in the 1960s, MRP was later extended to the management of all manufacturing resources. In
particular it focuses on machine capacity planning and labour scheduling as well as material requirement planning.
This extended system is known as manufacturing resource planning or MRP II.

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CHAPTER 24 ENTERPRISE RESOURCE PLANNING

Q.1. What do you mean by ERP? State the major features of ERP. Or State the benefits accruing from ERP.
Or Explain the reasons for the implementation of ERP by companies.
Ans:
1. ERP refers to software, which integrates all departments and functions across a company into a single computer system
that can serve all those needs of different departments. (Integration is the key word for ERP system).
2. ERP is a management information system that integrates and automates many of the business processes like
manufacturing, warehousing, marketing, distribution, inventory, packing, invoicing, accounting, financing , human
resource etc.

Features / Benefits/Reasons for implementation of ERP

1. ERP fully integrates all departments and functions throughout an organization into a single information system.
2. Multinational companies of today run the complex businesses. Such businesses are carried at different locations, in
different countries, speaking and writing different languages, in different time zones, using different technologies,
transacting in different currencies, employing multilingual people and governed by different laws rules and
regulations. ERP systems make the running of such complex businesses quite simple.
3. ERP allows access to information in a real time environment. ERP system always provide updated information.
4. No double encoding of information.
5. ERP not only addresses the current requirements of the company but also provides the opportunity of continually
improving and refining business processes.
6. ERP allows automatic introduction of technologies like Electronic Fund Transfer (EFT) Electronic Data interchange
(EDI), Interact, Video conferencing, E-Commerce etc.
7. ERP system improve the quality and efficiency of a business. This leads to improved customers satisfaction.
8. ERP system support the upper level management by providing them with critical decision making information.
9. ERP system lead to reduced requirement of workforce.

Q.2.What are the different reasons for failure of ERP implementation?

Ans:
There are many reasons for failure of ERP implementation as follows:
1. Lack of defined goals
2. Lack of change management
3. Lack of proper training and building internal capacity
4. Lack of communication with ERP vendor.
5. Lack of communication and coordination between team members in ERP project.
6. Lack of experience of employee
7. Lack of accurate data.
8. Lack of sufficient budget.

Q.3.Compare MRP I vs MRP II vs ERP

Ans:
MRP I (Material requirement Planning)
- Computerized scheduling system that plans the need for FG and materials used in the manufacturing process.
- Does not include the planning of personal, machines or facilities requirements.
-
MRP II (Manufacturing Requirements Planning)
- Extended version of MRP I which plans and controls all manufacturing resources, not only material but also personal,
machines or facilities requirements.

ERP (Enterprise Resource Planning)

- Is an integrated information system that serves all department within an organization. It plans and control all the
resources in the entire company. It also integrates accounting, billing procedures and information sharing thouughout
the organization.

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CHAPTER 25 COST AUDIT

Q.1. Define Cost Audit. And What are the important aspects of cost audit? Or What is scope of Cost audit?
Ans:
Cost Audit means:-
• Verification of cost accounting records
• And ensure that they adhere to cost accounting principles.
The Important Aspects of Cost Audit/ Scope of Cost Audit are as under:-
Cost audit apart from having all the normal ingredients of audit ie. Vouching, Verification etc, has elements of Efficiency
audit and Propriety audit as well.
1. Efficiency Audit:- it is directed towards the measurement of whether corporate resources have been effectively
executed. The parameters based on which efficiency audit is conducted are I) Return on Capital ii) Capacity
utilization –man, machine , materials etc iii) Liquidity position v)Pay back period etc.
2. Propriety Audit:- Propriety audit refers to an audit in which the various actions and decisions are examined to find
out whether they are in public interest and whether they meet the standards of conducts. In propriety audit, the auditor
does not confine his concern to evaluate the evidence supporting of transaction, rather he attempts to examine
prudence and impact of various actions and decisions. The cost auditor needs to insure:-
• The expenditure are not more than the occasion demand.
• The authority which has power to sanction the expenditure, has not pass order to its own advantages directly
or indirectly.
• Public money is not utilized for the benefit of a particular person or section of a community.
•
Q.2. What the different Purpose of Cost Audit?
Ans:
The purpose of cost audit can be classified as: -
a) Protective purpose of Cost Audit:- Under this, cost auditor aims to ensure that there is no undue wastage or losses
and the costing system shows the correct and realistic cost of production.
b) Constructive Purpose of Cost Audit:- Cost audit has a constructive purpose as well. Cost auditor plays a
constructive role by providing management of the company with information usefull in regulating production,
choosing economical methods of operation, reducing operations cost and re-formulating plans etc, on the basis of his
findings during the course of Cost Audit.

Q.3. What are the different types of Cost Audit? Or

Indicate the various dimensions of Cost Audit.
Ans:
1. Cost audit on behalf of the management:- To ensure the accuracy of the cost data. To provide the management useful
information to reduce cost, eliminate waste etc.
2. Cost audit on behalf of Customer:- Eg in case of cost plus contracts, the contractee insists on a cost audit to satisfy him
about the correct ascertainment of cost.
3. Cost audit on behalf of Government:- Where certain subsidy is to be given, cost audit is done by Government.
4. Cost audit by trade association;- To fix the uniform prices over all the member units cost audit is done by trade
association.

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Q.4. Explain the Circumstances under which a Cost Audit is ordered.

Ans:
1. Price Fixation:- The need for fixation of retention price in the case of materials of national importance like steel, cement
etc may cause a necessity for cost audit.
2. Cost variation within an Industry:- Where the cost of production varies significantly from unit to unit in the same
industry, cost audit may be necessary to find the reasons for such differences.
3. Inefficient Management :- Where a factory runs inefficiently and uneconomically, cost audit may be necessary to fine
the reasons.
4. Tax assessment:- where a duty is levied on products based on the cost of production, the levying authorities may ask for
cost audit to determine the correct cost of production.

Q.5. Differences between Financial Audit and Cost Audit.

Ans:

Financial Audit Cost Audit

1. Financial audit is the audit of Financial 1. Cost audit is the audit of cost accounts.
accounts.
2. Financial audit aims to know whether the 2. Cost audit aims to determine the correctness of
financial statements, namely, PL ac and BS cost figures. Apart from normal ingredients of
present a true and fair view of the business audit ie vouching, verification, cost audit also
result and state of affairs of a business focuses on propriety of expenditure and
enterprises or not. efficiency of performance.
3. Financial audit is related with only historical 3. Cost audit is performed with the help of budgets
figures and data after the expenditures have and therefore has a futuristic focus.
been incurred and account have been prepared.

Miscellaneous Theory

Q.1. Define sustainability accounting and elaborate the role of the management accountant in sustainability accounting.
Ans:
Sustainability accounting (also known as social accounting, social and environmental accounting, corporate social
reporting, corporate social responsibility reporting, or non-financial reporting) is considered a subcategory of financial
accounting that focuses on the disclosure of non-financial information about a firm's performance to external
stakeholders. Sustainability accounting reports its activities that have a direct impact on society, environment, and
economic performance of an organization.
There are three key dimensions (or 3 P’s,) of sustainability.
Social = People
Environment: Planet
Economic: Profit
According to this concept, while company is doing its business, making profit, it is equally liable for the development of
society and maintaining environment for sustainability development.

The role of the management accountant in sustainability accounting includes:

i) Define its sustainability objectives, and ensure their alignment to business objectives;
ii) Identify sustainability challenges, risks, and opportunities; and
iii) Producing reports or information of an organization’s carbon emissions, energy use, waste generation etc
iv) Ensure sufficient funds are allocated for society development and environment maintenance.

THANK YOU VERY MUCH

[HAPPY LEARINING]

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