The segregation of business processes into departmental levels is done by means of Value Chain. It is a conventional practice of segregating business process into various stages. The significance of the presence of an operational manager right from the purchasing of raw materials to the sale of finished goods to customers is realized due to the value chain. Functional boundaries are not given importance in the value chain approach. Due to value chain approach, a lot of firms have now realized and accepted the significance of the presence of an operation manager who functions right from procuring goods from suppliers to the selling of the finished goods to the customers (Drury, 2011). The value chain has now undertaken human resources, accounting, and marketing into consideration as well. Therefore, this calls for the operations manager to responsibly participate in these departments of the organization along with others as well.
Value chain works at a slow pace but at the same time, its significance cannot be ignored. It helps in the determination of total costs incurred and apportion of the same to their respective departments. This makes it easier for the management to trace such activities that derive higher expenditures. This allows an organization to maximize the use of its resources and helps the management in making appropriate decisions. Porter’s model can be taken into consideration while framing an evaluation (Freedman, 2013). The model depicts primary business affairs like outbound logistics, inbound logistics, sales and marketing, operations, etc and helps in locating discrete operations that are found in operations like technology, infrastructure, procurement, and human resource management.
In the business of manufacturing garments, the contributors to basic expenses are direct labor and direct material. Direct material here is required for different types such as threads, buttons, fabrics, bands, hooks, etc. Also, labor is one significant driving force in such a manufacturing concern for it allows and initiates the smooth functioning of the overall production process (DeWit & Meyer, 2010). Apart from direct material and direct labor, there are other expenses such as land and buildings, plant and machinery, etc. These are direct costs that attribute to the maximization of profits. The net cost of the finished goods is comprised of many other costs that are related to sales, logistic, and marketing and henceforth, the same cannot be ignored.
The amount of time taken by the organization to make its finished goods available to wholesalers or retailers can be reduced with the help of value chain analysis. This shall allow the resellers and wholesalers to gain more trust in the organization and better relationships can be built over a period of time which will ultimately maximize profits for the organization. The consumers will also be benefitted owing to the faster availability of the end goods. Therefore, the significance of value chain analysis is huge for any organization as it helps in gaining competitive advantage in its industry along with maximization of profits and better utilization of available resources.
Note for Raw materials consumed
less closing stock
Determination of the TOTAL cost is allocated to both the Departments first.
i. Total repair cost = add Repair department cost with cost allocated to repair from engineering and ii.Total engineering cost = add engineering department cost with cost allocated to engineering from repair. Engineering cost formula in (ii) will be dealt initially: Total engineering cost = add engineering department cost with cost allocated to engineering from repair.
From the first step, it is well known that the cost allocation to Engineering from repair is (10% x total repair cost). Repair cost is not known. Total Engineering cost = $ 580,000 Engineering department cost + (10%x total repair cost). Formula from (i) can be used for total repair cost into the total Engineering cost formula (ii) :
Total Engineering cost = $580,000 Engineering department cost + [10% x (repair department cost + cost allocated to repair from Engineering) ] from the first step it is seen that Engineering cost is allocated to repair as total Engineering cost x 20%. If we add to the formula, the result will be :
Total Engineering cost = $580,000 engineering department cost + [10% x ($100,000 repair department cost + (total admin cost x 20%) ) ] Now assignment will be done
Total Engineering Cost a variable of A giving the formula:
A = 580,000 + [10% x ($100,000 + 0.20)A]
A = 580,000 + (10% x 100,000) + (10% x 0.20A)
A = 580,000 + 10,000 + 0.02A --- rounded
A = 590,000 + 0.02A
1.0A – 0.02A = 590,000
0.98A = 590,000
A or total Engineering cost = $602,040 rounded
Computation of total repair cost can be done as $100,000 department cost + $120,408 (602,040 x 20%) allocated from Engineering for a total of $220,408.
Presence of Total cost linked to repairs and engineering. Now it should be done using the overall cost figure from step ii and percent from step i
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