Profit Analysis and Costing for the 21st Essay

Profit Analysis and Costing for the 21st Century

Value costing is about looking at the different aspects of a business paying particular attention to the opportunity cost they represent, how much they are likely to financially benefit a firm, and how much they are likely to cost it. Through this analysis, it is possible to determine the parts of the business that function the most efficiently and locate the parts that do not.

It is thought that value costing is no longer relevant because business has become far more complex than the traditional format, and with the rise of the internet and the increase in ebusiness, more and more factors must be added to the equation. It is also though that this form of costing is not only too simplistic, but takes too long to put into practice, and harder still to gain any meaningful results from. Value costing tries to define units of a business in detail and then make estimations about their worth based on an evaluation of associated costs. For this to prove valuable to any extent, this process must be carried out continuously in light of any changes. In a climate where changes occur frequently and often, it is believed that value costing is no longer appropriate for businesses to carry out. Most businesses are thought to have abandoned this style of costing (Stratton, W. et al., 2009).

Value costing considers how much it costs to make a product or deliver a service and then makes an additional mark-up based on how much the organisation feels it needs to make in order to avoid a loss and make a profit. Value costing although still of some use to some businesses, is largely redundant for contemporary industries that compete on a whole range of factors other than simply cost. In addition, this kind of costing does not take into consideration how a company is perceived and how it fares against its competitors. This is a traditional way of evaluating cost and would not account for costs associated with a multi-faceted business with fixed and variable costs attributed to numerable factors. Given this, value costing is inappropriate for complicated businesses with complex infrastructures that cannot be evaluated in this way. For a business to use value-costing they must be prepared to turnover a profit that is substantially smaller than they had originally anticipated.

There are some businesses that would be able to use this costing strategy, however. For a business that produces huge volumes and competes solely on price, value costing could still….....