Cost Management and Value Creation: The Missing Link

Posted: 9 Aug 2001

See all articles by Carol J. McNair

Carol J. McNair

Babson College - Accounting and Law Division

Lidija Polutnik

Babson College - Economics Division

Riccardo Silvi

University of Bologna - Department of Management

Abstract

Understanding of the relationship between the costs of the firm provides to its customers is the key to the ability of the firm to reach its profit potential. From this perspective the firm needs to have a thorough understanding of its activities, their costs and their relation to market prices. Advanced cost management studies and practices suggest a variety of different tools that help us understand the relationship between value and cost. However, most of these studies provide us with qualitative tools only. An exception is studies related to product cost planning, as in the case of target costing or value analysis/value engineering. This paper, while being a part of emerging literature on strategic cost management, extends the existing knowledge of the relationship between costs and value by introducing the value creation model (VCM). In particular, the VCM model defines the firms' cost structure in terms of value added, non-value added but required activities, as well as of waste. A firm's cost structure is aligned with value attributes embedded in products and services. The VCM model seeks to understand the trade-off between what the customer is willing to pay for product/service bundle (value) and the cost the firm bears to provide what the customer desires. Based on these trade-offs, VCM defines value multipliers, which help the firm determine which activities the firm should focus on in order to develop a competitive advantage.

JEL Classification: G12, M40, M46

Suggested Citation

McNair, Carol J. and Polutnik, Lidija and Silvi, Riccardo, Cost Management and Value Creation: The Missing Link. The European Accounting Review, Vol. 10, No. 1, Forthcoming. Available at SSRN: https://ssrn.com/abstract=274440

Carol J. McNair

Babson College - Accounting and Law Division ( email )

Babson Park, MA 02157
United States

Lidija Polutnik

Babson College - Economics Division ( email )

Babson Park, MA 02457
United States

Riccardo Silvi (Contact Author)

University of Bologna - Department of Management ( email )

P.le della Vittoria, 15
Forli', Bologna 47100
Italy

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