23/11/2021

Strategic
Managerial Accounting

International Luxury
Management

Charles
1 DAUSSY

Strategic Managerial Accounting

Value chain and costing
• Introduction to Managerial Accounting
• Value creationchain:
a. Value & Valuethe
analysis
process for
• The creating valuein the competitive world
luxury industry
• Cost management in the Supply Chain
b. Value chain costing (Supply
chain): cost accumulation

Luxury Management

Luxury
Management
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Supply Chain: definition

• The movement of materials as they flow from

their source to the end customer.
– Supply Chain includes purchasing, manufacturing,
warehousing, transportation, customer service, demand
planning, supply planning and Supply Chain
management.
– It is made up of the people, activities, information and
resources involved in moving a product from its supplier
to customer.
– If the supply chain cannot deliver resources that the
customer values (at the price the customer is willing to
pay) there will be no flow.

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Supply Chain management

• Processes of streamlining the supply chain by:

– managing costs,
– accelerating time-to-market of new products,
– and creating close relationships with supplier and
customers

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The process of creating value

Michael Porter’s Value Chain

CUSTOMERS
SUPPLIERS

The accumulation of costs

• Is the process of collecting costs as a product progresses

through the production system, enabling the total cost of
manufacture to be built up in a sequential fashion:

– Is the accumulation of successive costs of a product

or service at the different stages of its production
(development).
– Costs are computed by steps of the operating cycle
and finally per product or service.

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Cost concept

• Cost may be defined as an amount that has to be paid or

given up to get something.

• Cost is an aggregation / accumulation of one or several

expenditures traced or allocated to a cost object.

• Companies incur different types of costs that can be

classified based on certain characteristics.

• Each cost classification provides management with a

different type of information to be applied in analysing
different business situations.

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Cost concept

A cost is characterized by three elements:

• “The cost of what?” (ex.: product)  the "cost object”

• The method of calculation : how we valuate the used
resources (with the historical cost? with the replacement
cost?), what resources connecting method to the cost
objects? How the used resources are traced to a cost object?
 Direct costing or Full costing method are examples;
• The time of calculation: calculated ex post, real cost or
forecasted cost, standard cost or pre-established cost,
budget.

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Cost concept

• A cost object is any item such as a product, market,

customer, department, project, order, geographic region,
plant, and so on, for which costs are measured and
assigned.

• Managerial accounting systems are structured to measure

and assign costs to entities called cost objects.

• Determining the costs that should attach to a cost object is

called cost assignment.

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Supply Chain: from the suppliers of our suppliers

to the customers of our customers

Bags: from leather/accessories to customers …

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Material/accessories
purchasing

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Cost of material/accessories
purchased = purchase price +
purchasing costs
1

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Cost of material/accessories
purchased = purchase price
+ purchasing costs

Material/Acc.
Inventory

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Cost of material/accessories
purchased = purchase price
+ purchasing costs

Material/Acc.
Inventory

Production of
bags

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Cost of material/accessories
purchased = purchase price
+ purchasing costs

Material/Acc.
Inventory

Cost of material/acc.
Used = AVCO 2

Production
AVCO = Average Weighted Cost

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Cost of material/accessories
purchased = purchase price
+ purchasing costs

Material/Acc.
3
Inventory Cost of bags
manufactured =
Cost of material/acc. AVCO +
used manufacturing costs

Production

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Cost of material/accessories
purchased = purchase price
+ purchasing costs

Material/Acc.
Inventory
Cost of material/acc.
Bags Inventory
used

Cost of bags
manufactured
Production

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Cost of material/accessories
purchased = purchase price
+ purchasing costs 4
Cost of bags
sold (COGS)
Material/Acc.
Inventory
Cost of material/acc.
Bags Inventory
used

Cost of bags
manufactured
Production

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Distribution of
bags
Cost of material/accessories
purchased = purchase price
+ purchasing costs

Material/Acc. Cost of bags sold

Inventory
Cost of material/acc.
Bags Inventory
used

Cost of bags
manufactured
Production

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Cost of sales
of bags sold
Cost of material/accessories
5
purchased = purchase price
+ purchasing costs

Material/Acc. Cost of bags sold

Inventory
Cost of material/acc.
Bags Inventory
used

Cost of bags
manufactured
Production

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Inventory flows

• Inventory equation (in units and in €)

BI + Purchases = Goods Available for Sale = COGS + EI

Beginning + Purchases or =
inventory Production
Goods available
for use or sale
Usage or Ending
+ =
COGS inventory

– Direct Material used quantities ≠ purchased quantities

– Finished Goods sold quantities ≠ manufactured quantities
– Merchandise sold quantities ≠ purchased quantities

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The accumulation of costs

Example : GIBELY Ltd is selling two products : A which used the

material X and B which used Y.
For the month of June, we have the following data :
Product A :
Purchasing of 8 000 kg of material X for 1 176 000 €
Purchasing costs : 120 100 €
Beginning inventory for X : 2 000 kg for 323 900 €
Raw material usage : 7 500 kg
Number of units manufactured : 7 040 units A
Manufacturing costs : 685 800 €
Beginning inventory for A : 1 200 units for 332 240 €
Sales of A : 7 000 units
Distribution costs : 343 000 €
Selling price : 330 €

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The accumulation of costs

Purchasing costs
 Cost of material purchased
Purchases 8000 kg : 1 176 000
+ Purchasing costs 120 100
= Cost of material purchased 8000 kg: 1 296 100
 Cost of material used
Beginning inventory 2000kg : 323 900
+ Cost of material purchased 8000 kg: 1 296 100
= Cost of material available 10 000 kg 1 620 000
(Cost of material per unit = AVCO) (1620000/10000=162)
= Cost of material used 7500kgx162=1 215 000
Ending inventory 2500kgx162= 405 000
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The accumulation of costs

Production cost
 Cost of goods manufactured
Cost of material used 7500 kg : 1 215 000
+ Production costs 685 800
= Cost of goods manufact. 7040 units 1 900 800
 Cost of goods sold (COGS)
Beginning inventory 1200 u: 332 240
+ Cost of goods manufactured 7040 u: 1 900 800
= Cost of goods available 8240 u:2 233 040
(Cost of goods sold per unit = AVCO) (2233040/8240=271)
= COGS 7000ux271=1 897 000
Ending inventory 1240ux271= 336 040
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The accumulation of costs

Full cost and earnings

 Full cost
Cost of goods sold 7000 x271= 1 897 000
+ Distribution costs 343 000
= Full cost 7000 x320= 2 240 000
Income
Sales 7000 x330= 2 310 000
-Full cost 7000 x320= 2 240 000
= Income 7000 x 10= 70 000

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The accumulation of costs

Example : GIBELY Ltd is selling two products : A which used the material X and
B which used Y.
For the month of June, we have the following data :

Product B :
Purchasing of 5 000 kg of material Y for 630 000 €
Purchasing costs : 80 000 €
Beginning inventory for Y : 1 100kg for 144 000 €
Ending inventory for Y: 900 kg for 126 000 €
Raw material usage : 5 200 kg
Number of units manufactured : 3 500 units B
Manufacturing costs : 292 000 €
Beginning inventory for B : 800 units for 227 000 €
Ending inventory for B: 600 units for 174 000 €
Sales of B : 3 700 units
Distribution costs : 148 000 €
Selling price : 350 €

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Case 1 The accumulation of costs

Value Chain Costing: KUSAFIRI
KUSAFIRI Group is a South African
luxury group with its headquarters in
Paris. The company manufactures
and sells bags and travel trunks.
KUSAFIRI has a very strong brand
identity. One of its most successful –
and controversial – products is the
shoulder bag JALIA made of
crocodile skin.
The selling price is not really an issue and in some cases, the company “organizes”
shortages in order to maintain the attractiveness, the singularity of the product. Rarity
creates value.
If price is not an issue, cost is not one either.
KUSAFIRI focuses on excellence in all of its value chain processes from the materials
supply to its 10 exclusive “boutiques”.

(see attached case data and questions)

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Examples of vertical integration in the value chain process

Chanel bought his first tannery,
Bodin Joyeux
By Dominique Chapuis | 05/12 | 8:06 p.m.

After Hermes and Kering a few months ago,

Chanel decided to secure its supply of leather. A
now strategic material in luxury industry.

Kering - PPR buys crocodile skins tannery France Croco

March 26, 2013

Hermes buys Tannerie d’Annonay

By LEXPRESS.fr published on 11/01/2013 at 13:32

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Luxury industry faces new challenges: from …

 Focus on control of specialized production rather
than diversification
 Favor a long term high-end positioning
 Focus on excellence: production cost is not
important
 Prices are determined on the basis of costs and
expected margin
 Focus on luxury distribution (exclusive)
 Vertical integration and specialization are
strategic issues to control excellence and margins
 Examples : Chanel, Vuitton, Hermes

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Luxury industry faces new challenges: … to

 With luxury groups more and more looking
outwards, new financial challenges appear:
 Move from excellence (or perfection) to “just
quality” (Value chain cost management)
 Big communication budgets (see watches)
 Innovation is key to retain customers (R&D and
design budgets)
 The distribution organization can be made with
exclusive or selective points of sales (exclusive = big
investments = challenging ROI)
 Any price: is it still acceptable (possible)?

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