Making Decisions with Value Point Accounting

 Examples of using VPA information to improve business performance:

Issue:  A major customer is pushing for price concessions and extended payment terms while promising an increase in purchase volume.

VPA:  The aggregate profit for this customer is  total sales dollars minus the aggregate cost of all of its value  points.  A profit amount is reported after each of the 4 value point  cost sets are subtracted.  The variable cost of capital reflects the  actual receivables collection experience with this customer.  This  customer’s P&L profit tiers show that the first 3 value point cost  sets are recovered but there is a loss after subtracting the 4th cost  (the cost of capital for fixed assets).  In other words, the total cost  of capital (target ROI) is not being earned by this customer with its  current product mix, price level and payment practice.  The  customer's proposal can be accepted provided there is unused capacity  available to handle it.  Fixed asset capacity expansion would not be  warranted to support higher volume from this customer under its  proposed price and payment terms.

Issue:  A review of the company's entire product line for price changes and possible product eliminations.

VPA:   All products are ranked in descending order by profit dollars generated  after subtracting total economic cost.  Those with positive profit  dollars are candidates for price reductions if demand is considered  elastic – more volume can increase ROI and economic value.  Those with  negative profit dollars are candidates for price increases or  elimination, particularly those that do not recover the variable cash  cost and the variable cost of capital.

Issue:  A specific production machine on the shop floor is now fully utilized and the purchase of second machine has been proposed.

VPA:  The value points of all products currently using  that machine are analyzed to see if each is earning the firm's cost of  capital.  Findings show that 30% of the current machine usage is for  value points with sales revenue below total economic cost.  In other  words, the machine has 100% physical capacity utilization but only 70% economic utilization.   Price increases to those value points with economic losses are  considered as an alternative to a capacity increase.  Any decrease in  the volume of loss value points can free existing machine capacity for  growth in higher profit value points.  The VPA insight:  there may be an  opportunity to redeploy an existing investment to a higher value use.      

Issue:  The product engineering team wants to identify cost reduction projects for the next fiscal year.

VPA:   Applying projected market demand to the current value point performance  for each product will point to those products where cost and/or  investment reduction will produce the greatest economic value  improvement.