View to the Business General Manager
VPA focuses on the total economic cost of a business which includes all operating costs plus the cost of capital* on the investment in net operating assets.
The total economic cost for the entire business is displayed in 3 cost sets:
1) Customer Cost – cost of value points from actual customer orders filled
2) Cost of Quality – losses from various quality issues
3) Cost of Unused Capacity – includes people and asset capacity
How does this relate to a traditional P&L? The sum of the 3 cost sets above is equal to the sum of:
• Cost of Goods Sold on the P&L
• Selling, General & Administrative expense on the P&L
• The company's cost of capital (expressed in dollars)
Simply put, Value Point Accounting views the business P&L differently, focusing on a set of issues that Management can better act upon.
View to the Product Marketing Manager
VPA provides 2 unit price points for consideration in marketing decisions:
1) Cash Breakeven Price - this recovers the product variable cash cost plus the cash cost of operating capacity consumed by the specific product.
2) Target Value Price - a higher price to recover total cash cost plus the cost of capital on the operating assets supporting the specific product. This price will earn the company's overall target rate of return.
View to each Value Point
Value Points are the fundamental business elements that can be combined to show the value of a product, product line, customer or market channel. Think of a customer’s value as the sum of all of that customer’s unique value points.
Each value point drives its own economic cost identified in 4 cost sets:
1) Order Cost or Variable cash cost
2) Cost of Net Working Capital Required or Variable cost of capital
3) Cost of Capacity Consumed or Fixed cash overhead cost
4) Cost of Fixed Assets Consumed or Fixed cost of capital
The value point breakdown into variable/fixed and cash/non-cash cost components supports a variety of business decisions. By comprehending operating assets used in addition to expense, VPA estimates both the P&L and balance sheet at the value point level. VPA can bring out the thousands of financial statements embedded in the company’s products and customers. Call it “nano-accounting”.
* Cost of Capital is the weighted average rate of return required by the providers of debt and equity financing for the business. It is used as a "hurdle rate" or target rate of return on investments in operating assets such as facilities, equipment, inventory and accounts receivable.