One of its products cost rmb800 while its main

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Unformatted text preview: profitability information • Impede the company’s ability to compete on pricing – E.g. One of its products cost RMB800, while its main competitor priced the product with the same specification at RMB500 – From 2001 to 2003, it successfully implemented an ABC system Wang 2013 5 ABC System in Business— Implementation of ABC • Xu Ji Electric Company – Objective of the ABC project • To establish accurate product costing information for cost control purposes – ABC Implementation Team • All cost accountants • An outside consulting team of scholars from the Shanghai University of Finance and Economics – Build an ABC conceptual model • Identify manufacturing process • Identify activity cost centers and cost drivers for each activity – Develop the ABC model into a computerized system • Produce monthly ABC product reports since June 2003 – Result • The ABC system established a clear understanding of “shop-floor” activities in First Product Department (FPD) by tracing activity costs to products • Relatively effective cost controls were established in FPD’s main functional divisions, i.e., manufacturing and logistic & warehouse. Wang 2013 6 Activity-Based Management • The use of ABC costing information to help management make decisions • Activity-based costing establishes relationships between overhead costs and activities so that we can better allocate overhead costs • Activity-based management focuses on managing activities to reduce costs Wang 2013 7 Activity-Based Management—Cost Drivers A characteristic of an event or activity that results in the incurrence of costs. In selecting a cost driver, we must consider . . . Cost Pool & Cost Driver Degree of Correlation Behavioral Effects Cost of Measurement Wang 2013 8 Activity-Based Management—Collecting ABC Data Interviews and paper trails - The information comes from interviews with employees in the support departments and a review of each department’s records. Storyboarding - A procedure used to develop a detailed process flow chart, which visually represents activities and the relationships among activities. Multidisciplinary ABC project teams –A typical ABC project team includes accounting, finance, production, operations, engineers, marketing etc. Wang 2013 9 ABC System: Example Overhead Costs Purchasing Storing Machining Supervising Number of Purchase Orders Amount of Square Footage Number of Machine Hours Number of Employees $ $ $ $ $ $ $ $ Product A Wang 2013 Product B 10 Overhead Costs Allocation • Step #1: Identify and classify major activities in manufacturing products, and allocate overhead to cost pools • Step #2: Identify cost driver that has a strong correlation to the costs accumulated in the cost pool • Step #3: Compute overhead rate for each cost driver • Step #4: Assign overhead...
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