ABSTRACT This paper will discuss and analyze the concepts of Activity- Based Costing (ABC) in the manufacturing industry. Specifically, the document will focus on General Motors (GM), and the innovation of one of their manufacturing facilities who used ABC to predict energy usage in the manufacturing of automobiles. The study yielded a successful ABC predictive energy model which provided a structure for competitive advantage for the corporation.
INTRODUCTION
General Motors (GM) is one of the most renowned automakers in the world. GM is well-known for their streamlined assembly processes which saves money and time in the production of cars. A study was conducted at one of GM’s vehicle assembly plants as part of a research project to examine how the ABC model provides value. GM specifically focused on its potential to determine expected energy use in a plant for varying production schedules in order to evaluate Demand and Response offers. According to the case study written by Jurek, Bras, Guldberg, D’Arcy, Oh, and Biller, energy costs were steadily rising and were predicted to continue this trend going into the future. At the same time, utility companies were beginning to implement Smart Grid technologies to increase the efficiency of energy distribution. One resulting program to emerge from these new technologies was Demand and Response contracting. (Jurek, Bras, Guldberg, D’Arcy, Oh, Biller 2000). This program allowed customers to obtain a discount on their
In a virtual corporation environment, I believe the ABC method to be the most ideal for accurately tracking the costs involved in manufacturing, storing, delivery, and sales. For Super Bakery, Inc. the addition of multiple outsourced companies to their processes meets the criteria of products with manufacturing complexity that requires differing degrees of support services (Kimmel, Weygandt, & Kieso, 2009, p. 876). As a result, I agree with Super Bakery Inc.’s decision to implement an ABC system.
Overhead costs are not in proportion to the production output because of the method they are using. This leads to inaccurate pricing and costing decisions. An Activity Based Costing System would help find the real relationship between the products produced and overhead.
In a virtual corporation environment, I believe the ABC method to be the most ideal for accurately tracking the costs involved in manufacturing, storing, delivery, and sales. For Super Bakery, Inc. the addition of multiple outsourced companies to their processes meets the criteria of products with manufacturing complexity that requires differing degrees of support services (Kimmel, Weygandt, & Kieso, 2009, p. 876). As a result, I agree with Super Bakery Inc.’s decision to implement an ABC system.
Activity-based costing is a system of accounting that puts emphases on activities performed to produce products or services (Schneider, 2012). In this costing system every activity is assigned a cost (Schneider, 2012). The goal of activity-based costing is not to allot common costs to products but to measure and then price out all the resources used for activities that sustain the production and delivery of products and services to customers (Mazumder, 2007). Activity-based costing is a cost system that is useful in business because of the fact that it does account for the cost of the products, resources used to produce the product and delivery of the product.
The account issue addressed in this case study was whether to continue with the existing costing method for each product line or implement a activity-based costing method. The ABC method allows for an organization to allocate direct and indirect costs to products and obtain an accurate level of costs and profit for each unit produced, thus allowing the company to improve their overall operational effectiveness. ABC does differ from the existing costing method described in the case as the old method does not account for volume related overhead costs which must be allocated to the specific ODD and TGC products.
Glaser Health Products of Ranier Falls, Georgia needs assistance in evaluating and classifying costs in order to implement an activity-based costing system. As stated in the case, these costs will be used for planning and control decisions rather than inventory valuation. The activity-based costing system will provide better allocation of Glaser’s overhead costs rather than a system to look at the cost drivers or the activities that their overhead costs comprise. Glaser’s general structure of an activity-based costing model should consist of cost
Under an ABC system, the allocation of costs to products is achieved through at least four analytical steps. Firstly, costs are grouped into activity levels. Secondly, cost drivers are
Traditional costing uses one overhead rate in light of chronicled overhead costs for the whole assembling procedure. A solitary overhead rate neglects to catch contrasts in per unit overhead costs, bringing about unnecessary planning for items with littler per unit overhead costs. Action based costing relegates overhead rates in view of particular overhead cost pools. The system then doles out the rates to the unit prerequisites of these expense pools per item. The outcome is overhead costs that mirror the contrasting overhead prerequisites for the individual item. The final result is aggregate costs that more precisely speak to contrasts in per unit overhead
Significant resources were needed to implement a complex system like ABC and it is also strategic in nature (Arnaboldi & Lapsley, 2005).
Over the past two decade’s adoption of Activity-Based Costing ABC has been tossed around like a hot potato by every size and type of organization. It was adopted by organizations ranging in size from huge multi-national companies like General Motors to the much smaller Alexandria Hospital. (Lanen, Anderson, & Maher, 2011) Some companies began the initial processes but stopped short of actual implementation when they discovered more time and resources were needed to effect the change so management ran from it just
Activity Based Costing is a two stage process. First, one must identify the significant activities involved in the production of each product, called pools. In Stanley’s case, the activities are material handling, inspection, machining and assembly. Then overhead activities are assigned to each activity, making up the activity-cost pool. The second stage of AB Costing is to identify the appropriate cost driver for each pool and determine the pool rate. These pool rates are used to more accurately determine the costs associated with each product.
This case details a fictional denim processing plant providing the service of custom finishing to denim pants for original manufacturers. The case is a lesson in how interdependencies among products in the production process and the costs associated with those interdependencies can be cost analyzed for management decisions. The retooling of a finishing machine change-over production from an existing stonewash process to accomplish a proposed distressed finishing process for a new customer, is the cost interdependency studied. We explain how marginal costing and full cost activity-based costing (ABC) are used by the controller to present management product optimal (profit-maximizing) production decisions on the proposed
Nowadays, we know that activity based costing system assigns overhead costs to products or services products that using a two-stage process, which focuses on activities. ABC is a relatively new and very important topic in managerial accounting. ABC allows us to find a way that we could determine the profitability of every product, profitability of every customer we serve, and the profitability of our process. Contents in brief, first that comparing potential advantages of ABC versus traditional costing methods. The
Part of Hewlett-Packard's success has been attributed to its decentralized organizational structure, which provides many advantages that often produce diverse solutions to market-focused problems. However, this diversity of solutions also can bring mixed results when activity-based costing (ABC) is implemented. HP's Colorado Springs Division experienced a less than totally effective ABC implementation. Over the period from August 1988 to August 1989, the Colorado Springs Division designed
8. What is the factory overhead cost allocated to Advance model, if activity-based costing is used?