ABSTRACT This paper will discuss and analyze the model and concepts of Activity- Based Costing (ABC) in the manufacturing industry. The document will specifically focus on the dependencies of ABC in created and performed at a General Motors (GM) manufacturing facility to predict energy usage in the manufacturing of automobiles. This study resulted in an ABC predictive energy model which can provide a structure for competitive advantage in the manufacturing industry.
INTRODUCTION
General Motors (GM) is one of the largest automaker in the world. A case study was conducted at one of GM’s vehicle assembly plants as part of a research project to examine where the ABC model shows its value, especially focusing on its potential to determine expected energy use in a plant for varying production schedules in order to evaluate Demand and Response offers. During the time of the project, Energy costs are 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. (Emblemsvåg and Bras, 2000). This program allowed customers to obtain a discount on their utility costs in return for reducing their energy usage during specified times. If a company is able to understand their processes well enough to change and meet the energy levels
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.
Activity-based costing can be defined as the managers allocate costs depending on the quantity of resources a product or service consumed in the manufacture of goods and services. The activity based
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.
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
Glaser Health Products manufactures medical items for the health care industry. Production involves machining, assembly and painting. Finished units are then packed and shipped. The financial controller is interested to introduce an activity-based costing (ABC) system to allocate (or distribute) indirect costs to products. Indirect costs, as distinct from direct costs, cannot be unambiguously linked to specific products. The controller would like to calculate product costs based on ABC for planning and control, not inventory valuation.
This paper provides a brief presentation of Activity-Based Costing methodology, how is used as well as its short comings.
The A/E shall contact local utility companies to determine available demand-side management programs and nocost assistance
Time-driven activity-based costing systems (TDABC or Time-Driven ABC) estimate two parameters and then assign indirect costs similar to the way direct costs are assigned.
1. Use the Overhead Cost Activity Analysis in Exhibit 5 and other data on manufacturing
We will examine the given data from the case and compare the unit costs from the company’s current costing system (traditional costing) and from activity-based costing. We will also highlight other qualitative data in consideration with the numerical factors that may result to a significant change on our recommendation.
Also, some savings are achieved by using more efficient cooling technology to reduce grid purchases. The retrofit therefore reduces the total energy purchased from the grid, but it also modifies the hourly electrical demand profile. Both pieces of information are required to compute the savings, because it is assumed that the grid pricing is demand-sensitive, such that the price per kWh each month is a function of the load factor for that month. Load factor is defined on a monthly basis as the ratio of the average power consumption for the month divided by the peak hourly power consumption. The load factor measures the consistency of the demand over time, with high load factors indicating a more consistent demand that is less costly for the utility to provide. The monthly per kWh grid price is therefore inversely related to load factor.
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.
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
Activity-based management, activity-based costing and continuous improvement, all these help in the improvement of the efficiency in manufacturing, better control of overhead costs and the accurate costing of products. With this in mind, We disagree with the advice that Chuck Davis, the firm’s controller, gave Leonard Bryner. The traditional way of costing produce average costs that severely overstated or understated. Without the accurate costs, the firm would not be able to price properly their products and that would be damaging to the firm. With activity-based costing and management, all costs are accounted for with the help activity-drivers and overhead costs are decreased. In turn, the costs that the firm has for their products are more accurate and pricing is much easier.
At present PC4U apportions its production overheads based on direct labour hours. With a range of products available and opportunity for customising these products individually to meet the retailer’s needs, this report aims to assess the effectiveness of this traditional method of allocating production overheads. It will discuss the drawbacks of the current approach used by PC4U, as well as an alternative approach in the Activity-Based Costing system, which “is intended to overcome the weakness of the traditional method by having various pools of costs and then allocating each pool’s costs on the basis of its root cause.”(Averkamp 2007) As well as comparing the benefits and drawbacks of these costing systems to determine what recommendations should be given regarding the approach PC4U should adopt, the report shall also discuss the impact an activity based management system may have on the company.