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In todays firm manufacturing department, it is essential to have a greater awareness on the impacts of changes in the business environment. Having to have a proper planning and strategy to form the best decision making possible in order to survive and prosper.
Activity Based Costing (ABC), which it is easier to trace overheads to individual products and which provides a better allocation of overheads and better product cost information (Cooper, 1990a, 1990b; Cooper & Kaplan, 1987, 1988). ABC method can be successfully implemented in an organizational setting and how ABC information can be used effectively to support top management decision making such as pricing or make or buy decisions.
On the other hand, there is also a system called Traditional Costing Systems. Traditional Costing Systems is a volume based cost driver such as the amount of direct labour hours needed to produce an item. A cost driver is a factor that causes cost to incur, such as machine hours, direct labour hours and direct material hours. Each of the methods has their own advantages and disadvantages, ABC system can provide a more accurate information and easier to understand for everyone however ABC also have limitations as well for example implementing ABC required more resources and ABC data can be easily misinterpreted and must be more aware when making decision.
Consider the Factors That Will Influence ABC.
Company should consider few factors that will influence when measuring the cost for example high technology is required to producing product, if any mistake happen will cause the product of chain to cancelled. Products are required to be constantly improved for they may be obsolete product. Doing so allows the company to gain effectiveness and the competitive edge in the market. However amortizations are applied for this asset, which leads to high volume of depreciation.
In the Electrical production industry where competitiveness of the market is high. Every now and then there are countless of new products are appearing in the market. The key strategy lies in the marketing and customer service department where reductions of price are made, at the same time improvement of quality of goods and services. Hence these will lead to higher cost in advertising and maintenance as well as warranty.
When making a product, there is a bill of materials also known as (BOM) which contain a list of raw materials, sub-components, sub-assemblies, parts, and the quantities that are needed each in order to manufacture the end product. The handling and controlling of bill of material (BOM) is complicated. Each and every working process are done by machines, which amount to direct labors salaries has less proportion compare to indirect labor salaries.
These indirect costs possess a vital role thus having higher proportion in activities of the enterprises. Examples, Cost of research and development and advertising for new products and projects. Due to the importance of indirect costs, allocation of such cost for indirect cost will result to influencing the value of the end product. This leads to errors in decision making by managers. Insufficient knowledge and information about the costs and profitability leads to relying extensively on intuitive decision-making.
A company must conduct training for managers to understand how ABC different compare with Traditional Costing System and why ABC provided excellent information system and economic measurement otherwise have to hire external consultant to help deal with organizational challenges.
The considering of the following will help company to implementing ABC.
Requires a complementary accounting system which provides precise cost that is organized by costs category and departments; these software maybe useful but not categorized as essential
2) Precise information is required on the volume of services that are provided.
3) Accessibility and effective cooperation from personnel are crucial.
4) To implement ABC methodology requires a good foundation to begin with, Example: Technical assistance and guidance.
In summary, it is not easy to implement ABC however if getting fully support from top management and having an adequate employees resources is one of the important factors to help ABC to success and also the external factors such as PEST factors.
Samsung Vina Corporation Ltd in Vietnam.
Samsung Vina Corporation Ltd is a joint venture company. Samsung Electronics Corporation Ltd holding 80% of the share and TIE Joint Stock Company holding 20% of share. TIE Joint Stock Company is one of the largest company distributors of electronics, Samsung Electronics Corporation Ltd operating many kinds of businesses for example semiconductors, Information technology and more. Samsung Vina Corporation Ltd developing in many kinds of products for example, washing machine, TV, monitors, and so on. The factory is at Thu Duc district and the head quarter at Ho Chi Minh City and also has two branches at Hanoi city and Da Nang city.
In recent years, Vietnam has been on top of the list for being an attractive country for foreign companies to invest in. Especially when Vietnam officially join the World Trade Organization (WTO) as the 150th member in the year 2007, this has brought huge economic growth for Vietnam. The amount of foreign companies investment has rapidly increase and many of the companies possess a diverse business. However most of Vietnamese companies practice traditional costing method in their accounting system due to the advantages of simplicity and how it is cost saving compare to others. Unfortunately this method has been exposed to many disadvantages, specifically by supplying incorrect or inaccurate data for the management. It is highly necessary for them to find an alternative costing system, which in this situation Activity Based Costing (ABC) seems to be the most suitable alternative to be put into consideration.
Due to the fact that the cost recording system in Samsung Vina not efficient enough and Samsung Vina decided to creating ABC to improve their costing system and finally they successful to it. This is the result after they implemented ABC as per below:
High accuracy to tracing products.
Information from Activity Based Costing frequently used by the managers of production sales and other departments in the company.
Higher approach to information delivery needed for decision making.
Cost of products calculated for normal production capacity.
Profitability analysis of the whole company, products, groups of customers and customers.
General Motors Automotive in USA.
General Motors is known to be one of the biggest automaker in the market. A case report was made upon one of General Motors automobile assembly plants for the purpose of an exploratory research project to analyze the ABC model on where does it appreciate, specifically on the potential in determining the expected energy utilized by a plant for every different production schedules to calculate the demand and response offers.
This section defines the concept and application of ABC energy model on to the PaintShop of General Motors automotive manufacturing facility. The initial section consists of the background on ABC, Smart Grid technologies, general Paint-Shop operations, and the Demand and Response program. The following section then demonstrates the results of a study implementing the ABC model onto a General Motors automotive manufacturing facility. Finally the last section explains the condition where these predicted information can be made use of to gain advantages in the Demand and Respond program.
In the automotive paint shop an Activity-Based Costing (ABC) energy model was produced and used to evaluate the Demand and Response offers. This model was designed for previous research specifically to evaluate the Demand and Response offers. The implementation of Smart Grid is to offer opportunities to decrease the cost of electricity on customers; however customers are required to have an understanding knowledge of their energy usage and its sources. The ABC model that is presented provides knowledge to customers together with a system to prioritize future improvement efforts to reach the corporate energy reduction goals.
Moreover, in the year 1995, Anderson has carry out a longitudinal investigation on the process of Activity Based Costing in General Motors (GM) in the period of 1986 till 1993. In result to the research, he manage to analyze the effects of contextual variables and organizational variables, and divided Activity Based Costing (ABC) implementation to 4 major phases, which are initiation, adoption, adaptation and finally acceptance. It is also discovered that the organizational factors, for example: Top management support as well as training for Activity Based Costing (ABC) system influences various phases of ABC tremendously, at the same time contextual variables like competition, applicability to manager's decisions and compatibility with the present systems generates different level of impact on different phases of Activity Based Costing (ABC).
China has gone through economic evolution, converting from previously a planned economy based on Soviet model into a Socialist market economy by improving and accepting the opening-up policies since the year of 1978. Numerous changes has been made, in result of emerging social market economy as well as merging both Chinese and Western's accounting standards that has already took place since 1985.
The Chinese firms has been widely taken up and implementing Western business management techniques along with modern management accounting methods for example: Capital budgeting, Activity Based Costing (ABC), Standard costing, Just-In-Time inventory system and balanced score card ever since joining the World Trade organization (WTO) in the year 2001. It is comprehended that when the global market is getting more competitive, the more crucial these management account techniques will be especially in the Chinese manufacturing sectors. Whereas among the methods that are mentioned above, Accounting Based Costing (ABC) has showed interest by many Chinese accounting academics and professionals.
Activity Based Costing has always been in favor in the west, and several of researched has been made focusing on the basic concepts of ABC like what it really is, how it actually function and how to identify multiple cost drivers. Chinese management accounting academics has been making theoretical debates upon these issues since the late of 1990s.
The whole intention of the study is to analyze the Activity Based Costing (ABC) execution process of PetroChina given special references to the obstacle and issues being faced while implementing Activity Based Costing (ABC). This study anticipated to detect factors affecting successful implementation of Activity Based Costing within large organization along with the problems and issues encountered by these organizations in the period of implementation process.
This first is to produce useful knowledge about the practice of Activity Based Costing (ABC) in China and valuable lessons for managers that are considering in adopting the Activity Based Costing (ABC) in to the system.
The second is that the results made the case study should be contributed towards completing the lacking of knowledge in the account literature on Activity Based Costing (ABC) implementing issues in counties that are still in the process of developing by providing a complete account of Activity Based Costing (ABC) that is being practiced by one of the many major companies in a country that is still developing such as China.
ABB Group from Sweeden.
The ABB Group is known be an international worldwide firm that specializes in electrical engineering that has consisted of 1,000 companies. Even though that the ABB Group is known primarily for their manufacturing in power equipment, stated by the CEO of ABB group himself. The ABB Group has increasingly reaching towards in becoming "moreover of knowledge based and service oriented corporation. The result of merging between both Swedish and Swiss companies has given birth to ABB Group. There are now ABB AD in Baden, ABB AB in Stockholm and Switzerland controls 50 percent shares of ABB Asea Brown Boveri Ltd. Azrich, this make Switzerland the holding company of ABB (Group). Every of the parent companies are listed in various stock exchanges in Europe and the United States.
ABB Group's Activity Based Costing-Closing Cycles Project (ABC-C) officially started operating at November 1995 with the introduction of "Faster, Better, Cheaper-ABB goes for ABC" signed by the CEO of ABB at the time. In reference from an ABB letter, the primary objective of the ABC-C project was actually to optimize/analyze company processes, because doing so it achieve substantial savings and bring improvement in calculating the orders and products through better exercise of the indirect costs based on an integrated Activity Based Costing (ABC) system.
After the implementation of Activity Based Costing (ABC) in the ABB industry, positive results were shown that it was extremely effective in developing work and therefore they have upgraded their system to version 4.0. The purpose of implementing was designed to model value flow of ABB Group industries with the use of Activity Based Costing (ABC). This version has demonstrated to the whole of ABB Group to demonstrate on how the new Activity Based Costing (ABC) module functions. This enhanced version of this module comes with additional features that include the ability to produce financial statement with the use of Activity Based Costing (ABC)
Since the beginning in 1920's and continually upgrading, Activity Based Costing (ABC) has established to be the primary method in producing the most reliable and precise costing information for manufacturing companies till to date. Even though implementation of Activity Based Costing (ABC) is not as easy, by using activity to track down costs provides a more accurate data in resulting in better decision making in strategy, planning and forecasting. Nevertheless, the most important aspect of Activity Based Costing (ABC) is the capability of it being able to save money. At the end of the day for all businesses what matter the most is to maximize the wealth of the shareholders. If a company is able to get a more accurate picture of costs, then it will have a greater advantage to achieve higher profits.