Type: Definition Essays
Sample donated: Madeline Beck
Last updated: April 17, 2019
This report was to address the issues involved in the process of activity-based system (ABC) implementation by referring to the case study on Oze-Digital Inc.
(ODI). The article was started with drawing the pre-existing conditions existing within the ODI, which considered ABC as a possible solution. Following by the benefits and limitations of ABC, the major steps to designing an ABC model was outlined in a technical perspective.
Later on, the article had explained about the success factors that led to successful ABC implementation and its similarities and difference to ABM.The pre-existing conditions within Oze-Digital Ltd had outlined common indicators of an outdated standard costing system (SCS). These warning signs had warranted the company considering activity-based cost (ABC) as a possible solution.Pre-existing Conditions* Product diversity – ODI produced a variety of goods including commodity and specialty products. The greater product diversity had led to increase demand of manufacturing overhead. For example, in downstream, the customers’ high demand of purchase diverse volume had reflected an increasing emphasis on qualified customer services. The cost of many of these support function did not vary in proposition to product volume, so product diversity had caused disproportional consumption.
* Activity complexity – the increasing use of technological manufacturing process has caused complexity in the activity-to-activity cost relationship. It was unlikely that a single cost driver -direct labor or time- could explain the behavior of all variable costs, but it led to a high proportion of which products were over/under-valued, e.g., the logic product line. In ODI case, the single cost driver had distorted the fact to identify what the profitable products were.* Significant overhead – the manufacturing overhead had occupied a significant proportion of total costs and had been less represented by direct labor as the trends of technology diversity increased.* External threats – with the increasing global competition and changes in the industry, ODI had increasing needs to understand how the marketing, selling, distribution, and administration costs were caused and traced relative to their channels and customers, in order to raise their competitiveness.A well designed ABC could able to offer a better solution than SCS.
Activity-based Cost (ABC)The ABC model was used for measuring both the cost of cost objects and performance of activities.* Vertical costing view – costs were first assigned to activities centers, e.g. the analog, digital and mix-signal could be combined into an activity center. These activity costs were then assigned to each product by selecting volume and/or non-volume based cost drivers. ABC rate was calculated.* Horizontal activity management – used different level of activities – unit, batch, product and facility level – to provide the information which could be used to monitor and control the performance and costs, e.g.
a complete “front-to-end” ABC cost.A strong consensus came out from ODI had shown that “… ABC resulted in both improved product-cost accuracy and greater product-cost visibility relative .
.. better capture the economic of the business …” As a result, the cost information in ABC provided the fact of product profitability and helped to review product prices, so that the activities and costs could be managed more effectively.Although better than SCS, as a tool for managing the business cost decomposition ABC still had some limitations which consultants should be aware:Limitations of ABC* The costs assigned to products in ABC included all the costs, e.g.
direct labor, (non)-manufacturing costs. However, facility level activities borne no obvious relationship to products. If a high level of facility level costs were allocated to products, this could lead to an arbitrary element of product cost.* Unitized batch, product and facility level costs could lead to product costs that are of limited use for decision making, as they varied on unit bases, but by definition, it was not.* The cost of updating an ABC could be high. Referring to the case, ODI could not afford to do “revaluation process” in short period.
However, this would cause producing outdated and irrelevant information needed for decision-making.Top management supports and senior managers’ commitment were the critical factor in the accomplishment of ABC implementation. A survey on best practice company illustrated that thirteen of the 15 best practice companies identified senior management commitment to ABC/M as either a high or top priority (APQC). They had become a basement of implementation that gather and influence other key success factors that were listed below:* To create organizational culture of automatic participation towards learning the implementation of ABC. There was an old Phrase “Better the devil you know than the devil you don’t know”.
Even if ABC provided managers with critically revealing information, managers might choose to remain status quo which they were comfortable with it. In addition, some employees might see job losing as a result of the cost reduction by ABC. Therefore, people’s nature resistance had impacts on the rate of organizational learning effectiveness. It was important for top management to create a culture so that everyone could perceive the change as a positive and put in efforts to learn ABC.* To change organization hierarchical structure and empower people.
Top management should allow information flow up through consulting with bottom-line employees and listening to their constructive concerns and needs to understand ABC, and grant data access and decision making for front-line.* To provide adequate training up front at the beginning and train the right people, in order to win buy-in and make people participating to the ABC process. Failing to get buy-in would affect the final expectations of implementing ABC, especially with operations people. Because in the long run, the real judges to determine the success of ABC would be the end-users of the data, although senior management sponsorship was critical. It was top management’s responsibility to assure that everyone had understood how to look at ABC data and use it to lower costs.
* To build “front- end” communication plan, because ABC had a significant behavioral change management aspect to it. The sequence of who initially got exposed to the ABC data and methodology mattered because there was risk that those who were threatened might immediately discredit ABC and seek termination the project.* To watch out the potential failure and retreat the new ABC data and process responsibly when a profit was realized.
The design of ABC model structure and selection and collection of driver data were technical aspects of the ABC project which needed to be in place before the implementation stage. The success factors that had led to the implementation of ABC were mainly behavioral. A quote said: “Ten percent of successfully implementing ABC is the math; the remaining ninety percent is managing organizational behavior” (Cokins). This was not an issue with the ABC model itself, but rather what the people in the organization did with it.Similarities and differences of Success factors for ABC and ABMABC focused on what do things cost and how to improve product cost. ABM was about what causes costs to occur and how to improve product profitability.
ABM drew on the technique of ABC to provide information help make long term strategic decisions about such thins as product mix and supple source. In term of success factors, ABM had shared the similarity of success factors for ABC. In addition to these, ABM had emphasized on creating more culture that supported change from ABC to ABM, such as* Internal teamwork and trust* Creating the willingness to embrace change and meet the challenge created by the external environment* Built-in customers who were used to support product development and reductions in customer support cost.Also, the rewarding system had been vital to create a positive reinforcement as it was the critical relationship between performance measurement systems and employee behavior.
ConclusionThe report illustrated that ABC was not only useful and powerful to any organization, but a need for companies that want to excel, and efficiently and effectively increase their Sustainable Competitive Advantage (SCA). As one marketing executive said: ‘This is revolutionary!’ (Emblemsvag, 2002)