Focus the factory with activity-based costing

Article Abstract:

A case study is presented of a factory management team which recosted its operations through activity-based costing (ABC) to alleviate the drain on resources wrought by low-volume product lines. The use of ABC allowed management to redistribute costs to reflect true product costs. Recosting manufacturing operations was accomplished by redistributing overhead, costing parts through a cost matrix, and formulating a new cost database that included departments' fixed and variable costs. ABC served as the basis for reforming the company's manufacturing strategy: the company reduced low-volume product lines and made changes to manufacturing configurations to create a focused factory. The case study revels that the use of ABC to justify eliminating low-volume product lines and their costs leads to great improvements in profitability.

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How much does that product really co$t?

Article Abstract:

Activity-based costing (ABC) may be a more relevant technique for product costing than traditional cost accounting methods, which may not accurately reflect product costs. Traditional cost accounting techniques have become less effective because direct labor accounts for 5% to 15% of costs, material accounts for 45% to 55% of costs, and overhead, which is becoming a fixed cost, accounts for 30% to 50% of total costs. ABC collects information about financial and operational performance to determine the relationship between the significant activities of an organization and product costs. Cost differentiation, activities and their cost drivers, and the determination of nonvalue-added cost enhancement opportunities are the three key elements of ABC. Two examples of the use of ABC are presented.

Product lines

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Selling ABC: new cost systems can flounder if they're not marketed

Article Abstract:

Activity-based cost (ABC) accounting systems can provide manufacturing companies with a powerful cost management tool that should enable senior management to effectively monitor the costs associated with implementing sophisticated flexible manufacturing methods. However, the implementation of a new cost management system based on ABC principles can flounder if the need for a change in cost accounting methods is not adequately explained. Steps that cost accountants can take to minimize problems in the changeover to ABC accounting include involving representatives of other departments in the planning process, informing management of the dynamics of cost management, and taking an interest in the problems of other departments.

Manufacturing industries, not elsewhere classified

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