Global Electronics
Background Information
This case analyses the ABC and ABM implementation process at Global Electronics Inc (GEI). GEI has been using a traditional costing system which allocates manufacturing overhead costs based on direct labour hours, which is about 10% of total cost. This costing system resulted in operating losses o $100 million although sales have been $650 million. As a result, it was believed that GEI’s costing system is not accurate.
GEI’s new top management team believed that an Activity Based Costing (ABC) system would address this profitability issue as they will have more relevant costs to make accurate decisions. Further, they had an ultimate goal to implement an Activity Based Management system to improve the decision making process overall. The first step on the implementation for ABC has been a success overall, while the ABM ideally failed overall.
Questions & Analysis
Question 1
1. What preexisting conditions (or warning signs) existed within Global Electronics to warrant considering ABC as a possible solution? When these preexisting conditions exist, why does ABC offer a better solution than traditional cost systems?
Analysis
There were many preexisting conditions at GEI which warranted the implementation of ABC. The first concern surrounds the overall profitability of the company. Although sales were approximately $650 million, and there was no indication that sales were decreasing, operating losses were at $100 million. The reason why businesses operate is to generate a profit, and if the firm is unable to generate a profit, it is a cause of concern.
On a micro level, managers could not identify which products which products were profitable, how much each product cost or were unable to determine fair prices for products. For example, new lower volume specialty products were underpriced while mature high volume product lines were overpriced. This resulted in the company selling more and more products below cost and less sales
This case analyses the ABC and ABM implementation process at Global Electronics Inc (GEI). GEI has been using a traditional costing system which allocates manufacturing overhead costs based on direct labour hours, which is about 10% of total cost. This costing system resulted in operating losses o $100 million although sales have been $650 million. As a result, it was believed that GEI’s costing system is not accurate.
GEI’s new top management team believed that an Activity Based Costing (ABC) system would address this profitability issue as they will have more relevant costs to make accurate decisions. Further, they had an ultimate goal to implement an Activity Based Management system to improve the decision making process overall. The first step on the implementation for ABC has been a success overall, while the ABM ideally failed overall.
Questions & Analysis
Question 1
1. What preexisting conditions (or warning signs) existed within Global Electronics to warrant considering ABC as a possible solution? When these preexisting conditions exist, why does ABC offer a better solution than traditional cost systems?
Analysis
There were many preexisting conditions at GEI which warranted the implementation of ABC. The first concern surrounds the overall profitability of the company. Although sales were approximately $650 million, and there was no indication that sales were decreasing, operating losses were at $100 million. The reason why businesses operate is to generate a profit, and if the firm is unable to generate a profit, it is a cause of concern.
On a micro level, managers could not identify which products which products were profitable, how much each product cost or were unable to determine fair prices for products. For example, new lower volume specialty products were underpriced while mature high volume product lines were overpriced. This resulted in the company selling more and more products below cost and less sales