Tapping the full Potential of Activity Based Costing

Group Number: 4 Group Members:

Brijan Anand Iyer (13077) Nimisha Singh(13078) Davis.N.S(13079)

Dheeraj Govind Sasi(13080)

Farjadh Faiyaz Ahmed Khan(13081)

Introduction

ABC when woven into Critical Management systems becomes a powerful tool to improve processes, products and market strategies. To convince employees of the worthiness of ABC and carefully rollout by taking into account the companies culture and operating idiosyncrasies.

Managers use Activity-based management to find answers to the following:

1. 2. 3.

What should a product or process cost? What are the non-value-adding activities that contribute to its current cost? Where can a company reduce costs to make a non-profitable distribution channel or market profitable? Cost reduction to make the company profitable By eliminating non-profitable products how much can it save in costs? What can the company do to avoid unnecessary costs in first place?

4. 5. 6.

Chrysler implemented ABC in 1991, and the benefits have been 10 to 20 times greater than the companies implementation cost. Savings being 50 -100 times the implementation cost.

Safety-Kleen also introduced ABC in 1991, got more than 14 times increased revenues than the implementation investment. $12.7 Million in cost savings. They initiated it as a pilot project at one plant and used its success to win over executives and other plants managers.

Turning to ABC

Chrysler
1.

In the late 1980s decided to transform the entire company into a processfocused org. Lutz had advocated for the use of ABC to help with this transformation.
It would show how much each process costs and by exposing inefficiencies. It would reports costs of both value and non-value-added processes or activities.

2. 3.

Safety-Kleen
1.

It turned to ABC as it had outgrown its accounting system. They needed it to have detailed information about:

Operation costs, and how profits could be generated for whole company rather than focusing on individual plant benefits. How much processing, shipping and handling a given batch of materials would cost at each plant.

Internal resistance

ABC was greeted with deep skepticism by the employees at Chrysler. In the Mid 1980s when ABC was implemented, it has to be abandoned due to the growing skepticism. Employees feared job elimination, and management questioned whether time was there to collect the data. At Safety-Kleen, Chaika ran into resistance on implementation of ABC from the manager, vice president of recycle-center operations, and the 5 marketing vice presidents. Each feared the other would use the numbers to invade its turf and feared reduction in pay if rules for calculating profits changed. Both companies began the implementation of ABC at one plant and later rolled out the program throughout their organization.

Getting widespread acceptance

Chrysler
1.

Executives were involved in ABCs implementation from the start who tracked and guided the ABC program regularly. The top 32 executives spend half a day a year in workshop where they receive indept briefings on the rollouts progress and deliberate on where ABC should be installed next. Both Lutz and Robert (CEO) have preached that a process-based structure using ABC could make Chrysler the most agile, lowest-cost automaker in North America by 1996 and in the world by 2000.

2.

3.

Safety-Kleen
1. 2.

Within 3 months plant costs were cut significantly ($3.5 M annual cost savings) ABC numbers were helpful in figuring out the amount of new materials that the plan needed to process in order to be competitive and profitable.

Training the workforce

At Chrysler, the courses had 2 main purposes:

To explain why ABC is necessary To instruct employees in how to set it up and use it.

3 courses were setup for this.

Safety-Kleen put its employees through a 3 month intensive on the job training program. The team had made a list of top 10 ways they thought that efficiency could be improved.

The rollout

At Chrysler, during the pilot ABC numbers showed:

1.

Actual costs of some low volume parts were much as 30 times the state costs, which made clear that the company was better off outsourcing those parts. It helped redesign both products and processes so it could make parts for the next minivan model more efficiently. The company refined the process into a science and rolled out ABC in all areas of company to emphasize it was for everyone not just manufacturing. The entire rollout at worksite takes 6-15 months. It helped Chrysler to determine the optimal number of wiring harnesses- the wiring packages used for vehicles electrical systems that it should design and produce for a new minivan.

2.

3.

4.

At Safety-Kleen the goal of the rollout was to get an overview of relative costs and profitability of each recycling process and line of business.

Final integration

ABC analysis to become the prime source of reporting financial numbers by building automatic links between its corporate general ledger and ABC system the numbers reconciles in both systems every month. Safety-Kleen uses it to develop annual budget and to make strategic decisions about closing plants and adding and cutting product lines. ABC when implemented into all of its financial systems they dramatically change the way an organizations people think. Quality of decisions will be higher and performance improvement will be shown.

Why is this issue important for managers? At what level is it important

The issues with regards to the management would be in terms of implementation of the ABC system into critical management systems which would help in day-to-day decision making. The biggest obstacle being resistance from employees. Managers need to be made aware that ABC is a major organizational change program and involves costs. It would help them pinpoint useful information about direct and indirect costs of a product or service. It is to assist the managers in taking all the steps in the implementation of ABC and that the employees do not retreat to their old practices in times of stress or self-doubt.

In what kind of organisations or organisational situations can a manager expect to encounter these issues or problems? What are the possible short term and long term consequences of not resolving this problem?

Chrysler

During the 1960s Chrysler made enormous strides to improve its operational efficiency and slashing cost. In spite of these efforts ,during the later part of 1980s,Chrysler had to face huge financial crisis The company management wanted to transform the entire organization into a process driven organization. ABC was used to bring about this transformation Short term consequences results in erroneous cost data Long term consequences 1.The financial crisis would have deepened 2.Loss of market share to competitors

Safety-Kleen It was a market driven company Efficiency of operation was of secondary concern The company did not know the true cost of their product and services The accounting system was used only to keep the books not to help in operational efficiency Short term consequences Inability to make informed decisions Long term consequences Their profits will start coming down