Global Electronic

BACKGROUND

Global Electronics, Inc. (GEI) is headquartered in Sarasota, Florida. The company designs,

manufactures, and markets power semiconductors and analog, digital, mixed-signal, and

radiation-hardened integrated circuits for signal-processing and power-control applications.

Its products are used in applications such as antilock braking systems, air-bag systems,

computer keyboards, modems, disk drives, and cell phones. Its products range from power and

logic commodity to analog and digital specialty. And it receives high volume orders from customers for any product line. It employs about 2,300 people at its three U.S. fabrication facilities (located in Huntsville, Alabama, Evansville, Indiana, and Reading, Pennsylvania), and 4000 people at its assembly and test facility in Kuala Lumpur, Malaysia.

The entire manufacturing process had become more technologically diverse. By 1999, direct labour represented less than 10% of total manufacturing cost. Ironically, GEI’s profitability decreased $100 million on sales of approximately $650 million. The management believed that the standard cost system could not accurately identify the profitability in each product. To increase the profitability and strengthen the company’s position in the market, there was an urgent need to switch to the alternative costing system which was activity based costing (ABC).

INTRODUCTION

The content of this report explains why there is a need for GEI to switch from the standard costing system to ABC system in order to obtain profitability. It discusses the success of ABC system implemented at GEI and the key factors that can lead to the success of ABC implementation. Also it includes some suggestions on how GEI can improve its migration to ABM.

THE ANALYSIS

GEI had good sales revenue of $650 million but it still experienced a loss of $100 million in 1999. The loss was due to lack of accuracy in calculation of product costs using the...