Activityy Based Costing in Manufacturing: Two Case Studies on Implementation

Activity based costing in manufacturing: two case studies on implementation

Amrik S. Sohal Department of Management, Monash University, Australia Walter W.C. Chung Department of Manufacturing Engineering, Hong Kong Polytechnic University, Hong Kong

This paper presents two case studies on the implementation of activity based costing (ABC). The first case is a company based in Melbourne, Australia, which manufactures engineering components. The second case study is a specialty chemicals company based in Hong Kong. The case studies discuss the introduction of ABC and the benefits and problems experienced during implementation in each company. Based on the experiences of the two companies, factors critical to successful implementation of ABC systems are identified.

Introduction

Manufacturing organisations of today are much more complex than those of the 1960s and earlier years. To manage today’s manufacturing organisations managers require information which is relevant, accurate and readily available. Information is needed to formulate and operationalise functional strategies and to make decisions on product mix and production costs. Although production systems have changed to meet the changing needs of the marketplace, in many organisations the internal management accounting systems and information systems have remained unchanged. Managers and accountants have become dissatisfied with conventional costing systems and have expressed concerns about their suitability in the modern manufacturing environment. Activity based costing (ABC) has emerged as an alternative to conventional costing systems. It was developed in the USA by Harvard Business School Professors Kaplan and Cooper and is a process of individually listing and measuring the cost of each activity contributing to the production and delivery of a particular product or service. In their executive summary to a report on ABC published by the Chartered Institute of Management Accountants, Innes and Mitchell...