Gei- Global Electronics

INTRODUCTION

Global Electronics, Inc. (GEI), designs, manufactures and markets discrete power semiconductors, and various types of integrated circuits for signal processing and power control applications. Its products are used in multiple industries including the computer, mobile phone and car industries. The company ‘s customers have a very diverse variance in purchasing volume within product lines. The process of GEI’s manufacturing is divided into two phases, which consist of various processing procedures.

GEI’s profitability crashed in 1999, with operating losses if $100 million even when sales revenue amounted to $650 million. This painful loss motivated the investigation of GEI’s current costing system and its ability to accurately calculate the cost of each manufactured product. Inaccurate costing can result in poor profitability, ineffective product mix, unsuccessful marketing, and distorted pricing decisions.

The current standard cost system assigned overhead costs using direct labor hours, however the current overhead rate was 600 percent of direct labor costs, as the manufacturing process has become increasingly more technology driven. It seems as though non-complex, high volume products are being overpriced (absorbing cost of the complex, low volume product) while complex, low volume products are underpriced.

Attempts to overcome the inaccurate costing system have failed. GEI’s product engineers tried to implement a system called Product Unit Cost, using time and labor as cost drivers. It got rid of some of the inaccuracies but the old system was still being used along side, and managers were able to choose the number that made them look best.

Finally, ABC costing was adopted. The managers of various departments made up the ABC project committee and decided to implement an integrated ABC system. Plant level employees, however were not involved in the planning, decision making or training, but management forced them to participate and...