Management And Accounting Web

Mangan, T. N. 1995. Integrating an activity-based cost system. Journal of Cost Management(Winter): 5-13.

Summary by David Miller
Master of Accountancy Program
University of South Florida, Summer 2001

ABC Main Page | ABM Main Page | Cost Management Main Page

Activity-based costing may be a popular subject in the costing arena, but a relatively small number of examples have surfaced in the area of integrated, on-line system implementations. Mangan, through the use of an experiment in the Semiconductor Sector of the Harris Corporation, discusses the process of implementing a fully integrated ABC system. Few people doubt the importance of ABC, but not all are convinced about integrating it into the operations of a company. Harris Corporation serves as evidence that activity-based costing does not have to be limited to an off-line analytical tool.

"Harris Semiconductor is subdivided into two operating divisions: the Semiconductor Products Division (Commercial) and the Military and Aerospace Division (Military)." In 1991, Harris realized that cross-subsidized product costs were present across all product lines making it impossible to distinguish between profitable and unprofitable products. "Product costing at Harris Semiconductor had the following characteristics:

A single, volume-related unit driver (direct labor) was used to allocate overhead despite the complex manufacturing process;

Direct labor comprised less than 10 percent of total costs;

Manufacturing overhead rates were extremely high (800-1400 percent); and

A wide diversity existed in terms of products, technology, and volume."

"When the Harris Semiconductor Product Division began its ABC project, there were two main objectives:

To provide better product cost for the company’s worldwide manufacturing operation; and

To integrate the results of the ABC analysis into the existing standard cost system."

"Through the reengineering of the existing standard cost system to cost using the ABC rates, ABC manufacturing costs were fully integrated into all existing transaction- based operational systems." As a result of the previously mentioned implementation, Harris Semiconductor has been recognized in reputable periodicals as a leader in advanced cost management techniques and practices. Since this was relatively new terrain for the company, several lessons were learned in the process and include the following:

  • Project objectives must be clearly defined;
  • Someone high in the organization must champion the project;
  • Project management skills are critical;
  • Cross-functional oversight and staffing are essential;
  • Visits to other companies involved in the process and effective use of outside consultants can significantly accelerate the process;
  • Industry experts should be used to educate top management on the concepts involved and to share their knowledge of the industry’s best practices;
  • Decision makers must be kept informed and involved from the beginning;
  • Data gathering always takes longer than planned;
  • Systems integration involves numerous complicated issues; and
  • ABC provides excellent data for decision making."

Harris subdivided the ABC work plan into the following four phases: the assessment phase, the analysis phase, the ABC model design phase, and the implementation phase. "The assessment phase accomplished all the preliminary ground work required to prepare each site for the ABC project. The second phase of the site work plan was the analysis phase, which was used to analyze activities, drivers, and cost triggers and to define performance measurements. The third phase of the site work plan was the ABC model design phase. Its focus was to design the ABC model given the results of the analysis done for the second phase. ABC rates could then be used to generate product costs. The fourth phase of the site work plan was the implementation phase. This involved making presentations to various managerial and cross-functional steering committees about the results of the ABC analysis and the project plan for implementing the reengineered standard cost system."

"Systems integration was essential in trying to make the ABC implementation a success. Since the intent was to make ABC the official cost system, ABC had to work with the operational systems that Harris Semiconductor uses in its manufacturing operations. The ABM system that resulted represented the interaction between ABC models and standard cost subsystems, along with interfaces with the general ledger, bills of materials, factory control, production planning, demand forecast, and material management systems."

"The ABM system has two components: the ABC models and the reengineered standard cost subsystem. The ABC models are used to calculate standard activity rates, which are then passed to the standard cost subsystem component of the ABM system for use in product costing and inventory valuation. To calculate these ABC standard rates, the ABM system needs to determine the budgeted cost for each manufacturing activity. Manufacturing activities are maintained directly on the ABC models in a bill of activities. Resource drivers, which are also maintained in the ABC models, are used to perform the cost mapping process between the departmental quarterly budgets and the manufacturing activities that define the actual work performed by manufacturing. The result of the mapping process is quarterly budgeted cost by manufacturing activity."

"Since the implementation of ABC, Harris has derived the following benefits:

Product costs have gained credibility and can be relied on for business decisions;

A single-system approach provides a competitive advantage because all business functions use the same view of cost for decision making;

Cost has been used to support process improvement;

ABC provides a basis for benchmarking manufacturing capability; and

ABC promotes cross-functional teamwork."

"Implementation of ABC as a single-system approach creates several transition issues that must be addressed. First of all, ABC provides a different way to view cost. Managing change is paramount to the success of an implementation. Reward systems based on profitability cause tremendous resistance to reassigning cost by product line. High-level management involvement is needed to ensure that reward systems are adjusted to prevent the sabotage of an ABC project because of changes in product-line profitability. Secondly, ABC is highly dependent on the quality of the data used for determining costs. For ABC to be integrated with other operational systems, the data from the other operational systems must be accurate and well-maintained."


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