Adopting Activity Based Costing Systems in Electrochic

The Case Study of Adopting Activity Based Costing Systems in Electrochic

Executive Summary

Through the research work of the Electrochic case study, it seems that activity based costing (ABC) model is preferred to estimate the cost of products. Different from the top management’ own view, the cost of Robots mixers are much higher than expected, mainly due to the activities such as assembling, transporting, and customer services. The management should further investigate why such cost activities are over 10 times higher than the other two products. For Chip pans and Irons, the ABC allocation cost is slightly lower than traditional accounting methods. The management should stabilize the production and profitability of these two products.

Our understanding of ABC and major business insights based on the case study material are given Section 1. The rational of choosing ABC and the discussion of pros and cons of using ABC for manufacturing firm Electrochic are given in details in Section 2. Then, practical recommendations to Electrochic and managerial implications of using ABC are summarized in Section 3 for final conclusions.

Table of Contents

1. INTRODUCTION 5

1.1 Problem Statement and Business Analysis 5

1.2 Brief Review of Activity Cased costing (ABC) 9

2. ABC: THE BETTER MODEL 11

2.1 Analyzing the Information and Findings 11

2.2 Pros and Cons of ABC in Electrochic 12

3. CONCLUSION 16

3.1 Recommendations to Electrochic 16

3.2 Managerial Implications 17

4. APPEXDICES 19

5. REFERENCES 19

1. INTRODUCTION

1.1 Problem Statement and Business Analysis

In this section, we carefully explain our opinion based on the facts from the case study material. We highlight our business consideration and insights rather than just repeated the story. The business analysis and comments in this section motivate our choice and the solution we give in the next chapters.

This case study is about a manufacturing firm called Electrochic which was founded by Mr. Bigshot in 1985 and initially manufactured excellent quality of chip pans. Consumers give good feedback to their chip pan products and it seems that this firm received good corporate reputation from their customers. This is a very critical factor of customer acceptance, we don’t think price war is good strategy. Good product plus reasonable price is more sustainable.

However, due to the market competition, the CEO notices that the chip pan market has gradually declined and entered its maturity stage. From our business sense, it is not a good signal for a product’s profit margin. Considering these appliances were for small businesses and professional use, we think that their customer base is solid and the demand should be consistent. Based on our analysis, the chip pan business has reached the demand ceiling in the domestic market.

We also learn that the company decided to expand its range of products and look for new market segments also in similar equipment. From their consultant’s advise, this firm decided to stick in small electrical domestic appliances. That means they will explore similar products in the domestic appliances markets. We agree this strategy since it can maximize the usage of the current facilities. If the development of new products requires heavy investment in new manufacturing facilities, we think it is a risky decision. Because if the new products fail, facilities could be no use. Also, as mentioned in the case, skillful workers are also needed for new products. Developing similar products will bring less problems of training suitable workers, because the existing workers own related manufacturing skills.

The synergies of developing similar products of irons and robot mixers is significant. It is very good that these three product lines use the same machines and the same manpower. However, notice that a significant difference is in distribution channels. The Electrochic chip pans has a reliable and unique distribution chain, but the Electrochic Irons and robot mixers need external distribution channels which are still developing. We know that contracts were signed with other distributors with a view to guaranteeing outlets for the new products. This is a very key information related to our findings. It seems that the marketing of new products is not mature. The firm is still looking good distribution channels to sell the new products. In this situation, the cost of marketing and distribution of the new products would be higher (even much higher) than the very mature chip pans product. The management may underestimate this difference.

We are confident about the production process of this firm and it should be efficient. However, as their production is not in huge volume, such as millions level, they choose to assemble the products with spare-parts bought from outside suppliers. It would save the time and cost by selecting suitable supplier partners. Comparing these three products, robot mixers are most difficult to assemble. But we have some doubt on delivering the products to the customers on a J-I-T basis. It would be costly and greatly increase the distribution cost. The inventory on a J-I-T basis seems lower, however, considering the product selling prices are not high (all below 100 euros per unit), we need to make a balance.

The manufacturing of Electrochic chip pans only consists of 2 cycles of production per month. It seems the organization of production of chip pans are more mature. Th only distribution channel seems to have good management of demand and supply. This also validated that the chip pans market is mature and the demand would be rather stable. So, usually no urgent or new customers need extra orders.

However, the iron market faces strong intensive competition. Price war would happen in this market. One observation