Global Electronics Analysis Essay Example

company's products. The lack of understanding regarding product profitability, along with a flawed product mix and poor marketing and pricing decisions, may have contributed to GEI's financial problems. Further warning signs emerged when the predetermined manufacturing overhead rate increased from 300 percent to over 600 percent of direct labor between 1994 and 1999.

Management became concerned when they noticed that as the manufacturing process advanced, it seemed like high-volume or less complex products were being charged too much, while low-volume or more complex products were not being charged enough (Brewer et al., 2003, para. 4).

According to an observation made by a product engineer, the mature high-volume logic product line is shouldering a significant portion of the total factory costs, which makes the new lower-volume specialty products appear cheaper. The perception is that everything is going well except for the marginally unprofitable logic product line. Another preexisting condition is that the product engineers at GEI intuitively understood the limitations of the current labor-based standard cost system. They recognized that manufacturing low-volume specialty orders adds complexity to the process that is not accurately accounted for in the cost system. As a solution, a product unit cost system (PUC) was implemented but instead of reconciling the difference between the PUC system and the direct labor-based standard cost system, both costs were tracked simultaneously.

Brewer et al. (2003, para. 6) stated that managers were able to choose the cost data that portrayed their departments in a favorable manner, as there were two sets of cost data available. This situation led to the effectiveness of ABC costing as a solution. The ABC costing system offered a

superior option compared to the standard costing system because it allocated resource costs to activities and utilized both volume and nonvolume-related cost drivers for assigning activity costs to products (Brewer et al., 2003, para. 8).

The ABC cost system aims to improve product cost accuracy and optimize the product mix as quickly as possible in order to help improve GEIs unsatisfactory financial performance. The long-term objective is to evolve toward the practice of Activity-Based Management (ABM) by defining activities, assigning resource costs to those activities, selecting activity drivers and determining driver quantities, and calculating ABC rates (Brewer et al., 2003, para. 12).

The ABC data can be utilized by GEI to assist its product engineers in predicting the cost impact of design changes and to aid its process engineers and operations managers in identifying and prioritizing opportunities for reducing process costs (Brewer et al., 2003, para. 13). The adoption of ABC costing systems was preferable for GEI because the company developed its own custom software, called ACCURATE, to collect data inputs, interface with the standard cost subsystem, and calculate product costs (Brewer et al., 2003, para. 20).

After the implementation of the ABC system, there was a consensus among the plants that it led to better accuracy and visibility in product costs compared to the labor-based system. Despite the lack of training, nonaccounting personnel believed that ABC captured the economics of the business more effectively. This resulted in improved marketing and product-mix decisions at a strategic level and enhanced relationships with GEI customers at a plant level.

The implementation of the ABC system at GEI was successful, as it offered a

better solution for the company. A product engineer mentioned that the previous price justification process was confusing and frustrating for both customers and employees. However, with the ABC system in place, the engineer can now provide clear information about the flow and cost of activities, as well as the overall cost of the product. This has proved to be extremely helpful for both customers and employees (Brewer et al., 2003, para. 29). Thus, it is evident that the ABC costing system had more benefits compared to the standard system at GEI.

The text discusses the strengths of GEI's implementation and areas that could have been improved upon. It emphasizes the importance of considering both behavioral and technical factors for successful ABC implementation. It quotes Chris Richards, Director of MIS for GEI, who states, "Implementing change in an organization is about ninety percent cultural and ten percent technical. This is because the organization dynamics, politics, and search for a champion that go on are the real issues that make or break the project" (Brewer et al. 2003, Headnote para. 2).

There were several factors that contributed to the success and challenges of implementing the ABC cost system. One of the main factors was Chris Richards pushing for a companywide implementation. He believed that a nonintegrated approach, while simpler and less risky, would not effectively influence behavior. For instance, if the marketing organization relied on inaccurate costs, it would lead to them promoting products that were not desirable.

The challenge lies in motivating individuals to pursue the correct products, especially when a group of accountants possesses knowledge from an offline system that others are

unaware of (Brewer et al., 2003, para. 19). To address this issue, a technical integrated approach was adopted. This approach involved creating an interface between GEI's general ledger, standard cost, and financial reporting systems, as well as its production planning, factory control, bill of material, and materials management systems.

According to Brewer et al. (2003), GEI developed a customized ABC software named accurate for capturing data inputs, interfacing with the standard cost subsystem, and calculating product costs (para. 20). The implementation of ABC was successfully completed within the nine-month timeframe as planned (para. 22). To streamline the implementation process, the project team only included activities in the cost model that were believed to have a significant impact on strategic product-pricing and mix decisions (para. 2).

Chris Richards played a crucial role in the success of the ABC system by stressing the significance of narrowing down the scope and identifying high-cost activities and optimal product mix at a macro level. This analysis was then further examined at a micro level to comprehend the driving costs and establish appropriate performance measures. Richards' expertise also promoted the utilization of the new ABC system data. The centralized/functional project team oversaw both the construction of the ABC model and collection of data at each plant. While employees at individual plants provided information on activity definition, resource driver, and activity driver, it was ultimately supervised by the project team during implementation across all plants.

Another important factor for success in behavior was having a core project team that coordinated everything to ensure consistency across plants (Brewer et al. 2003, para. 25). However, there were also technical and behavioral

issues that hindered the implementation of the ABC system. One mistake was sending a new core team to Malaysia that was not as involved in the front end of the project. This team did not have sufficient knowledge of ABC, which affected the behavior of the Malaysian plant in using the new system (Brewer et al., 2003, para. 25). In addition, the training provided by the project team for the plant-level employees was minimal, which also contributed to behavioral obstacles.

The top-down implementation of the ABC system at the plant level focused on ensuring that everyone participated, regardless of personal beliefs. The decision to implement ABC was made by headquarters without consulting plant-level personnel, who were then expected to comply with the project team's demands. According to Brewer et al. (2003, para. 26), the implementation of the ABC system was only partially successful.

The first phase achieved the delivery of timely, revised product-cost information for decision making on strategic pricing and mix. However, the second phase faced difficulties in delivering the promised productivity improvement and cost reduction (Brewer et al., 2003, para. 60). In analyzing how GEI could enhance the success of the ABM system, it was found that the system required the same level of support from top management as the ABC system. The resignation of Chris Richards had a negative impact on the promotion of the ABM system, as management refused to support him.

The issue is that everyone is so busy that unless their job requires them to be fully knowledgeable in ABM, they will avoid it. ABM should be something that is considered on a daily basis. According

to Brewer et al. (2003), the training during the initial ABC implementation was minimal, and there was virtually no commitment to training during the ABM stage. Additionally, more commitment to ABM resources was needed in order to have a relational database with all the activities and rates.

According to Brewer et al. (2003, para. 39), the way to perceive ABM is to have all costs readily available for analysis and examination. Brewer et al. (2003, para. 41) highlight the lack of satisfactory discussion on the time required to create an integrated and fully relational ABC system. Additionally, Brewer et al. (2003, para. 44) argue that there is still a need to provide activity-based cost information to front-line workers and improve upon the "pockets" of ABM advocates found in various plants.

According to Brewer et al. (2003, para. 45), these individuals appreciated that the ABC system presented cost information in a language that made sense to them. The ABM system, however, requires the most significant improvement in addressing throughput bottlenecks, as commented by an operations manager: "Lowering a product's ABC cost in a fixed cost environment may not increase the plant's throughput" (Brewer et al., 2003, para. 59). In conclusion, this case demonstrates that ABC costing systems offer more accurate information for making pricing decisions for products.

The implementation of the ABC system was mostly successful, except for inadequate operational training. This training is crucial for a smooth transition to ABM. Without support from top management, it is uncertain how GEI can fully succeed with the ABC system. There are still areas in need of improvement in the ABM system, which could be

better addressed if management approached the conversion from a bottom-up perspective instead of relying solely on top-down decisions without top management support as it currently stands.