Computing for the overhead costs per unit revealed that the ABC system resulted in a more accurate application of overhead costs for the three products. The existing overhead system uses the direct labour hour as its basis for the overhead rate, which was at $20. The overhead costs per unit was seen to be lower for the Dance, Run and Walk product line when compared to the ABC system. The advantage of the existing overhead system is that it is easy to compute since it is based on a standardized labour hour or machine hour rate. However when the ABC system was implemented the overhead costs for the Dance, Run, and Walk products significantly changed from $40 to only $20.91 for the Dance products. This means that the actual production cost of each unit of Dance products are lower by around $19.09 while the Walk product is higher at $72.44.
Cardos and Pete (2011, p.151) revealed that using traditional management accounting systems are misleading manufacturing companies with the perception that their products are generating profits when they are actually incurring losses. The reason for this is that there are various factors affecting the computation of a unit cost for a product or a product line such as the volatility in the prices of direct materials. The most difficult computation is the determination of the overhead costs, which will be applied to the unit cost of a product. The purpose of determining a more accurate product unit cost is to improve the competitiveness of the manufacturing company especially in a changing business environment (Cardos & Pete, 2011, p.151).
A significant number of researchers revealed that the use of the ABC system in conjunction with the Activity Based Management is the best option for manufacturing companies (Cardos & Pete, 2011, p.151). The reason for this is that Sneakers Unlimited is competing in a highly seasonal market due to the fact that its current product styles will become obsolete in the next season. The adoption of automation processes by companies resulted in the modification and development of more relevant costing systems in order to improve the determination of product costs (Cardos & Pete, 2011, p.152). Another effect of the high adoption of automation processes is that there is a decreased reliance on direct labour costs and an increase in indirect costs (Fadzil & Rababah, 2012, p.1).
Increased global competition (Fadzil & Rababah, 2012, p.1) is also another factor for the development of a reliable and relevant cost system such as the ABC system (Cardos & Pete, 2011, p.157). Technological advances also resulted to the increase in the number of products with shorter life cycles (Fadzil & Rababah, 2012, p.1) resulting to a greater threat of product obsolescence. Fadzil and Rababah (2012, p.2) revealed that the adoption and implementation of the ABC system in manufacturing companies are volatile with regards to the different industries.
The primary factors that motivate the implementation of the ABC system in companies are top management support, education, allocation problems, higher information technology, non-accounting ownership, growing costs, and financial crisis (Fadzil & Rababah, 2012, p.1). Financial crisis or the economic recession was the main reason for the adoption of the ABC system in Thailand (Fadzil & Rababah, 2012, p.3).
The most significant factor to push for the implementation of the ABC system is the shortcomings of the current costing system with regards to the relevancy of provided information (Fadzil & Rababah, 2012, p.13). The value of the ABC system is that it generates a more accurate and detailed accounting information for decision making by management as concurred by the company Xu Ji (Liu, 2011, p.11). The company was able to successfully implement ABC and its benefit is that the company was able to improve production efficiency by reorganizing their assembly line layout (Liu, 2011, p.11).
Failure
The main problems seen by Fadzil and Rababah (2012, p.1) in the implementation of the ABC system in other industries are technical problems along with management and employee behaviour. The primary reason for this is that management face difficulties in the determination of the ABC components such as the establishment of cost drivers (Fadzil & Rababah, 2012, p.4). The most significant barrier in the adoption of the ABC is that most company management perceive the development of the system as complex due to a lack of support and experience in its implementation (Fadzil & Rababah, 2012, p.4). Another significant factor in adoption failure for Ireland companies is that it is considered to be more expensive when compared to the traditional costing systems (Fadzil & Rababah, 2012, p.4).
The adoption rate of the ABC system is perceived to be low on a global scale since only a limited number of global companies have adequate internal resources and training as well as the support of top management (Fadzil & Rababah, 2012, p.5). But in order to increase ABC system adoption, the most significant factor is top management support along with training in the design, implementation and use (Fadzil & Rababah, 2012, p.13). Another important consideration is the availability or the required development of the cost drivers to be used in the ABC system using information technology (Fadzil & Rababah, 2012, p.13).
Bibliography
Barfield, J. T., Raiborn, C. A. & Kinney, M. R. (2001). Cost Accounting: Traditions and Innovations. (4th ed.). United Kingdom: Thomson Learning.
Cardos, I.R., and Pete, S. (2011). Activity-based costing (ABC) and activity based management (ABM) implementation-is this the solution for organizations to gain profitability. Romanian Journal of Economics, 32(1), 151-168. Retrieved from http://www.freepatentsonline.com/article/International-Journal-Business-Strategy/237533592.html
Fadzil, F. H. B., and Rababah, A. (2012). Management accounting change: ABC adoption and implementation. Journal of Accounting and Auditing: Research & Practice, 1-17.
Horngren, C. T., Harrison, W. T. and Oliver, M. S. (2012). Financial & Managerial Accounting (3rd ed.). Boston: Prentice Hall.
Liu, L. Y. J. (2011). Activity based costing in China: A case study of Xu Ji Electric Co. Ltd. Research executive summary series, 7(13), 1-13. Newcastle University Business School.
