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Cost Accounting

Strategic Advantage of ABC

1. When compared with Dual Company it demonstrates the strategic advantage of ABC for
setting prices and making product line decisions such as discounting a product
2. Notice that while Dual Company produces one high and one low volume product, Vanilla
Company produces two high volume products
3. To facilitate comparions, Vanilla Company batch level costs per setup, product level costs
per design change and other overhead cost per direct labor hour are identical to Dual
Company
4. In other word, the two firms are equally efficient this point is crucial to the strategic
analysis as will emphasized.
5. It is important to understand that the preceding discussion is realistic concerning sales
prices
6. Many high volume products tend to become standardized, commodity type items
7. These products often face intense price competition that drives market prices down to a
level at which efficient producers earn just enough profit to stay in the business
8. Low volume products in contrast are often customized speciality items that face little or
no price competition because they are close to being one of a kind products.
9. The strategic advantage of ABC lies in its potential to save Dual company from
mistakenly discontinuing common due to price competition.
10. Equally important, ABC can show Duals management the high cost of a low volume
product like special.
11. This doesnt meant that Dual necessarily should continue Special, even if customers are
unwilling to pay much more than they have.
Example of ABC Implementation

1. A well documented example of ABC implementation is can be found in Schrader Bellows


(SB), a producer of pneumatic controls such as the flow control valves used in
pressurized air equipment.
2. SB made over 2700 different products and used over 20,000 different manufactured and
purchased parts.
3. These companies had several significant common characteristics.
4. They all produced a large number of distinct products in a single facility
5. The products formed several distinct product lines and were sold through diverse
marketing channels
6. The range in demand volume for products within a product line was high with sales of
high volume products between 100 and 1000 times greater than sales of low volume
products.
7. Product costs played an important role in the decisions that surrounded the introduction,
pricing, and discontinuance of products.
8. SB new ABC system used four unit level drivers including direct labor cost and number
of units

9. Compared with the old costing system, the ABC systems increased the overhead cost
assigned to low volume products as much as 1000 percent and increased their reported
total manufacturing cost as much as 500 percent.
10. An early example of a full fledged ABC implementation occurred in John Deere
Component Work (JDCW), a producer of machine parts for the automotive industry and
for other John Deere plants.
11. Under ABC systems, two of JDCW products were assigned overhead cost more than 500
percent higher than in tis previous costing systems
12. Of the 10 products whose reported overhead costs increased the most under ABC
systems, the average increase in overhead cost was more than 100 percent.
13. These large increase occurer despite the ABC systems assigning only 41 percent of
overhead using batch and product level drivers.

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