Question

choose two manufacturinf companies and explain why these companies would benefit from using an activity based costing system

Answer 1

Activity-based costing (ABC) is a costing method that identifies activities in an organization and assigns the cost of each activity to all products and services according to the actual consumption by each. This model assigns more indirect costs (overhead) into direct costs compared to conventional costing.

Two Manufacturing companies are -

{A}- Maruti Suzuki- ABC measures the amount of resources consumed by the products.From this amount, one can use the specific costs or environmental impact of the resource to calculate the total cost. For example, a product may consume 2MWH of electricity which has a specific cost of $100.00 per MWH. The specific environmental impact may be 10 kg CO2 per MWH. Thus, the total costs of this product in monetary and environmental aspects would be $200.00 (Table 1) and 20 kg CO2 released (Table 2). With this expansion to environmental factors, this method has been successfully utilized in the manufacturing industry to perform Life Cycle Assessments (LCA) [4] on the manufacturing process.

The manufacturing process of an automobile is split into three departments:

1. Body Shop

2. Paint Shop

3. General Assembly

The body shop transforms the raw materials into the structure of the vehicle. Then the paint shop applies a protective and visual coating to the product. Finally general assembly assembles all sub-components [6] into the vehicle such as the engine and seats

In the paint booth, primer, basecoat, and topcoat are applied to the vehicle. The application of these layers is performed by robots to provide a consistent layer of paint to the product.

And in general Assembly all parts are assembled

i can take example of paints shop for further illustrations.

1. Pretreatment of Product 2. Application of ELPO 3. Sealing Application 4. Paint Booth 5. Post-Paint Repairs

cost is allocated in paint shop on the basis of above.

{B}- Pidilite Industries Ltd

These activities cover all the production and distribution chain at Chemco. The activities identified are given below

List of the Activities

1 Acquisition of material 2 Inventory handling / Moving 3 Production    4 Machinery maintenance 5 Engineering support 6 Inspection 7 Building maintenance 8 Production supervision 9 Packaging 10 Selling and administrative activitiy

These companies are get benefit as they can calculate actual cost on based of activity & simultanelously product cost.