Professional Documents
Culture Documents
Activity Based Costing
Activity Based Costing
Activity Based Costing
PROFILE
Through unremitting efforts of over nearly sixty years, the current XJ Group has become
the most competitive large-scaled power equipments manufacturer and systematic resolutions
supplier with the most powerful comprehensive technical supporting ability all over the Country.
Looking into the future, XJs main target is to become one of the strongest and largest
electric corporations known for excellence within the electrical equipment industry in the world.
Our mission is to assist our customers and utility companies both in China and the world to
facilitate provision of clean, sustainable, affordable, reliable and secure energy while protecting
the environment.
Why Xu Ji Company Using Activity Based Costing Method?
The reason why XJ Company is implementing ABC system. ABC model is used to
capture the direct costs and variable overhead costs, which are less in the traditional system.
generally the implementation of cost-based activities in this company allows to make better
information about cost and profitability for customers as well as to make accurate decisions for
production, sales and control the results of this decision.
For that reason, it is crucial for the company to seek for amore effective costing system
and finally, in 2003, ABC system was successfully applied by Xuji with 2 main tasks is to trace
direct labor costs directly to product and client contracts and to allocate manufacturing overhead
costs based on up-to-date direct laborhours to contracts.
Notes: With ABC Method it is more complex and the company know the imformation of cost
repots are using for each.
Xu Ji Relay company manufactures many different relay products and sells internally to
other Xu Ji subsidiaries as well as outsiders. The organisational structure is independent to the
rest of the group and has full financial autonomy. Relay operates in a highly competitive and
saturated market, so its main aim has been to survive and avoid closure. An urgent need was to
get their product costs right,With the lessons learnt from the ABC implementation, Xu Jis ABC
team, together with Relay accountants and the software company which developed FPDs ABC
system embarked on developing its own ABC system at Relay in late 2004. The cost structure
in Relay comprised 85% direct materials and 15% direct labour, variable and fixed overheads.
During the implementation, the team realised the main inaccuracy of product costs was not the
use of out of date planned material cost information but the lack of standardised working
practices and lack of inventory control. Relay still recorded inventory manually. Huge
discrepancies between accounting figures and physical stock were treated as monthly
manufacturing overheads. Xu Jis top management decided to invest in office computerisation at
Relay. The first step was to develop a computerised material cost recording system in order to
capture the actual material quantity information and stock movements between warehouse and
assembly lines. In addition, standardized procedures for recording and inventory control were put
in place and enforced by building into employees personal key performance indicators.
Activity-based costing breaks products down into activities and assigns all costs
associated with completing the activities. This allows a more accurate view of how much a
particular product cost. It shows the direct relationship among activities, cost and products.
Activity-based costing assigns to activities both manufacturing and non-manufacturing costs. It
also eliminates the process of attaching some unrelated manufacturing cost to products.
Overhead costs associated with activities are shown more accurately as well. So the benefit is the
company provides Attributing Costs More Accurately
2. Budgeting
What is the disadvantages of use Activity Based Costing for Xu Ji Company and also for other
company ?
1. Expensive to Implement
2. Conforming to GAAP