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AVM Case Study: iSVMS Umbrella Manufacturing Company

1. Case Introduction
iSVMS Umbrella Manufacturing Company is a
company that mainly sells hand-open umbrellas. In the
early days, iSVMS only sold two types of products,
namely hand-opening umbrellas and parasols. The competitive advantage of
iSVMS’s products is that the materials used are patented, so the price is higher, but
consumers can accept it.
However, with the rise of automatic umbrellas, the market for
hand-opened umbrellas has gradually declined. To this trend, CEO
Mr. Wu, who is distressed, is determined to invest money to build
high-automatic production lines to make automatic umbrellas to grab
market share in emerging markets.
After completing the construction of the new production line after more than two
months, it was discovered that the sales volume and revenue were indeed increased
by the production of automatic umbrellas, but the net profit is not as
good as expected to increase. For this reason, although Mr. Wu is
eager to solve the problem, he does not know where the problem is
and has no alternative.
Fortunately, CEO Wu took a MBA program of National Cheng-chi University
(Taiwan) and learned a strategic management accounting skill called AVM(Activity
Value Management) that can let enterprises understand the causal relationship
between costs and profits. After participating in the AVM workshops, he gained a
preliminary understanding about it. CEO Wu began to understand the problems of his
company and began to ask the following questions by himself:
♦ Are the cost and price of all products correct?
♦ Which current clients are making money and which ones are losing money?
♦ What activities can be improved from R&D to after sales?
In order to find the answers, Mr. Wu opened the company’s financial statements

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after returning to CEO office, and only realized that the traditional four major
financial statements could not provide precise answers to his questions. The cost
structure of each product could not be known from current ERP system. It is also
impossible to know the real profitability of the clients.
CEO Wu felt that he needed to quickly accumulate basic information about the
company's entire operation and management, and implement AVM system to avoid
the company gone from bad to worse. Therefore, after reaching a consensus with the
heads of various departments of the company, Mr. Wu introduced the Cheng-Chi
University’s AVM project team to help the heads of various departments to collect
essential data and design an AVM system to discover management problems, find
directions for improvement, improve operational efficiency, and accomplish strategic
goal.
2. Company basic information
CEO Wu with the AVM team began a series of discussions with various
departments and figured out that the main raw materials, machines, products and
customers are shown in Table 1-1. The organization chart is shown in Figure 1. By
the way, they have discussed about the roles of departments that played are classified
into the management activity center, the supporting activity center and the direct
activity center, shown in Table 1-2.

Figure 1 Organization Chart

Next, Mr. Wu requested each department to conduct internal discussions based

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on the information required by AVM, and submitted the information before the
deadline. The information provided by each department is as follows:

2.1 Accounting Department

The accounting department reclassified the company's resources from traditional
financial accounting expense items to AVM resource items (Table 1-3, 1-6), and
listed them separately according to the nature of each cost and the cause of
occurrence.

2.2 The function of Departments

The CEO office is responsible for the affairs and help various departments to
make decision by CEO and special assistants; the operation supporting departments
are including the general affair department, the accounting department, the human
resource office and Information system department, responsible for the company-
related accounting, informational and personnel affairs; the production department is
managed by the manufacturing manager and his assistants who support the following
2 section. The hand-opening umbrella production section (H_Goods Production Sec.)
and the automatic umbrella production section (A_Goods Production Sec.) have 11
and 6 employees respectively; the sales department is managed by the sales manager
and four staffs to deal with four clients (N_customer, C_customer, S_customer,
E_customer); the procurement department Managers and assistants are responsible
for the purchasing affairs of company. The employee and floor area of company’s
department are shown in Table 1-4.

2.3 Direct Activity Centers and Activities

iSVMS Umbrella Manufacturing Company is open for a total of five days a
week, with two days off each week. The working hours of the day are from 9 am to 6
pm and the lunch break is 1 hour. Therefore, the normal working hours per day is 8
hours. As integrated in Table 1-5, the operating value chain of the iSVMS umbrella
manufacturing company starts with the sales department for business contacts (in

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order to make the company’s products visible to the market, the sales department’s
personnel must often negotiate with major four distributors), the operation is related
to the working time (table 1-11).
After obtaining the order, the procurement department will then purchase
materials and provide the materials (parasol cloth, umbrella cloth, hand-opened stand,
automatic stand, and cover) needed to make the umbrella. This operation is related to
the times of purchases (table 1-11). After obtaining the materials, the manufacturing
department conducts the incoming inspection, which is related to the working hours
(table 1-11).
After passing the quality inspection, the production department’s sections then
starts production. The manufacturing steps are cutting → sewing → assembling →
packaging. The steps are described as follows:

Business Procurement Incoming Cutting Sewing

Contact of Material Inspection Activity Activity

After-sale- Outgoing Packaging Assembly

service Inspection Activity Activity

2.3.1 Cutting Activity

♦ Manpower: 2 persons working for hand-open products; 1 person working for
automatic products.
♦ Machine: 1 cutting machine operated for hand-open products; 1 cutting machine
operated for automatic products.
According to the requirements of the customer’s order, the required materials
are cut out. The cutting machine used by the hand-open goods belongs to the old type
and can cut up to 120 sheets a day; the cutting machine used by the automatic
products is a new type of machine, which can cut up to 240 sheets a day. The
occurrence of operating cost is related to the cutting quantity. Re-cutting operations

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may occur in both manufacturing sections, and the cost of operations is related to the
number of re-cutting. Shown in Table 1-12, 1-13, 1-14.

2.3.2 sewing activity

♦ Manpower: 2 persons (hand-open products); 1 person (automatic products).
♦ Machine: 1 sewing machine (hand-open products); 1 sewing machine (automatic
products).
Trim the cut fabric with burrs, sew the umbrella edge and sew side strips on the
umbrella surface. The sewing machine used by the hand-open goods belongs to the
old type and can sew up to 100 sheets a day. The sewing machine used by the
automatic products is a new type of machine that can sew up to 180 sheets a day. The
occurrence of operating costs is related to the number of sewing. Re-sewing
operations may occur in both sections, and the cost of operations is related to the
number of re-sewings. Shown in Table 1-12, 1-13, 1-14.

2.3.3 Assembly Activity

♦ Manpower: 4 people (hand-open products); 2 people (automatic products).
♦ Machine: 1 assembly machine (automatic products).
Finally, the sewn semi-finished product and the stand are assembled, and the
hand-open goods are assembled only by manpower. The daily production capacity of
assembly can be up to 80 pieces. The automatic products are assembled using an
assembly machine, and the daily production capacity can assemble up to 150. The
occurrence of operating cost is related to the assembly quantity. Reproduction
operations may occur in both sections, and the occurrence of operating costs is
related to the amount of reproduction. Shown in Table 1-12, 1-13, 1-14.

2.3.4 Packaging activity

♦ Manpower: 2 persons (hand-open products); 1 person (automatic products).
♦ Machine: Packaging machine (both products shared)
The packaging is carried out according to the requirements of the customer's

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order. The hand-open good production section and the automatic good production
section share the packaging machine. The daily production capacity of packaging can
be up to 300 sticks. The occurrence of operating costs is related to the packaging
quantity. Shown in Table 1-12, 1-13, 1-14.

2.3.5 Business Contact & After-sale-service activity, Traveling expense

After the packaging is completed, the manufacturing department need to conduct
the final outgoing inspection. This operation is related to the operation time, shown in
Table 1-12, 1-13, 1-14. If any defects are found during the inspection process, it will
be returned and reproduction (re-cutting, resewing, reassembly). After the order is
completed, the sales department will ship and continue to provide after-sales service.
This operation is related to the operation time.
Finally, CEO Wu and the sales department determine the service cost drivers for
individual customer costs so that the costs can be attributed to the products they
purchase. The resource "traveling expense" and the activity "business contact" use the
goods sales amount as their service cost driver. The activity "after-sale service " use
sales volume as the service cost driver. Shown in Table 1-19.

After finishing the collection of the above data, the AVM team believes that
there is enough information to build the AVM basic module data. In order to insert
the actual figures to design and simulate an AVM system, Mr. Wu also asked all
departments to start collecting actual monthly data.

3. Period information
3.1 Company resources
The resources of iSVMS Umbrella Manufacturing Company in March, April
and May are shown in Table 1-6.

3.2 Resource Drivers

In the resource item, the number of floor area in the activity centers is used as

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the resource drivers of utilities (for general use) and depreciation expenses (for public
equipment). Table 1-4 is for related information.

3.3 Management activity center

The time of CEO office spent in each department in March is: 12.5% for the
operation supporting department; 25% for the production department; 12.5% for the
hand-open good manufacturing section; 37.5% for the sales department; 12.5% for
the procurement department.
CEO office held several meetings with the sales department during March to
discuss the sales strategies of newly developed customers, so the proportion of time
spent was also high.
The "production department" of the activity center only has the hand-open good
production section in March, so its allocation value is 100%. Other month related
information is shown in Table 1-7.

3.4 Supporting Activity Center

The "Operation Supporting Dept." assigns values to the number of people in
each department. The data in March are: 13 people in the hand-open good production
section (including the production department); 5 people in the sales department; 2
people in the purchasing department. Related data for other months is shown in Table
1-8 below:
The cost of the supporting activity center can only be allocated to the direct
activity centers (ie, hand-open good production section, automatic good production
section, sales department, and procurement department).

3.5 Normal capacity and actual capacity

The iSVMS umbrella manufacturing company works 8 hours a day. Working 5
days a week is the basis for measuring normal production capacity. The company's
normal production capacity is shown in Table 1-9.
The actual performance of daily operations of iSVMS Umbrella Manufacturing

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Company is recorded in the form of Time Sheet, as shown in Table 1-10.

In addition to time drivers, CEO Wu also wanted to know other drivers to trace
cost of some activities. He designed various forms and collected the data for various
drivers, as shown in Table 1-11 and Manufacturing order driver value information in
Table 1-12, 1-13, 1-14 for three months.

3.6 Manufacturing order

We assume the manufacturing orders (M.O.) of iSVMS are all completed in the
month when they are assigned, and there is no inter-period situation. The tables 1-15,
1-16, and 1-17 are the number of manufacturing orders assigned and expected to
complete in each month.

3.7 Purchase (used) material quantity and amount

The policy of iSVMS umbrella manufacturing company to purchase raw
materials is Just-in-time, to place orders directly with suppliers before production,
and the suppliers send them directly to factory. Therefore, the purchase amount is
equal to the used amount. The purchased (used) materials in each month are shown in
Table 1-18.

3.8 Sales volume and sales amount

Since the patented hand-open umbrella manufactured by iSVMS Umbrella
Manufacturing Company has a certain market share in the market, and at the same
time, it has signed a monthly stable and fixed quota supply with customers, so the
sales volume in March, April and May are the same. The sales volume and amount of
each month are shown in Tables 1-19.

With the above information, iSVMS Umbrella Manufacturing Company can

begin to calculate the three-month period data. After completing the calculations of
cost allocation (table 2-1 ~ 2-9) and creating the report of product and client income
statement (table 2-10 & 2-11), the report on five categories of resources of direct

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activity center (table 2-12), the report on unused/overused capacity (table 2-13), and
the report on activity attribute cost (table 2-14), CEO Wu can also discuss the
following issues with variate departments’ managers:
♦ Are the cost and price of all products correct?
♦ Which current clients are making money and which ones are losing money?
♦ What activities can be improved from R&D to after sales?