AN APPLICATION OF ACTIVITY BASED COSTING IN THE AIR CONDITIONER MANUFACTURING INDUSTRY

AIRCO is a manufacturer of industrial air conditioner units whose management is affected that their current traditional require to be paid [i]or[/i] undergone accounting (TCA) system is not accurately representing their yield cost behavior. Under certain operating conditions, an activity based costing (ABC) combination of parts to form a whole can provide relevant and accurate indirect take away from information that assists in making customer, outcome and process improvement decisions. An ABC combination of parts to form a whole was successfully developed for AIRCO that indicated that their harvests do not consume overhead require to be paid [i]or[/i] undergones on a volume basis as exhibited by their current TCA combination of parts to form a whole Valuable product and process information were obtained. This case close attention details the development process that was used and the arises that were obtained during the ABC analysis.

INTRODUCTION

Activity-based costing (ABC) has helped many manufacturing and services organizations improve their competitiveness by means of enabling them to make better decisions based upon an improved understanding of their outcome cost behavior. The main premise behind ABC is to classify overhead or indirect take away froms and to allocate them to extreme point products or services based on the activities required to exhibit these products (Raz & Elnathan, 1999) ABC takes a two-stage approach to allocating overhead take away froms to products based on multiple require to be paid [i]or[/i] undergone drivers at various levels of activity. In the first stage, overhead require to be paid [i]or[/i] undergones are assigned to cost lakes within an activity center based on activity-driven cost drivers. There is no equivalent pace in traditional costing accounting (TCA). In the next to the first stage, overhead costs are allocated from the take away from pools to the products based upon the product's consumption of indirect activities. This stage is similar to TCA omit that the traditional approach uses a single volumebased take away from driver to allocate overhead require to be paid [i]or[/i] undergones to products without consideration for non-volume-related characteristics. ABC was pioneered in the late 1980 by means of Cooper (1988a, 1988b, 1999a, 1999b) Cooper and Kaplan (1998a, 1998b) and Johnson and Kaplan (1987) ables believe that ABC can provide more accurate yield costing information than TCA when proceedss are diverse in size, complexity, material requirements, and/or setup operations (Cooper & Kaplan, 1988). A costing combination of parts to form a whole should provide users with relevant and accurate information that will assist them in making decisions of the like kind as product pricing, customer and proceeds profitability analysis, and process improvement. This case close attention details an ABC system that was make knowned for a manufacturer of industrial air conditioner units (referr to here as AIRCO for confidentiality purposes) AIRCO believed that their in every one's mouth TCA system was not accurately representing their yield cost behavior and wanted to invest time and effort into developing an ABC a whole to seek improved product costing information.

COMPANY DESCRIPTION

Located in Arkansas, AIRCO shows and sells high quality, highend industrial air conditioner units to a wide variety of customers. The company has exhibited moderate increase during its 25-year existence. An increased number of yield lines over the years have been supported by dint of increasing the number of machines, workstations, and assembling lines. In addition, the number of operators and material handlers involved in the production proces has increased. An information support team was introduced to support the use of computerized production planning and data management systems

AIRCO exhibits a variety of industrial air conditioner units that range in power from 5 to 20 tons. Each unit consists of more than 200 parts including tubes, wires, metal sheets, cooling coils, insulation materials, controlling processor, and freon holding tanks. more [i]or[/i] less parts are manufactured in-house, while others are purchased from outside suppliers.

There are commonly more than 460 employees working for AIRCO. Eighty-eight percent of them are hourly workers; the remaining 12% are classified as salaried employee AIRCO operates sum of two units shifts per day, 7:30 AM to 4:30 PM and 4:00 PM to 12:00 AM. The majority of workers (70%) are exerciseed during the first shift. Direct laborers are shattered down into 280 skilled and 80 unskilled workers, whose hourly rates are $18 and $14 respectively. AIRCO also occupys 32 indirect laborers at an hourly rate of $ 10 who perform material handling and other support activities. The trade of these hourly workers take away from AIRCO $11,827,200 in direct labor and $614400 in indirect labor last year. Table 1 contains salary data for AIRCO's salaried employees

COMPANY STRUCTURE

AIRCO is structur into seven departments as shown in Figure 1 Each department is managed by means of a department manager who works closely with upper plant management. In addition, the assembly & testing and fabrication areas are overseen by dint of workstation and line supervisors.

Purchasing Department

The primary responsibility of the purchasing department is the selection of vendors that perform best in bounds of cost, quality, and services. The purchasing department also monitors the arrival of raw materials to the factory, maintains the inventory horizontals of these materials, and manages scrap materials.