Global Electronics

INTRODUCTION

The purpose of this case is to allow the reader to identify the behavioral variables that can determine the success of implementing an ABC system. There are several case studies that have been performed to examine technicalities in regards to ABC models and how profitability can be determined by the product, customer, or service. This case study focuses on how behavior can impact implementation because of the evidence that ABC has had high implementation failure rates and these failures have occurred mainly due to behavioral variables. We will discuss the background of Global Electronics, Inc. and their situation and then we will expand upon the signs that reveal that a costing system is not supporting management decision making. We will discuss the differences between traditional volume-based cost systems and ABC systems in terms of their ability to support decision-making in addition to the steps related to designing an ABC model.

BACKGROUND

Global Electronics, Inc. (GEI) is headquartered in Sarasota, Florida. The company designs, manufactures, and markets power semiconductors and analog, digital, mixed-signal, and radiation-hardened integrated circuits for signal-processing and power-control applications. The products that Global Electronics produces are used in several functions such as antilock braking systems, air-bag systems, computer keyboards, modems, disk drives, and cell phones. In layman’s terms, GEI produces a variety of electronic goods such as power and logic commodity products to analog and digital specialty products. Global Electronics has three fabrication facilities located in the U.S. that employs a total of 2,300 people and the company also employs 4,000 employees at an assembly and test facility located in Malaysia. There are two phases to the manufacturing process that GEI uses as alluded to above: fabrication as well as assembly and test. Fabrication has four main processing procedures including photolithography, etch, diffusion, and circuit probe. Assembly and test has six processing procedures including wafer saw, die attach, wire bond, mold, solder dip, and final inspection. The manufacturing process as a whole evolves to be more technologically diverse and intense every year. The company’s customer base exhibits a high level of purchase volume diversity inside each respective product line. Starting in 1999, GEI has had several serious issues affecting the company. GEI has had a loss in profitability with operating losses as much as $100 million on estimated sales of $650 million. Management believes that the profitability problems are stemming from the company’s standard costing system that was in place at the time. Management felt that the standard costing system was not accurate and could not identify which of the company’s products were profitable from the ones that were not. Compounding GEI’s financial problems is the lack of understanding regarding product profitability, an incorrect product mix, and poor marketing and pricing decisions. The industry that GEI is in is characterized by increasing global competition, decreasing product life cycles, product proliferation, and exploding technological capability. This combined with internal problems led GEI to obtain a new president and a new controller with the hopes of strengthening the company’s position in the market and improving its financial performance.

Standard Cost System

Before the attempt to implement an ABC system, GEI had assigned manufacturing overhead costs to products based on direct labor dollars. The predetermined manufacturing overhead had increased from 300% to 600% of direct labor, but as the manufacturing process became more technology-driven, there was concern that high-volume products and less complex products were being overcosted and that low-volume products that were usually more complex were being undercosted. GEI was having a hard time competing with competitors that were offering low prices on high-volume commodities, but they did well in the high-margin, low-volume specialty business. The inability to compete in commodities was creating a finished goods inventory that continued to grow. At the same time, producing low-volume specialty orders added complexity to the manufacturing process that was not revealed in the standard cost system. At one time GEI had two sets of cost data, Product Unit Cost (PUC) that used time as a cost driver and direct labor dollar, where managers could choose the data that made their departments look best. The problem was that managers spent a great deal of time conflicted about which costs were actually correct instead of dealing with the true problems at hand. This led the company to discard of the PUC system and an executive as well as a steering committee was developed to create a solution where ABC was adopted.

Activity-Based Cost System

Chris Richards, Director of MIS, headed the implementation process of the ABC cost system. In this system resource costs are assigned to activities and then volume and non-volume related cost drivers are used to assign activity costs to products (first phase). Richards had a background in ABC and along with an academic consultant and an external consulting firm; he gained the support of top management. The steering committee, of which Chris Richards was chairman, was formed and given the task of overseeing the ABC implementation. The committee was formed of members from finance, product engineering, operations management, marketing, plant management, and the external consulting firm. The steering committee formed a project team of MIS and finance personnel that traveled to each plant to instill ABC techniques. These activities consisted of defining activities, assigning resource costs to those activities, selecting activity drivers, determining driver quantities, and calculating ABC rates. The steering committee and the project team had the complete backing of the president, controller, and the executive committee. The short-term goal of the project was to develop product cost accuracy and create the best product mix quickly so as to improve the company’s poor financial performance. The long-term goal of the project was to progress to using Activity-Based Management (ABM). This meant that ABC cost data could be used to aid product engineers plan the cost impact of product design changes. In addition, the data could aid process engineers and operations managers identify and prioritize process cost-reduction opportunities.

The project team decided to focus on calculating a complete