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1
Need of ABM in HP
The greatest reason HP moved to ABM was its traditional labor
based system. It was not meeting expectations of both the costing and
performance measurement systems. In addition to that, the primary method
3
the key aspects of ABM, the report restricts itself to the ABC accounting
methods of one of the manufacturing divisions of the company: Roseville
Network Division. The division is a high mix and low volume operating
assembly. The product line has about 250 products with each of them having
multiple options, which makes the number of items up to 1100! And yet the
focus was on the individual products and not the manufacturing process.
In order to build the new cost accounting system of Activity based
Management, the first and foremost step was to gain the perspective of the
manufacturing department and identify each and every element of the
manufacturing process: all the sub processes and the
activities
involved
Figure 2: Cost Allocation for the production of a board through ABC
within
them.
The
goal was
to transform the manufacturing into a process environment, to create a
continuous flow without any interruptions by set up or configuration changes.
Employees from manufacturing finance and information systems were
included in the whole transformation process. Every existing procedure was
scrutinized and details were collected about them. Data (how the process is
carried out, how much time does it take) about the processes was the most
essential need for building the activity based costing methodology. The
system was aimed at accurately reflecting manufacturing costs, use data
that manufacturing department could collect easily, and meet the legal and
practical needs of the firm.
The old traditional system allocated the overheads based on the direct
labor hours required for the processes. The manufacturing overhead formed
30% of the total product cost, thus it made more important to identify how
the end product used the things they included. Costs had to be allocated
according to the things that were really driving them. The old system had
three categories of costs: direct material, direct labor, and manufacturing
overhead. The new system changed that to: procurement overhead,
production overhead, and support overhead.
driver. The
was
to
the
next step
determine
Figure 3: Costing a PC board
actual cost drivers for each of the manufacturing activities. This was done by
just getting information as much as possible through the people working on
the manufacturing floor. It was found out that cost accounting using the cost
drivers was much more accurate than the previous old traditional system.
Thus the new cost accounting method of activity based costing improved the
conditions of the HP division. This was then refined over a period of time with
much more inputs added to it to make it more efficient.
References
I.
II.
III.
IV.
V.
VI.
http://www.cimaglobal.com/Documents/ImportedDocuments/ABM_techrpt_04
01.pdf
http://www8.hp.com/us/en/hp-information/index.html
https://en.wikipedia.org/wiki/Activity-based_management
https://en.wikipedia.org/wiki/Hewlett-Packard
https://hbr.org/1990/01/how-hewlett-packard-gets-numbers-it-can-trust
http://www.ame.org/sites/default/files/target_articles/92Q2A2.pdf