Introduction

Volkswagen is a German automobile manufacturer

headquartered in Wolfsburg, Volkswagen is the top-selling and
original marque of the Volkswagen Group, the biggest German
automaker.
Volkswagen has three cars in the top 10 list of best-selling cars of
all time compiled by the website 24/7 Wall St: the Volkswagen
Golf, the Volkswagen Beetle, and the Volkswagen Passat. With
these three cars, Volkswagen has the most cars of any automobile
manufacturer in the list that are still being manufactured.
Volkswagen ranks first in spending the most money of any
automaker on research and development as of 2011
Volkswagen's story is not unlike many stories in the automotive or
manufacturing industries of the 1990s. Massive changes in
technology and competition have caused the company to take
drastic action to continue being profitable and prosperous, and to
satisfy ever-increasing expectations from the corporate head
office. These actions range from aggressive pricing and selling
policies to cost cutting and downsizing. Activity-based costing has
helped management make tough decisions, with a degree of
clarity that otherwise would not have been possible.
Traditional Costing or ABC?
The Company uses Activity Based Costing approach and not
Traditional costing.
Shift to ABC Approach
The summer of 1993 saw the reawakening of ABC at VW.
Management needed accurate cost information which was not
being provided by the traditional accounting methods.

A full ABC implementation looked at the whole organization or

location and takes into account all of the activities performed. It
aims to fully reconcile to the general ledger, and trace all costs to
cost objects (products, services, customers, sustaining costs). A
full implementation gives far more detailed information than a
pilot project, and it is usually far more quicker to implement,
organization-wide. There are efficiencies in data collection and
model building that greatly speed up the process. As the people
at VW had already tried a pilot project, they were confident the
information would help them and, so, launched right into a fullblown ABC implementation.
Practical difficulties
The road to implementing activity-based costing and
activity-based management may be long and hard. But for
Volkswagen Canada,
it was a road worth traveling in its quest to become the ultimate,
cost-conscious, world-class, customer-focused supplier.
An ABC project was first undertaken in 1991 in the die casting
area. The initial results were encouraging enough to continue the
project and expand it to the full plant. The results of this initial
project came as a large surprise to some and a validation of
already known, but unproved, results for others. "The initial study
showed VW that while the die cast area in general was profitable,
over 80 per cent of the products were either losing money or
contributing very little to the operating results. There were a
couple of parts with very high revenues that brought up the
results of the whole area," explains John McIlmoyle, one of the two
VW employees to be positioned as full-time ABC analysts at the
beginning of 1994. This revelation brought a whole set of issues
to management's attention that, before, were unknown.
ABC is all about giving management information it can use to
make changes. Activity- based costing cannot make the changes
itself. What VW lacked, when this information was presented, was
a culture and an urgency to face these issues and tackle the

problems in the die cast area. Back then, the focus was on
expanding the wheel business and as long as the other areas
were not losing money, they were not a priority. The net result
was that nothing major changed, and the ABC information was
essentially shelved. The leader of the project became very busy
with other issues and, without a champion, the project went to
sleep.
The revitalization of activity-based costing coincided with a newly
installed management team and the decision to re-engineer the
major business processes of the company. As the ABC team
worked away at building the ABC structure, the re-engineering
team worked away at redesigning the plant's business strategies
and processes. Preliminary ABC results were passed on to the reengineering team which helped it in its decision making, and gave
it a taste of the type of information available from an activitybased costing system.
As compared to the first attempt at ABC, which started with a
pilot project, this incarnation of ABC began as a full- blown
implementation. Pilot projects generally look at one small part of
an organization. They look at one product line or one service area
along with the shared resources of the organization such as
finance, information systems, and sales and marketing. Pilot
projects are generally small in nature and allow management to
see if ABC will work before launching into a big, long-term project.
A full ABC implementation, instead, looks at the whole
organization or location and takes into account all of the activities
performed. It aims to fully reconcile to the general ledger, and
trace all costs to cost objects (products, services, customers,
sustaining costs). A full implementation gives far more detailed
information than a pilot project, and it is usually far more quicker
to implement, organization-wide. There are efficiencies in data
collection and model building that greatly speed up the process.
As the people at VW had already tried a pilot project, they were
confident the information would help them and, so, launched right
into a full-blown ABC implementation.

Benefits of Adopting ABC

Activity-based costing provides valuable core information that
helps management make key decisions around pricing, product
costing, and purchasing. This is only a first step in the use of ABC.
By extending the ABC analysis, Volkswagen has been able to
transform ABC into full activity-based management (ABM). It has
been able to use the information to support total quality, process
re-engineering, cost of quality, resource utilization and much
more. While not the only factor, it is hoped that the ABM
information will help VW to achieve its goal of becoming the
ultimate, cost-conscious, world- class, customer-focused supplier.

The ABC information and its many uses have proved invaluable to
many functions and improvement initiatives, in the end, the ABC
information simply helps managers and all employees do their
jobs better and with more certainty. It provides accurate, precise
data that decision makers can use. While standard costing gives
you detailed but incorrect product information, activity-based
costing gives you accurate and detailed product, customer,
process and activity information. It tells you not only what your
organization does, but also, how well it does it.

The ABC system is used extensively in Volkswagen's processimprovement work.

VW uses a tool named KVP2 (Kontinuierliche
Verbesserungspozess) to drive all of its process improvement
work. KVP2 is a form of continuous improvement whereby a group
of employees, knowledgeable about a particular process, will
spend a week at a time delving in to process in an effort to
improve it.
This ensures that the team has accurate cost information.
Process-improvement projects which lack costing information tend
to be unfocused exercises which concentrate on perceived
problems. The cost and economic data provided by ABC ensure
the process-improvement team concentrates on what is
important, and allows it to prioritize its improvement targets.
Volkswagen is not continuing with traditional costing any more it
has completely shifted to Activity based Costing.