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ABC and other management tools

Anu Ghai was a new production analyst at RHI, Inc., a large furniture factory in North Carolina. One of her first jobs was to update the activity rates for factory production costs. This was normally done once a year, by analyzing the previous year's actual data, factoring in projected changes, and calculating a new rate for the coming year. What Anu found was strange. The activity rate for "maintenance" had more than doubled in one year, and she was puzzled how that could have happened. When she spoke with Larry McAfee, the factory manager, she was told to spread the increases out over the other activity costs to "smooth out" the trends. She was a bit intimidated by Larry, an imposing and aggressive man, but she knew something wasn't quite right. Then one night she was at a restaurant and overheard a few employees who worked at RHI talking. They were joking about the work they had done fixing up Larry's home at the lake last year. Suddenly everything made sense. Larry had been using factory labor, tools, and supplies to have his lake house renovated on the weekends. Anu had a distinct feeling that if she went up against Larry on this issue, she would come out the loser. She decided to look for work elsewhere.

Requirements

1. Besides spotting irregularities, like the case above, what are some other ways that ABC cost data are useful for manufacturing companies?
2. What are some of the other options that Anu might have considered?

Solution Preview

1. Besides spotting irregularities, like the case above, what are some other ways that ABC cost data are useful for manufacturing companies?

ABC can create a "cost per activity"? as a benchmark for comparing the cost to replace the service from outside the organization. For instance, if forklifts cost \$45 per hour to operate and move materials from the loading dock to the staging area, what would the vendor charge to deliver the materials on rolling stages that do not require forklifts at all? The predetermined overhead rate for forklifts gives managers an idea of what costs might be saved and therefore bring to their attention ideas about how to ...

Solution Summary

Your tutorial is 360 words and gives three ideas on activity based costing and three ideas for Anu. Anu's shirking of his professional responsibility is discussed.

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