Activity based costing and an application in automotive industry

The study is dedicated to hadling increased overhead cost and measuring and improving process cost. Companies have traditionally accomplished controlling goals by allocating overhead to products on the basis of direct labor utilization. Products with more direct labor received more overhead, regardless of how many overhead services they actually consumed. All products were assumed to consume overhead in the same proportion -a safe assumption when the majority of costs were direct labor and direct material. The proportion of overhead cost to direct cost has increased dramatically in recent years as a result of increased product complexity and the application of industrial automation and flexible manufacturing systems. An increase in the service-related component of manufacturing has also driven increases in overhead. Investment in technology continues to decrease the need for direct labor while increasing the overhead component of cost. The distinction between direct and indirect labor is becoming blurred with the formation of flexible work teams. As products become more complex, significant resources become necessary for engineering development, sales promotions, and after-market customer support. Each product consumes these expensive overhead services in different quantities. Because traditional accounting systems do not allocate overhead activities based on usage, costs become distorted. Activity based costing provides operating managers with improved and analysis reporting capabilities. ABM provides information for managing activities using ABC data and other tools to achieve continuous improvement. ABM is a method for not only reporting costs but also for managing them. With ABM data, teams are empowered to re-engineer business processes, to identify waste, to reduce cycle times, and to accomplish these tasks profitably. Keywords: Activity Based Costing, Activity Based Management