Global Electronics
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