Activity Based Management at Ws Industries

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Activity Based Management at W.S. Industries

Business Process Improvement

Group 13

Sangbarta Chakraborty         1511431

Shubhankar Shakhari         1511436

Subhojoy Maji                 1511134

Vinit Kumar                         1511442

Sreejith Satheesh                1614059

Kartik Aggarwal                1614027

1. What are the main differences between the old cost system at W.S. Industries and the new ABC system?

W.S. Industries product portfolio included a whole gamut of electrical products such as porcelain insulators, transformers, surge arrestors, reactors, linetraps etc. Insulators were the most revenue (60%) generating product. Even Insulators had three variants -Disc (50%), hollow (35%) and solid core (15%). Further, the company had production units in multiple locations such as Chennai, Bangalore, and Pondicherry.

W.S. Industries used traditional costing system for accounting purposes. Under traditional system total cost of the companies were grouped into four categories: raw material, manufacturing overhead, administrative overhead and selling overhead. Further, all the manufacturing plants categorized either processing or assembly.

Now, because of the complex product mix in multi-factory system, the company operated under higher idle time, set up time, high inventory level. Under traditional system at W.S. Industries, the costs of all the different product variants manufactured will be accumulated under the four cost categories and per unit cost will be determined. Hence, for W.S. Industries overhead costs will be applicable proportional to volume of the product manufactured (for processing centers) or labour hours (for assembly centers). Since low volume product requires more resources than high volume products, under traditional costing system, low volume products will be under costed and high volume products will be over costed. So, a high volume item like hollow insulator will be over costed and low volume item like solid core insulator will be under costed. Hence, with traditional costing system it is difficult to ascertain why the cost of W.S. industries have gone high. The current costing practice also led to problems with pricing in the marketplace leading to WS industries losing a few tenders.

With Activity based cost system the various sub-activities were identified and bundled into 4 activities- internal movement, inspection, processing and process support. While determining the individual cost of the product, only the cost relevant to the product would now be considered. Hence, the costing will be far more accurate for individual product variant. A noticeable difference between traditional costing system and ABC is that the former uses unit cost driver like volumes or labor hours whereas ABC uses non-unit cost drivers. Because ABC is not dependent on the number of a number of units, it provides management with very significant insights about the cost structure of the company. Further, instead of the physical volume, ABC systems uses the expenditure of the resource to give a more accurate picture of organizational spending in each activity.