Global Electronics Inc. Case Analysis
Global Electronics, Inc. (GEI), has its main office in Sarasota, Florida and the company employs about 2,300 people at its three U.S. fabrication facilities (located in Huntsville, Alabama; Evansville, Indiana; and Reading, Pennsylvania), and has 4,000 employees at its assembly and test facility in Kuala Lumpur, Malaysia. Discrete power semiconductors and analog, digital, mixed-signal, and radiation-hardened integrated circuits for signal processing and power-control applications are at the heart of what GEI designs, manufactures, and markets. This case will examine the warning signs that existed within GEI to implement ABC as a possible solution and why ABC is a better solution when these warning signs exist. The implementation of the ABC system at GEI will also be highlighted as to degree of success, what GEI did well and what GEI could have improved upon. The key behavioral and technical factors that help or hinder a successful ABC implementation will also be examined. Recommendations for the improvement of the ABM system will be highlighted followed by an overall conclusion on GEI’s ABC system and continued implementation into Activity Based Mangement (ABM). Analysis (Question 1) What preexisting conditions (or warning signs) existed within Global Electronics to warrant considering ABC as a possible solution? When these preexisting conditions exist, why does ABC offer a better solution than traditional cost systems? The warning signs that existed within GEI to warrant ABC costing began “In 1999, GEI's profitability spiraled downward with operating losses reaching $100 million on sales of approximately $650 million, causing management concern about the accuracy of the company's standard cost system. There was a feeling that the standard cost system could not truly identify which of the company's products were profitable and which were not. The lack of an understanding of product profitability, a flawed product mix, and poor marketing and pricing decisions could have contributed to GEI's financial problems” (Brewer, Juras & Brownlee, 2003, para. 3). Other warning signs included “From 1994-1999, the predetermined manufacturing overhead rate had spiraled upward from 300 percent to more than 600 percent of direct labor. As the manufacturing process became more technology driven, management worried that high-volume products and/or less complex products were being overcosted and that low-volume products and/or more complex products were being undercosted (Brewer et al., 2003, para. 4). A product engineer observed , “…the logic product line, which is a mature high-volume product, is bearing a lot of the total factory costs, thereby making the new lower-- volume specialty products look cheaper. The perception is that we are doing well on all sides, except for logic, which looks marginally unprofitable” (Brewer et al., 2003, para. 5). Another preexisting condition was that, “GEI's product engineers intuitively understood the shortcomings of the existing labor-based standard cost system. For example, they knew that producing low-volume, specialty orders added complexity to the manufacturing process that was not reflected in the cost system” (Brewer et al., 2003, para. 6). A product unit cost system (PUC) was set but “rather than reconcile the difference between the PUC system and the direct labor-based standard cost system, both costs were tracked. With two sets of cost data available, managers could choose the figures that made their departments look best” (Brewer et al., 2003, para. 6). These conditions all led to why an ABC costing offered a better solution. The ABC costing system was a better solution to the standard costing system because “ABC systems assign resource costs to activities, and they use volume and nonvolume-related cost drivers to assign activity costs to products” (Brewer et al., 2003, para. 8). The ABC cost system would more clearly “define the...
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