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Until recently, Xu Ji Electric Co Ltd was a typical stateowned Chinese enterprise manufacturing electrical products such as relays. From an accounting point of view, this implied a manual book-keeping system which was primarily designed to meet external reporting requirements. This was to the detriment of management accounting information, and product costing was not accurate. The company underwent several changes under Chinese free market developments. If the company were to compete and introduce new products, it needed to invest in more modern production control and testing methods, increase its marketing, increase its research and development, as well as improve its costing system. It decided to adopt an activity-based costing (ABC) system which would trace labour costs directly to products and customer contracts and allocate manufacturing overheads. It took some years for Xu Ji Electric Co Ltd to get the ABC system up and running, but the eventual result was monthly ABC cost reports in some divisions. For example, at the Relays Division which manufactures many types of electrical relay, these reports allocated costs like after-sales service, technical support, warehousing, marketing and production planning to products and customer contracts. At the Relays Division, the activity cost centres included activities such as wiring, labelling, installation, electrical testing and materials management. The Relays division operated in a highly competitive and saturated market and the resulting ABC system assisted the division managers in obtaining more accurate costs and improving divisional performance.
Questions:
1 Do you think Xu Ji Electric Co Ltd is a good example of a business where ABC might be useful?
2 Can you think of some activities of Xu Ji Electric Co Ltd other than those stated above?