Page 140 - DMGT514_MANAGEMENT_CONTROL_SYSTEMS

Unit 6: Strategic Planning for Management Control

Notes
Example: In procurement, the cost driver may be the number of orders placed, for
internal transportation, the number of parts moved, for product design, the number of the
different parts in the product and the production control, the number of set ups.

Notes In earlier days, factories tended to produce different products. Cost was labour-
dominated (high labour cost relative to overhead) and products tended to differ less in the
amount of support services they consumed. Thus, the activity basis for overhead allocation
was not likely to result in product costs much different from a simple volume - driver
basis tied to labour cost.
Today, labour cost in most companies is not only less important but is viewed less and less as a
cost to be varied when production volume varies. Indirect cost accounts for dominant part of
cost in many companies. Advocates of ABC maintain that a meaningful assessment of full cost
today must involve assigning overhead in proportion to the activities that generate it in the
long run.

6.3.3 Use of ABC Information

ABC is a strategic planning tool. ABC may provide useful insights.

Example: It may show that complex products with many separate parts have higher
design and production costs than simpler products; that products with less volume have higher
unit costs than high volume products; that products with many set ups or many engineering
change orders have higher unit costs than other products; and that products with a short life
cycle have higher unit cost than other costs. Information on the magnitudes of these differences
may lead to changes in policies relating to full line versus focused product line, product pricing
policies, make or buy decisions, product mix decisions, policies on adding or deleting products,
elimination of non value added activities and to an emphasis on better factory layouts and
simplicity in product design. Example: Hewlett Packard’s successful products, new models of
HP 3000 and HP 9000 mid range computers, benefited for better cost information. When ABC
showed that testing, new design and parts were extremely expensive, engineers changed their
plans to favour components that required less testing, thus lowering costs. Other companies
have realized significant cost savings as a result of reducing complexity.

Self Assessment

Fill in the blanks:
6. The ................................. with suppliers should be managed so that both the firm and its
supplier may benefit in lowering costs, increasing value or both.

7. Reducing the number of separate parts and increasing their ease of manufacture might
increase efficiency of the design portion of the ................................. .

6.4 Strategic Planning Process

In a company that operates on a calendar year basis, the programming process is completed just
prior to the preparation of the annual budget. The process involves the following steps:

LOVELY PROFESSIONAL UNIVERSITY 135