Changes in Manufacturing Process and Costs Due to Automation and Applying ABC to Small Businesses - Case Study Example

Depending on the level of automation the impact on the company workforce falls on the employees of the company. Generally, the existing employees take a lot of time in adapting to the changing working condition of the company. This may result in the employees losing their job and being replaced but such employees who have prior knowledge about the automation process of the firm.

4. The automation process of the company may result in the improved quality of the product which can be made affordable at a cheaper price than before. The automation process is both repeatable as well as precise which ensures the manufacturing of the product with the same specification, thus leading to the high-efficiency level of the company.

5. The overhead costs related to the direct material, direct labor, and other manufacturing costs get affected after the implementation of the automation process to the extent that initially there is a rise in the cost because of the conversion to the automated process. But after reaching the break-even point of the company’s per-unit cost of the product seems to decrease with time in terms of all manufacturing costs except labor. The labor cost is usually high because employing skilled labor is essential for manufacturing companies with automated processes. Moreover, with the further updating of the machinery of the company; the cost of labor increases in the process of training as well.

6. The automation effect may tend to increase the fixed and variable proportion of the company. This rise may usually come from the increase in technological up-gradation and the increase in the salary of its employees.

7. The upgrading of the manufacturing process may result in the product being available to the customers at a low price than usual because the adaption of the new technology will help the company in producing better quality products at affordable prices.

8. The bottom-line of the manufacturing company can be greatly affected as of now for the process of upgrading. But in the future, the company has many scopes of improving its bottom-line by increased revenue and efficiency.

Case Study 2:
Applying ABC to Small Businesses
1. According to Hicks the reason for the avoidance of the ABC system of costing by the small enterprise is that they have a concept that the ABC system of costing was only meant for the large enterprises as the cost involved in the implementation of the same was huge. But through the theory placed by Hicks, it can be said that the implementation of the ABC system of accounting is beneficial for all kinds of business at a minimal cost. Even the clarity in the understanding of the ABC accounting led to its avoidance.

2. Before adopting the ABC system of accounting the small enterprises based their manufacturing cost of the products by the use of plant-wide costing rate on the basis of the direct labor. Apart from this the non-manufacturing costs of the company were computed by assigning the cost to the general and administrative rate which was computed as a percentage of the total cost of the company. Thus the manufacturing company operated on the basis of the direct-labor-based plant-wide measurement of cost.

3. The traditional cost adopted by the manufacturing company neither helped in elaborating the total labor cost as well as the general and administrative cost, so much so, that it failed to support its customer base.

4. As the calculation of the press hours and the labor hours could not be segregated hence the ABC team separated the rates under press operating costs based on press hours, cost of labor production on the basis of labor hours, and the cost of induction on the basis of the part’s weight. Even for the non-manufacturing products the manufacturing company created a separate cost model with a spreadsheet that calculated the cost based on the rates generated by the cost model.

5. After the implementation of the ABC accounting the sales of the company visibly increased thrice of its previous amount while the profit of the company rose by fivefold. The corresponding rise in the sales and profit of the company was due to the profitable mix of contracts which helped in reducing the actual cost of the company. The movement of the cost of the material movement was measured intricately such that the data related to the operational changes were justified.

6. Changes were noted by Hicks in the attitude of the management during the application of the ABC system of accounting. The management of the company measured the cost of the company in a uniform way. Adapting to the changes of the costing system the mental model being prepared by the managers has greatly benefited the organization as a whole (Hicks D. T., 1999). Read More