Customer center

We are a boutique essay service, not a mass production custom writing factory. Let us create a perfect paper for you today!

Example research essay topic: Harvard Business Review Overhead Costs - 1,793 words

NOTE: Free essay sample provided on this page should be used for references or sample purposes only. The sample essay is available to anyone, so any direct quoting without mentioning the source will be considered plagiarism by schools, colleges and universities that use plagiarism detection software. To get a completely brand-new, plagiarism-free essay, please use our essay writing service.
One click instant price quote

... ass produced [ 12 ]. Order entry is more frequent. As product variety increased, order entry frequency did also. More specialized products for diverse markets means more customers entering orders for different products, more frequently.

Furthermore, such customization means that it is more difficult to produce large quantities for stock. Also, because the cost of holding inventories is prohibitive, more frequent orders are entered at the plant in response to JIT buying. Key costs are shifted away from manufacturing to marketing subsystems, but they must be captured and related to the products and lines that generate them. Distribution is expensive. As JIT shifts costs away from storage, it shifts them into distribution.

This may mean that transportation expenses increase or channel costs must go up to compensate dealers for holding inventory. These costs must be allocated appropriately if prices and profits are to be reflected accurately in management decision making. Selling is more costly. More customers and customized products mean more sales calls and sales expenses. In some industries, the cost of a business-to-business sales call now exceeds $ 300.

Such costs across product lines can easily eclipse direct labor expense in the factory and significantly impact profitability. Many companies are seeking to reduce costs by employing telemarketing and direct mail. Others are seeking more productivity from sales by using personal computers, "virtual" offices, and key account marketing. But these approaches may generate marketing costs as they shift them away from direct labor. These costs must be recognized in the cost accounting system. How Do the Changes Impact Costs?

The changes documented above have had a profound impact on the costs of operating a business in the 1990 s. Using a conventional cost accounting approach in today's environment may provide distorted information to management. This can result in incorrect decisions. The use of ABC, on the other hand, provides a way to reflect the contemporary business environment in a firm's accounting system. The exhibits below illustrate the physical changes on the plant floor and the market changes in the environment, trace these changes in the accounting system, and show how the costing approach can dramatically alter the apparent profitability of a company's strategies.

Two stereotypical products are displayed in Exhibit 2. The "traditional" product has high labor cost and a simple manufacturing environment. The "contemporary" product, reflecting the mid- 1990 s environment for many companies, has much less labor, lower volume, more change / turnover in manufacturing, and increased sales effort. The exhibit summarizes these general differences.

Exhibit 3 takes the product characteristics in Exhibit 2 and shows representative activities that these characteristics might entail. For example, the traditional product's higher sales volumes would lead to many units sold (23, 000) and fewer setups, i. e. , longer production runs. This is consistent with the business environment of the past.

The traditional product is labor intensive, five hours versus one hour for the contemporary product, and material intensive, $ 15 versus $ 13. 50. On theater hand, the contemporary product requires more setups, 18 versus nine, and engineering changes, 12 versus seven. The contemporary product's increased selling effort requires more sales calls and more advertising. The total costs of some departments providing the services are also shown in Exhibit 3. These costs, reflecting the different business conditions of the mid- 1990 s, are documented to develop a realistic model of the two types of operating environments. Total costs for the period are $ 4, 015, 000.

This information will be used later in comparing conventional cost accounting with ABC to show the potential impact of ABC. The information in Exhibit 3 is used to generate the costs of each product and the total costs under both the conventional method and the ABC method of allocating costs. Refer to Exhibits 4 and 5. In Exhibit 4, labor and material are derived from actual costs as usual. The contemporary product has much less direct labor, $ 12 compared with $ 60, and uses less material, $ 13. 50 versus $ 15. 00. Using the conventional (non-ABC) costing method, overhead costs are allocated by labor according to the formula shown in Exhibit 4, $ 68. 83 to the traditional product but only $ 13. 77 to the contemporary product.

This yields a total traditional product cost of $ 143. 83 per unit versus $ 39. 27 for the contemporary product. The development of costs using ABC is shown in Exhibit 5. Direct material and labor are the same as they were in Exhibit 4. Using ABC, overhead costs were distributed across products by the drivers, as explained in Exhibit 5.

In other words, rather than simply allocating costs based on direct labor, costs were allocated by the unique drivers identified in Exhibit 3. For example, the receiving department cost $ 61, 000 and received 950 shipments, as shown in Exhibit 3. Therefore, each receipt of materials cost $ 64. 21. The traditional product required 350 material receipts generating receiving costs of $ 22, 474. Since 23, 000 units of traditional product were sold, each unit sold generated $ 0. 98 in receiving costs.

Other overhead costs were allocated similarly to distribute total product costs of $ 4, 015, 000; each unit of the traditional product cost $ 105. 18. The per unit cost of the contemporary product was $ 88. 65. These costs are quite different from those of the conventional method in Exhibit 4. The dramatic impact on apparent profitability due to this change in cost allocation is shown in Exhibits 6 and 7 on page 30. Using conventional cost accounting methods with labor-based allocations, the traditional product's higher labor accumulated excessive overhead costs, such as engineering or sales, that it did not generate.

Instead of losing more than $ 548, 000 as shown in Exhibit 6, the traditional product would have generated net profits in excess of $ 340, 000 as shown in Exhibit 7. On the other hand, the contemporary product was undercharged for costs it incurred, generating an apparent net profit of more than $ 1 million, shown in Exhibit 6. However, when costs were charged to the products as they actually occurred using ABC, the picture was quite different as shown in Exhibit 7. The contemporary product's $ 1 million profit shrank to about $ 204, 000. Thus, ABC avoided a potentially erroneous decision to drop the traditional product and seek more business for the contemporary product. Exhibit 8 on page 30 summarizes these results.

The traditional product shows a significant decrease in costs using ABC rather than historic costing. The contemporary product, which required more support and service (changes, setup, sales calls, and orders), saw costs per unit increase to reflect these expenses. In this situation, ABC exposed the charges inherent in the 1990 s business environment whereas historic costing concealed them. Managerial Implications The business environment of the 1990 s is vastly different from that of the 1920 s when conventional cost accounting procedures were established. The primary difference is the decline of labor costs and the increase in overhead generated by shorter product-life cycles, product-line complexities, expensive new technology, and the other realities of today's business environment. As a result, the information necessary to make good decisions regarding products and markets can be obscured by conventional costing procedures.

Activity-based costing, a natural progression of the technology of information systems, can more realistically model the cost structure facing businesses today. Surprisingly however, ABC has spread very slowly in the industry. This means that important strategic decisions are being based on incomplete (inaccurate) information. The examples used in this article show how profoundly the information used for decision making can be influenced. The purpose of the examples is not to suggest that contemporary products are less profitable than traditional ones. Even if that were true, management does not have the option of producing only traditional products.

The market dictates which products are required, and the market of the 1990 s is different. Instead, the examples are used to draw attention to how these differences in the market need to be recognized in costing. Conclusion The pioneers of the ABC concept wrote that activity-based costing "is designed to provide more accurate information about production and support activities and product costs so that management can focus its attention on the products and processes with the most leverage for increasing profits. It helps managers make better decisions about product design, pricing, marketing, and mix and encourages continual operating improvements" [ 31: 103 ]. The purpose of this article was to show that there is more to ABC than smoke and mirrors. ABC can make a genuine contribution to improving decision making.

References 1. Branch, J. M. "Selling ABC: New Cost Systems Can Flounder if They Are Not Marketed. " Management Accounting, February 1992, pp. 42 - 46. 2. Collins, F. and M. L.

Werner. "Improving Performance with Cost Drivers. " Journal of Accountancy, June 1990, pp. 131 - 134. 3. Cooper, R. and R. S.

Kaplan. "Measure Costs Right: Make the Right Decisions. " Harvard Business Review, September/October 1988, pp. 96 - 103. 4. Crawford, C. M. "The Hidden Costs of Accelerated Product Development. " Journal of Product Innovation Management, September 1992, pp. 188 - 199. 5. Geishecker, M. L. "New Technologies Support ABC. " Management Accounting, March 1996, pp. 42 - 48. 6. Header, J.

and B. Render. Production and Operations Management. Prentice Hall, 1996, p. 581. 7. Kelly, K. "A Bean-Counter's Best Friend. " Business Week, October 25, 1991, pp. 42 - 43. 8. Lewis, R.

J. "Activity-Based Costing for Marketing. " Management Accounting, November 1991, pp. 33 - 38. 9. Lofgren, G. Q. "Quality System Registration: A Guide to Q 90 /ISO 9000 Series Registration. " Quality Progress, May 1991, p. 37. 10. "More Companies Turn to ABC. "Journal of Accountancy, July 1994, p. 14. 11. Ness, J. A. and T.

G. Cucuzza. "Tapping the Full Potential of ABC. " Harvard Business Review, July/August 1995, pp. 130 - 131. 12. Port, O. "Custom-Made, Direct from the Plant. " Business Week, November 18, 1994, p. 158. 13. Romano, P. L. "Trends in Management Accounting. " Management Accounting, August 1990, pp. 53 - 56. 14. Roth, A.

V. , C. Gain, and L. Krazewski. "Optimal Acquisition of FMS Technology Subject to Technological Process. " Decision Sciences, Vol. 22, No. 2, Spring 1991, pp. 308 - 334. 15. Schonberger, R. J.

and E. M. Know Jr. Operations Management: Continuous Improvement. Richard D. Irwin, 1994, p. 44. 16.

Set, F. H. and D. W. Jasinski. "ABC and High Technology: A Story with a Moral. " Management Accounting, March 1996, pp. 37 - 40. 17. Smith, R.

B. "Competitiveness in the ' 90 s. " Management Accounting, September 1989, pp. 24 - 29. Bibliography:


Free research essays on topics related to: harvard business review, decision making, management accounting, overhead costs, cost accounting

Research essay sample on Harvard Business Review Overhead Costs

Writing service prices per page

  • $18.85 - in 14 days
  • $19.95 - in 3 days
  • $23.95 - within 48 hours
  • $26.95 - within 24 hours
  • $29.95 - within 12 hours
  • $34.95 - within 6 hours
  • $39.95 - within 3 hours
  • Calculate total price

Our guarantee

  • 100% money back guarantee
  • plagiarism-free authentic works
  • completely confidential service
  • timely revisions until completely satisfied
  • 24/7 customer support
  • payments protected by PayPal

Secure payment

With EssayChief you get

  • Strict plagiarism detection regulations
  • 300+ words per page
  • Times New Roman font 12 pts, double-spaced
  • FREE abstract, outline, bibliography
  • Money back guarantee for missed deadline
  • Round-the-clock customer support
  • Complete anonymity of all our clients
  • Custom essays
  • Writing service

EssayChief can handle your

  • essays, term papers
  • book and movie reports
  • Power Point presentations
  • annotated bibliographies
  • theses, dissertations
  • exam preparations
  • editing and proofreading of your texts
  • academic ghostwriting of any kind

Free essay samples

Browse essays by topic:

Stay with EssayChief! We offer 10% discount to all our return customers. Once you place your order you will receive an email with the password. You can use this password for unlimited period and you can share it with your friends!

Academic ghostwriting

About us

© 2002-2024 EssayChief.com