Activity Based Costing (ABC)

Xu Ji Electric Co Ltd, China

Activity-based costing (ABC) is an accounting method that identifies the activities that a
firm performs and then assigns indirect costs to products.Most of the Activity based costing are
use in the big manufacture company. because the implementation of this method can calculate
the cost more accurately, so it can help management to make decisions. Here is an analysis of the
ABC implementation at Xu Ji Company

PROFILE

XJ Group Corporation was founded in the year 1947,and it started as a state-owned

military factory. It was then based in Harbin, capital of Heilongjiang Province, in the northeast
part of China. It was then moved down to Xuchang city, Henan Province, which is in the central
part of China in the year 1970.Today,XJ Group of companies operates all over China and in 30
Countries around the globe.
 XJ Group is a leading enterprise in the power equipment manufacturing industry in
China. It is known for providing system solutions and services for power generation,
transmission and distribution sectors for the utilization of global development, and for the
improvement of customers performance and efficiency.

XJ Group Corporation develops, manufactures, and sells power generation equipment.

The Company produces electrical substation equipment, distribution management equipment,
traction power supply operation equipment, adaptive optical current transformers, and other
products.XJ Group Corporation is 100% owned by the State Grid Corporation of China (SGCC).
SGCC is one of the biggest state-owned enterprise in China. In the year 2010, the total assets of
SGCC reached 330 billion US dollars, and SGCC rose through the ranks to become the 8th in the
Fortune Global 500 Enterprise. It supplied electricity to a population of over one billion in China
in 2010. An annual electricity sale of 2689.1 billion KWH has been achieved by SGCC, SGCC
owns 618,837KM transmission lines in total, and achieved the substation equipment capacity of
2131.93 million KVA. Under the management of XJ Group Corporation, there are one listed
company, two industrial research institutes, two national products inspection centers, two
financial institutes, twenty-seven subsidiaries and shareholding companies. The products of XJ
cover AC transmission and transformation, primary and secondary equipments, distribution
network automation equipments, DC transmission converter and control protection equipments,
etc.

Through unremitting efforts of over nearly sixty years, the current XJ Group has become
the most competitive large-scaled power equipments manufacturer and systematic resolutions
supplier with the most powerful comprehensive technical supporting ability all over the Country.

Looking into the future, XJs main target is to become one of the strongest and largest
electric corporations known for excellence within the electrical equipment industry in the world.
Our mission is to assist our customers and utility companies both in China and the world to
facilitate provision of clean, sustainable, affordable, reliable and secure energy while protecting
the environment.
Why Xu Ji Company Using Activity Based Costing Method?

The reason why XJ Company is implementing ABC system. ABC model is used to
capture the direct costs and variable overhead costs, which are less in the traditional system.
generally the implementation of cost-based activities in this company allows to make better
information about cost and profitability for customers as well as to make accurate decisions for
production, sales and control the results of this decision.

When Xu Ji Company use this Activity Based Costing Method?

Xu Ji Electric Co Ltd (Xu Ji), a manufacturing company and a state-owned

enterprise(SOE) in China, is known as one of the companies that applied activity based costing
(ABC) in 2001 when this method is still a theory in China (Liu and Pan, 2007). During 10 years
of the Xu jis ABC implementation, this method has enormously changed the SOEstraditional
costing system and provides more accurate standardization in the companyworking practices.
Before applying ABC, Xuji was operating a traditional accountingsystem which involves
book keeping conducted manually, thus inaccurate costingoccurred.This inappropriate costing
method has severely damaged Xuji in terms ofability to compete on pricing.

For that reason, it is crucial for the company to seek for amore effective costing system
and finally, in 2003, ABC system was successfully applied by Xuji with 2 main tasks is to trace
direct labor costs directly to product and client contracts and to allocate manufacturing overhead
costs based on up-to-date direct laborhours to contracts.

What is the Benefit or Advintage in Using ABC Method for XU JI COMPANY?

1. Attributing Costs More Accurately

*Note: In Xu Ji, direct labour cost instead of being charged directly to products was allocated
first to production departments then to finished products. This practice was common in some
Chinese manufacturing companies as it was relatively difficulty to track direct labour to
individual products without using sophisticated tools such as Manufacturing Resource Planning
(MRP) systems or some elaborate recording mechanism within a mass production.

Notes: With ABC Method it is more complex and the company know the imformation of cost
repots are using for each.

Xu Ji Relay company manufactures many different relay products and sells internally to
other Xu Ji subsidiaries as well as outsiders. The organisational structure is independent to the
rest of the group and has full financial autonomy. Relay operates in a highly competitive and
saturated market, so its main aim has been to survive and avoid closure. An urgent need was to
get their product costs right,With the lessons learnt from the ABC implementation, Xu Jis ABC
team, together with Relay accountants and the software company which developed FPDs ABC
system embarked on developing its own ABC system at Relay in late 2004. The cost structure
in Relay comprised 85% direct materials and 15% direct labour, variable and fixed overheads.
During the implementation, the team realised the main inaccuracy of product costs was not the
use of out of date planned material cost information but the lack of standardised working
practices and lack of inventory control. Relay still recorded inventory manually. Huge
discrepancies between accounting figures and physical stock were treated as monthly
manufacturing overheads. Xu Jis top management decided to invest in office computerisation at
Relay. The first step was to develop a computerised material cost recording system in order to
capture the actual material quantity information and stock movements between warehouse and
assembly lines. In addition, standardized procedures for recording and inventory control were put
in place and enforced by building into employees personal key performance indicators.

Activity-based costing breaks products down into activities and assigns all costs
associated with completing the activities. This allows a more accurate view of how much a
particular product cost. It shows the direct relationship among activities, cost and products.
Activity-based costing assigns to activities both manufacturing and non-manufacturing costs. It
also eliminates the process of attaching some unrelated manufacturing cost to products.
Overhead costs associated with activities are shown more accurately as well. So the benefit is the
company provides Attributing Costs More Accurately

2. Budgeting

Xu Ji company can know their budget.This Activity-based costing allows management to

effectively create budgets by clearly showing the relationship between costs and service
production for different service levels. Activity-based costing clearly shows a company's
overhead costs, and management is able to budget for such costs accordingly. Budgeting based
on activity-based costing can replace traditional budgeting that is based solely on a company's
expenses. Budgeting is an important aspect within an organization because the allocation of
resources is based on the budget

What is the disadvantages of use Activity Based Costing for Xu Ji Company and also for other
company ?

1. Expensive to Implement

Implementing an activity-based costing system is more expensive than implementing a

traditional costing system. Not only is the implementation expensive, but the costs to maintain
the system are high as well. Companies must train employees to use the activity-based costing
system. These are major disadvantages for many small firms that do not have a lot of services,
products or resources. Even some large companies have abandoned the model because of the
high costs associated with activity-based costing.

2. Conforming to GAAP

Activity-based costing does not conform to generally accepted accounting principles

(GAAP), meaning companies need to implement another costing system in addition to the
activity-based costing system. GAAP requires that a companys external reports include all
manufacturing costs. Activity-based costing does not include all manufacturing costs and
includes other costs, such as product costs. It is possible for companies to make adjustments to
their activity-based costing information to comply with GAAP, but it takes additional work.
Some companies do not believe the additional work required is cost effective, and, therefore, use
another costing system.