Application of Activity Based Costing (ABC) in Manufacturing Industry: A Case Study Manufacturing Furniture Factory

Abstract

The aim of this research is to find a way to develop a cost estimating method tailored to provide total production cost in small scale factory. The concepts and techniques presented in this research sustain this objective. Although, traditional cost estimation of the design and manufacturing activity have been hard to implement, activity based costing (ABC) has become a mature cost estimation and accounting methodology to solve the estimation problem. ABC system provides more accurate cost estimates rather than the traditional costing methods. Traditional cost methods distort the costs by applying overhead uniformly over different products of varied complexities and activities scope. ABC distributes the overhead costs in proportion to the actual activities performed to manufacture a product. The cost model has developed, in order to identify the cost drivers in manufacturing processes, the developed spreadsheet addressed a gap in current cost estimating methods and provides a systematic method for evaluating manufacture cost using the latest updated information. It may not tell the whole truth about the component costs but can be used to enlighten the producer about the escalation of component’s cost under design or manufacturing. The method appears to be more accurate an additional advantage of the method presented is the ability to expand the costly activities and look in more detail in the causes of the cost. This can provide a valuable guidance into the factors that cause the cost, helping to better manage these activities.