Activity-based Cost Management for Design and Development Stage – Management Assignment Help

Assignment Task

Abstract
The fierce global competition in the international markets forces manufacturers to compete in quality, cost, and the time to market aspects of their products. Knowing the cost of the manufactured components is essential for efficient operation and competitive production. The current evolution of competitive manufacturing requires a shorter market life span of products—emphasizing the design and development phase of the product life cycle. Thus, it has become more important to analyze the cost of the design and development phase accurately. Activity-based costing (ABC) has become a mature cost estimation and accounting methodology. Using ABC for cost estimation of manufactured parts is being practiced today with acceptable rate of success. Cost estimation of the design activity on the other hand, has been nebulous and hard to implement.This paper presents a methodology of using ABC to evaluate the cost of the design and development activity for machined parts.methodology is demonstrated on a sample part being produced in a controlled manufacturing facility.

Literature review and background Cost estimation methods can be classified as: intuitive, analogical, parametric, and analytical methods. The intuitive methods are based on past experience of the estimator. The analogical methods estimate the cost of products using similarity to other products with known cost. The parametric methods estimate the costs of a product from parameters, which are usually used by the designers. These parameters influence the cost in a known way represented usually by a simple equation. Analytical methods such as ABC allow evaluation of the cost of a product from a decomposition of the work required into elementary tasks, operations or activities with known (or easily calculated) cost. Some analytical methods for cost estimation advocate integrating process information with product cost information. Luong and Spedding (1995) developed a generic knowledge-based system for process planning and cost estimation for holemaking. Takakuwa (1997) utilized simulation to estimate cost for a flexible manufacturing system based on ABC analysis. Yang et al. (1998) integrated information from process planning, scheduling, and cost accounting to estimate the cost in more detail.

In order to determine overall costs for alternative process plans, Kiritsis et al. (1999) used Petri net models to calculate the optimum process planning cost. Different cost models have been developed for various manufacturing applications. Examples include injection molding process, PCB manufacturing and assembly (Ong, 1995), and gear drive manufacturing (Yang and Lin, 1997). Geiger and Dilts (1996) presented an automated design-tocost model by integrating costing into the design decision. Aseiedu et al. (2000) considered the uncertainties associated with the cost model 170 D. Ben-Arieh, L. Qian / Int. J. Production Economics 83 (2003) 169–183 parameters such as time, inflation, labor rates, and failure rates by employing non-parametric estimation techniques. Somecost analysis of manufacturing operations use features technology. This approach is useful especially when the designer uses features as the design building blocks. Feng et al.

(1996) presented a feature-based cost evaluation model in which the geometry of features and relationships between features are used for cost estimation. Yang and Lin (1997) proposed a framework for feature-based early cost estimation according to the shapes and precision of features. Zhang and Fuh (1997) used a back-propagation neural network for a feature-based cost estimation. Veeramani and Joshi (1997) used characteristics of several features (such as dimensions and surface finish requirement) to directly determine the total resource requirement for manufacturing the feature. Roberts and Hermosillo (2000) estimated time and cost for small surface units, called primitives, using approximated tool paths and process parameters for available factory resources. Parametric cost estimation methods seek to evaluate the costs of a product from parameters characterizing the product without describing it completely.

This method meets the criteria of precision and speed of results with well-defined part families but without good explanation facilities. At least three types of parametric methods have been identified (Duverlie and Castelain, 1999): The method of scales, statistical models, and cost estimation formulae. Boothroyd and Reynolds (1989) demonstrated the use of volume or weight of typical turned parts as parameters for approximating cost estimates. A relatively new cost estimation approach is the ABC method. ABC systems help designers to understand the design parameters that create demands on indirect and support resources. A review and comparison of traditional cost accounting and ABC analysis can befound in Park and Kim (1995). ABC is often used as a part of total cost management. ABC system differs from traditional system in two ways: first, cost pools are defined as activities rather than production cost centers and secondly, the cost drivers used to assign activity costs are structurally different from those used in traditional cost systems (Lewis, 1995). Thepopularity of ABC has grown at a fast pace in the1980s dueto thepromotion of organizations such as computer-aided manufacturing-international (CAM-I) and theNational Instituteof Management Accountants. ABC has been applied to various industries (Tsai, 1996) such as electronics (Merz and Hardy, 1993), automotive(Miller, 1994), aerospace and defense (Soloway, 1993), airplanemanufacturing (Haedicke and Feil, 1991), shipbuilding (Porter and Kehoe, 1994), and telecommunication (Hodby et al., 1994), among many other areas of application.