This paper conducted a review of production activities for General Motors for purposes of applying concepts learned in Activity Based Costing (ABC) for the company.  This in effect necessitated this research to identify of a product or service of General Motors that could use ABC. Similarly, this paper must identify at least two activities for ABC and including their appropriate respective cost drivers for those activities. This was   followed by making an estimate of the application rates for each applicable cost driver earlier identified.   This researcher has also included discussing some of the implications of the result generated in applying ABC for General Motors as compared with the use of traditional costing method that company may be using in practice.

        General Motors could use activity based costing in the production one of its car model based on the review made on the company’s production process. Several  activities and their respective drivers for the ABC model generally encompass the following setting-up the machine as with the driver units by the number of set-ups; inspection activities with driver units by the number of inspection hours and the actual operation  of the machines as with the driver units in terms of  number of hours in use.

      The total overhead rate for each set of activities was identified and each was divided by the estimated drivers unit to get the application rate for each cost driver as shown in the Table I below.  The period covered for the activity being studies is a certain month of 2007 from the financial statement of General Motors (2007). The inputs to be used in the computation include variable unit costs of material and labor and total overhead cost.  The variable cost and the direct labor cost per unit were taken dividing the total costs by total cars produced and direct labor hours used respectively.  The total overhead cost includes estimated cost to put the machine into operation under the activity called the setting up the machines. The same cost also includes the activity of making it sure that the machines are usable as per specifications under the activity called conducting the inspections.  Finally the total overhead cost also include that actual operation or running of the machines.  For activity based costing purposes it is also necessary to have the estimated number of cost driver units for each activity.

        Estimates and assumptions were made for certain figures in this report since financial information are basically prepared for external users. Since ABC is an internal management practice there is a need to convert some financial information to terms which can allow the application of model of activity based costing. Since actual amounts could not be identified specifically, reasonable estimates were made and the necessary decision toot was as if the data were actual.   Table I below summarized given and assumed data and results of the calculations using the inputs.

     The implication of results is that the unit cost of product under the Machines shows lower cost per unit  if activity based costing is applied as a tool as against traditional approach of merely approximating for factory overhead at 350% of the direct labor cost. Based on this, there is basis to deduce that activity based costing (ABC) is better than traditional costing. ABC can assign costs to activities instead of putting them to cost pools.  The appropriate activities needed however to be defined after careful analyses. After wards, cost drivers were derived for each kind of appropriate activity. Subsequently, the estimated unallocated overhead cost for each activity was divided by the respective cost driver to get the driver cost per unit.   As distinguished with traditional costing, activity based costing in effect allocated unallocated fixed cost based on different relevant activities that consume resources. This has successfully redefined the behavior of the fixed cost into variable cost. This in effect also caused more costs to become relevant for decision making since they can how be controlled by looking at the activities (Turney, 1996).  As applied for General Motors, the company’s management to know what cost is controllable and what are manageable. General Motors could benefit from this exercise when it puts into effect responsibility accounting for the purpose of holding managers responsible for their decisions. This also has the effect of producing goal congruence for company since motivations of managers would not be in conflict with greater corporate objectives.

        As computed in Table I, there is an observed difference as to unit cost between traditional costing and activity based costing. That of traditional costing was higher. General management may view the difference as advantage of ABC over traditional costing. As to whether the company will decide to adopt ABC costing may still be subject to the additional cost of adopting the method since ABC is perceptibly more complicated than traditional costing (Hicks, 2002).  The need to do additional activities may require expert’s knowledge to really study the relationship of activities and costs and this would require serious consideration on the part of management. The company is therefore advised to consider the additional cost of adopting ABC into its systems under the principle of cost benefit analysis with due consideration of the difference of the two methods as presented in this paper.

References:

General Motors (2008) Annual Report of General Motors for 2007,

Hicks (2002) Activity-Based Costing: Making It Work for Small and Mid-Sized Companies, John Wiley & Sons

Turney (1996) Activity Based Costing: The Performance Breakthrough, Kogan Page