Activity Based Costing Analysis for Band-aid
Band-aid (BA) is a worldwide renowned wound care brand which has been produced in two manufacturing plants—Brazil and China. This analysis is for the factory in Shanghai, China, which mainly supports the sales in Japan, North America, Australia and China. On July, 2009, the operation team was asked to do the business plan for 2010, including the annual volume, the total production hours and the overall operation cost. Based on the unique production process of Band-aid, there are seven work centers to go through from raw material and packaging material to the finish goods, including film coating, film slitting, strips making, cutting, sterilization, auto pack and manual pack. For each work center, the cost will be split into four types: Labor cost, Indirect overhead, direct overhead and machine depreciation. Here is the detail explanation. Labor cost is the wages or salaries for the operator of each work center. Direct overhead refers to the expense directly consumed by each work center, including the electricity, the gas, the petrol and the maintenance expense for each work center. Indirect overhead stands for the cost which is not directly allocated to each production work center, including administration, personnel, training and other supporting expense. Machine depreciation is the annual depreciation cost allocated for each work center, and for this part of cost, it’s allocated by finance team and cannot be changed by operation team. The Band-aid operation team wants a cost improving plan in 2010 to benefit the whole company. Data Analysis
During June and July every year, operation team will conduct the business plan for the next financial year based on the historical data and the forecast. Figure 1 shows the annual production prediction plan for 2010 with the historical data from 2006 to 2009.
The volume of 2010 is 3,254 million strips which is 10% more than the volume of 2009 latest estimation (LE). Whilst the target for operation expense of 2010 for Band-aid given by the regional operation center is to keep the expense the same as the 2009 LE. Improvement from Work center Perspective
Then operation team will break down the production plan of 2010 from finish goods (FG) to the work in process (WIP) to each work center based on the bill of material (BOM). Eventually the procurement team will obtain demand of the raw material and package material from the operation team. Given the machine performance data, such as production volume per shift (PV), efficiency and changeover time, the operation team will convert the production plan to working hours for each work center and then multiply the working hours by the hourly ratio allocated to each work center. Before any action plan, the initial expense of 2010 would be $13,284,810 with the detail break down to each work center as in figure2.
For coating, the expense in 2010 will increase around 40% since the 2nd shift will be run because of the volume increase. And for slitting, since the capacity occupation in 2009 is less than 50% and the additional volume can be covered by the remained available production capacity, there is no major change on the expense. As for strips making, strips cutting, auto pack and manual pack, the operation expense will be correspondingly increase in 10% due to the increasing production hours and changeover hours. Lastly for the sterilization, since the sku numbers increase in 2010 and the different sku cannot be put in the same pallet, the working time will be lengthened. Therefore, the sterilization will cost 23% more in 2010 than in 2009. After review the production process and the production plan of 2010, Operation team defines the opportunities to improve. Firstly, by referring to the production line in Brazil which is more automatic than the China production line, China operation team plans to adopt the same method to relief the increasing labor...
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