Genesis Manufacturing

Genesis Manufacturing currently uses a traditional cost management system as the basis for its accounting structure. Cost accounting's fundamental aim is to assist managers in making a wide range of decisions. Historical information is used to predict the expenses for the coming year, and predictions based on expected changes in unit prices are used to show a budgeted material cost. Budgets are implemented based on that information, evaluated as the year progresses, and recalculated for the upcoming year. At Genesis, nonmanufacturing costs are allocated to the various product lines based on sales volume (as a percentage of total sales). Direct costs are distributed across product lines using standard cost data. Manufacturing variances are distributed using a system based on standard hours earned versus actual hours.

We are proposing a departure from this cost-based accounting method to an activity-based accounting system.

Activity-based accounting recognize various decision centers throughout an organization and take into account the organization itself and its processes. These decision centers may be called cost centers or profit centers, but the emphasis is on the degree of latitude that individual managers of these centers have with regard to the decisions that are made regarding their operation. It is considerably more latitude than our managers currently have.

Under activity-based accounting, Genesis would move from allocating costs across the company as a who

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ganizational structure and the same approach to providing information to our managers. While the move to activity-based accounting may seem radical, it is in keeping with the history of innovation that Genesis has established. We have invested in high technology on the production floor, we use cellular technology in our facilities, and our total quality control program has proven successful in helping us control costs and improve our quality, which the industry recognizes as superior. We took advantage of opportunities in Mexico and established a facility there with lower operating costs than we were able to achieve in the United States. While this plant initially required intensive management effort, it has paid off in its performance. The move to activity-based accounting will also require a great deal of management involvement to be successful, but it should enable us to return to company-wide profitability. Not only will the company's executives have a better idea of which areas of the company are in trouble and need additional attention, but those areas which are functioning well may provide answers as to how other areas in the company can improve. Activity-based accounting is not a panacea, however, and it cannot be e

Category: Business - G