Universal Electronics, Inc.

Universal Electronics, Inc. is a company that designs, manufactures, and markets power semiconductors and integrated circuits. Their business is a highly fixed cost, machine-paced manufacturing environment. In 2007 the company's profits was significantly decreasing, based in part to an outdated standard cost system that was not conducive to correctly capturing costs associated with their manufacturing processes. Line managers were using a second, offline system called Product Unit Cost (PUC) to capture what they believed to be more accurate costs that made their different product lines look more profitable. This dual cost system led to disagreements among management and ultimately resulted in the demise of the PUC system.

In 2008 UEI replaced their President and their Controller in order to strengthen their market position and improve financial performance. This new leadership team supported an aggressive implementation of Activity Based Costing (ABC) and Activity Based Management (ABM) in order to generate more accurate costs for the manufacturing process for their various products. Their belief was that more accurate cost accounting would give them the opportunity to affect the behavior of their managers by enabling them to make decisions on product pricing, product mix, and process improvements that would strengthen the financial performance and market position of UEI. The case details the implementation of UEI's ABC/ABM system and the mixed success results of the first six months of use.

1. How was the implementation of an ABC/ABM system compatible/supportive of Universal's strategies?

Answer:

Implementation of ABC/ABM should have been supportive of UEI's strategies, because UEI is in a very competitive industry where manufacturing a variety of products uses multiple processes/procedures, or "activities". UEI's former standard cost system was clearly not assigning correct costs to their various products, and a successful ABC/ABM system could have more accurately assigned costs to various activities and products, giving UEI managers and workers the tools they needed to reduce costs for targeted activities, as well as charge customers competitive prices based on the more accurate manufacturing costs. ABC/ABM would enable the senior leaders to affect the behavior of the line managers by synchronizing their motivations with the overall company's strategies and goals. The following bullets provide supporting information for our answer.

Background:

A. Activity Based Costing (ABC). ABC systems are designed to calculate costs for various processes or procedures and assign those costs to a set of "activities". For example, if an organization makes a product, an ABC system would assign costs to each step in the making of that product.

B. Activity Based Management (ABM). After you have an ABC system in place, you can use ABM to assist in conducting an analysis to determine which steps in the process cost the most. Once you know the costs of each step in the process, you can focus your process improvement efforts on those steps that cost the most. Additionally, your marketers or pricing staff can more easily quote accurate prices to customers because they have a good idea of what the costs of products would be, depending on the manufacturing steps or processes they went through.

C. Universal's Strategies. UEI's business strategy is to compete in the power semiconductor and integrated circuit market. They have a high fixed cost organization which forces them to attempt to maximize throughput capacity. In a high fixed cost organization, it is very difficult to adjust your capacity because the machines are very expensive, so you can't easily, or quickly purchase new high cost machines, and you have to run your existing machines as close to capacity as possible in order to maximize your quantity of products to sell. This structure also forces the organization