Thesis Abstract

<p>                   <b>ABSTRACT&nbsp;</b><br></p><p> There is increasing evidence that external and internal pressures are being placed upon companies to acknowledge, characterize and analyses environmental issues, impacts and costs. It has been becoming crucial that companies will increasingly be faced with responsibilities extending outside the factory gate to point of sale and beyond. Companies will need to adopt a life cycle perspective into the decision-making framework, to support managements' decisions regarding the environmental impacts and costs of activities and products. The manufacturing and process sector has suffered from poor management systems for a long time. In process industries, the need for better cost management systems arises from efficiency problems and lack of resources. With activity-based costing, the processes and the costs of activities become more transparent than earlier. ABC has highlighted that true understanding of what it costs to provide products/services is at the same time a tool for better management. It helps to better understand and serve as guides in any business process improvement initiatives, and to subject resources to its efficient usage. In a nutshell, it helps to make more effective business process improvement at more transparent cost. This study is an illustration to point out required changes that could be made during the activity-based costing process in Zemilli paint factory. It shows the benefits and advantages that have come true because of the ABC-process and discuss the problems connected to this process. The ABC-process consists of two phases. The phases and their outcomes are described in chapter four preceded by the basic principle of ABC in chapter three of this study. The first chapter of the thesis dedicated to introduction, background, the importance, objective and the general outline of the paper. The second chapter of the thesis gives the existing condition of process industries in Ethiopia considering specific attention to Zemilli paint factory. While the third chapter of the thesis is fully dedicated to literature survey and followed by chapter four which gives emphasis to problem formulation and the Activity Based Costing model developed to the factory. The thesis is wind up by including chapter five with outline information to the developed visual basic programming using ABC principles. Finally a conclusion and recommendation is drawn out from the executions of the study in chapter six. The most concrete result of the whole process is a database with visual basic programming working on ABC-model. The model can be used as a tool of daily management. It has been used to find out the costs of each activity and operation. This has enhanced the cost awareness of the unit. The model can also be used for simulation. It can be used to find out the profitability of the operation of the factory. <br></p>

Thesis Overview

<p> <b>1. INTRODUCTION&nbsp;</b></p><p><b>1.1 Background</b></p><p>&nbsp;In order to get competitive advantage, processes industries have to improve productivity and quality, which lead them to improve production cost. Reduction of production cost can not be carried out as long as the exact production cost of each product is identified. This is especially difficult in process industries having several varieties of products. Exact costing of products will help the industry to identify profitable and non-profitable production in order to increase the share of highly profitable product in the product mix. In traditional costing system overheads are determined as function value or volume which leads to inaccurate cost information. In contrary, activity based costing system is based on the primary requirement of activity to produce a product and resource throughput of each activity. Thus, activity based costing system a better alternative to determine product cost. The general objective of the thesis is to demonstrate the role of computerized activity based costing system in performance improvement of processes industries. With activity-based costing, the production process becomes more transparent than earlier. Moreover, the activity costs become clearer for all employees. At the present moment activity-based costing is considered to be a good costing system that can serve as a decision support system (DSS) for management. Initially, activity-based costing was perceived as overcoming the flaws of the traditional costing systems. Organization were eager to implement the activity costing system which had the great advantage that it could provide a better allocation of indirect costs to products in manufacturing industry. The accurate cost information on products was the beginning of ABC, in time it grew to be applied to the service sector, as well. In the long run, ABC has proved to be fit for the allocation of non-production costs, such as distribution costs or selling costs. Stimulated by the practitioners’ responses, academics discovered another scope for ABC: application of activity-based costing to customers, in order to study more accurately the profit or loss per individual customer with which the company has trading relationships. Furthermore, ABC allows understanding of cost behavior, due to the fact that it permits the contraction of a cost driver hierarchy that reveals at which level costs are incurred. Finally, ABC can be used as a basis for budgeting process. <br></p><p> As the information systems of organizations evolve, ABC is considered to be very valuable for those organizations that have an ERP system are very fundamental. As a result, ERP implementation needs inclusion of ABC as a module. The ERP systems might overcome some of the problems related to data collection, cost drivers selection, and so forth. Therefore, it is interesting to analyze an activity– based costing case study in the context of financial information systems. <br></p><p> Traditional costing systems allocate overhead costs arbitrarily, primarily based on direct labor hours. However, direct labor hours often do not adequately represent the percentage of indirect resources consumed by a certain cost object in a certain period. As a result, product cost distortion occurs. Activity-based costing provides a solution to this problem by viewing the manufacturing system as being composed of activities. It assigns the costs of these activities to cost objects by using cost drivers that represent the consumption of indirect resources by cost objects more accurately than arbitrary allocation bases. The real power of activity-based costing arises from its ability to support managerial decision [3]. <br></p><p> Recently due to the increase of popularity utilizing alternative finishing materials (like glass, gypsum etc.) in construction industry deteriorates paint industries market. Therefore, the principle of ABC model developed for the factory in the case study targeted to counter act the above problems by improving accuracy of costing in bid preparation, recipe and appropriate product selection for promoting profitability. <br></p><p> <b>1.2 Problem Statement&nbsp;</b></p><p>In today’s competitive world of business, having accurate information may be the key factor in distinguishing between the loser and the winner. Using more accurate cost information, while determining the optimal product mix of a company may lead management to make better decisions, and as a result, may have a great effect on the success of a company. For a long-term existence of industries, it is mandatory to have an active control &amp; improvement of every activity of the firm exhaustively. Nowadays, owning to the state of the art sustainable manufacturing technology for an industrial business may not guarantee a long lasting profitability both in the local and global market. This is mainly subjected to globalization pressure. It could be counteracted by an interactive follow-ups and control that ascertains its perpetual improvement and strength against competitors in the market. This can be achieved by proper methodology of product costing system with reference to the activities performed in the production process. One of the developed practical tools is Activity Based Costing (ABC) that enables factories to determine costs of their products along with why they cost what they do. With this knowledge, the factories can acquire information on profitable product mix, activities of prime improvement importance, better utilization of their capital funds, and better business decision.<br></p><p> <b>1.3 The Elements of the Thesis&nbsp;</b></p><p><b>1.3.1 The Questions of the thesis&nbsp;</b></p><p>Can a computerized ABC system modeling help to improve product mix decisions and performance of a process system?&nbsp;</p><p><b>1.3.2 The Purpose of the thesis&nbsp;</b></p><p>The purpose of this research is to provide relevant virtual information to managers that will enable them to make better business decisions regarding the target towards performance improvement of the mission of the company in its businesses endeavor. <br></p><p> <b>1.3.3 The Objective of the Thesis&nbsp;</b></p><p><b>A. Main objectives&nbsp;</b></p><p>The objective of this thesis is to develop and demonstrate an interactive visual basic program model that uses activity-based cost information or principle that can be used by the paint factory.&nbsp;</p><p><b>B. Specific Objectives&nbsp;</b></p><p>a) Considering all the processes in the case study and develop the governing principle to the Activity Based Costing methodology.&nbsp;</p><p>b) To assesses and develop method of computation of cost with reference to the accompanied process and activity.&nbsp;</p><p>c) To develop a model suitable for implementing Activity Based Costing in Zemilli Paint factory.&nbsp;</p><p>d) To develop an interactive visual basic program working on the above objectives.&nbsp;</p><p>e) To demonstrate the application of the program to the factory performance improvement. <br></p><p> <b>1.4 Scope of the Thesis&nbsp;</b></p><p>The study entails a literature survey regarding the activity-based costing and the method of ABC model development. In addition, the thesis includes the conceptual development of an activity-based cost model that may help companies to improve their performance which brings pronounced business profitability. A case study is included in this research to demonstrate the use of the developed ABC model and interactive program for the illustration purpose. There has been limited effort to implement the concepts developed in this research in company at hand with real costs, activities, and products. The major difficulty that is expected in real-life implementation of this thesis is to collect the data necessary for the intended development of a model and related program. First the theoretical framework of the study is introduced preceded by background information about process industries sector and company situation. After that it describes the two-pronged ABC-process in the paint factory at hand. This part starts with a short introduction of the factory. Then the process is described. This includes the objectives of the two phases, the tools used and the main outcomes of both phases. After that the structure of the ABC-model is described. Finally it introduces the results that this thesis achieved so far. First the numerical results are presented, and then the managerial results and changes that have occurred are clarified. Also the problems arisen in this whole process are discussed. In the end of this study, conclusions are made and some ideas concerning the future development are introduced. <br></p><p> The study was carried out as an experimental case study. The intention was to find out how the activity-based costing works for multi-product process industries especially on a paint factory, The purpose was also to find out what benefits and problems are linked to the implementation process. The study includes literature reviews, interviews, modeling and out put presentation.<br></p><p> <b>1.5 Major Assumptions&nbsp;</b></p><p>a) A batch of a specific product i has to be finished completely once that batch is started to be processed.&nbsp;</p><p>b) Even if there is no partition which demarcates physically basic processing machines of the company, they are taken as an independent unit as preferred in the cost center model developed with regard to the production process.&nbsp;</p><p>c) Whenever one unit of product i is started to be manufactured by using a specific route, all the other parts in that batch must follow the same route. <br></p>