ABB robotics Cost Management Assignment
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Group: JAMBO1

Federico Rosales

Federico Tagliabue

Jesper Jarnhall

Panthep Pengniti

Wyclife Amollo
Process Analyzed
ME2605 - Cost management and control
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Cost Drive Structure
*This analysis is based on cost assumptions and not on real costs. Also is assumed that ABB Robotics is using a
traditional costing system. All the conclusion taken derive from these assumptions.
Traditional Cost System
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Cost analysis sheet
ABC system
Adequacy of use at ABB

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This methodology can potentially bring high benefits to ABB, since the
nature of the company’s products implies that some of the service
departments account for a high portion of the total costs. Some examples:

Purchasing: the differences in the complexity of the materials implies that they
have to be managed diversely. Some materials are difficult to negotiate even if
their proportional value in the product is not so high. This represents a great
opportunity to apply ABC.

Customer service: most products encompass a post-sales service package
(installation, maintenance, etc). These differences should be taken into account
to trace down the costs in a more effective way
ABB is a huge company that relies strongly on Information Systems and
therefore possesses the pre-requisites to track costs with a more detailed
approach.
Mix model proposal
1.
Identify Direct costs and directly allocate them to cost objects.
•
2.
Identify easy assignable manufacturing Overhead Cost and allocate them
to cost objects with the traditional method.
•
3.
direct material, direct labour, direct energy used.
indirect material, facility expenses, indirect wages and supervision.
Rank the remaining manufacturing overhead costs by their total
contribution.
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Potential Outcome of ranking
1. Machinery expenses
2. Logistic and distribution
3. Management salaries
4. Customer service
5. Sales and marketing
6. Purchasing
7. General management
Mix model proposal (2)
4.
Starting with the most important one select the appropriate cost drivers
according to ABC model
•
Transaction, Duration or Intesity driver
•
The driver has to be chosen trading-off between its cost and benefit.
Potential Outcome of ranking
1. Machinery expenses
2. Logistic and distribution
3. Management salaries
4. Customer service
5. Sales and marketing
6. Purchasing
7. General management
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5.
Driver
 Duration
 Intensity
 Intensity
 Intensity
 Duration
 Transaction
 Intensity
Allocation base
 machine time used
 weight and distance
 Discretionary method
 Average post-sales cost per product
 Time spent per customer
 number of purchase orders
 Discretionary method
Allocate both direct and overhead costs to the cost objects
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Pricing

Since the company is a leader in Robotic industry, ABB is a price setter.
ABB also provides products with premium quality and excellent service.
However, ABB has also cannot sets price too high, or customers will move
to competitors.

ABB also could use cost-plus approach compared with the market price.
As long as the market price is higher than the cost-plus price they could
price their products according to what the market is willing to pay.
If the market price is lower they have to reduce costs or profit margin and
always considering that they have cover all the costs occurred and gets
appropriate profit to survive and satisfy stockholders.
Pricing (2) Transfer pricing

Transfer pricing is a methodology to price goods and services within a multi-divisional
organisation. Transfer pricing has 3 main functions:
price setting for services or goods performed/produced by a division;
1.
2.
a mean to evaluate financial performance of a division;
3.
determine the contribution to net income by profit centres in the organisation.

Born to shifting the profits in low taxes county to reduce overall taxes paid by multinational enterprises, transfer
pricing is today used to determine profitability for the single divisions and to show the performance of each
department in financial terms, since is not longer permitted use it for tax reduction due to the arm’s length
principle introduced by tax authority.

In our situation, ABB Robotics Warehouse will sale materials to production departments. Cabinet and robotic
departments will sell products to assembly department. The assembly department can either sell goods to
testing department or buying service from it. The last holder will sell products to sale and marketing
department. Other services departments can set prices for their services.
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
ABB Robotic is performing in a single location so the benefits
pricing will be limited, since financial performance can be
accounting department too. There is also no benefit
Therefore, ABB Robotic has few reason to use transfer pricing
does not use it.
from transfer
measure by
from taxes.
and probably
Budgeting
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Based on our analysis we consider that the budgeting process which fits
better the division that we observed is the bottom-up approach. The
reasons for this are the following:

It is a manufacturing company that produces highly-complex products.
This makes it virtually impossible to estimate the costs accurately from a level
that is not directly linked to the production floor or production control.

Even if a top-down approach could be considered in manufacturing companies
with highly standardized products this wouldn’t be the case. This plant receives
orders that reflect the different needs of customers and thus call for some
customization. This implies differences in costs that can only be assessed by the
people that works at plant level.

Manual labour has a great importance in the process under consideration. This
makes it difficult to establish very precise standards because there is always the
intrinsic variation in manual processes. The best way to estimate costs
accurately therefore is to have it done by the persons that have the best grasp of
the situation and that is in the bottom levels.
Conclusion
The conclusions of the analysis of the case considerd could be summarized as
follows:
1.
Costing system:

2.
3.
Pricing:

The usual situation in competitive markets a cost-plus approach compared with
the market price should be undertaken.

For innovative products (patent or high technology) ABB Robotics could act as
the price setter.

For the current situation, the usage of a transfer pricing system would not add
enough value compared to the cost and the complexity that will be introduced.
Budgeting process:

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ABB Robotics should use a Mix model costing system with the benefits of both
the traditional and ABC costing system.
Due to the cost structure deriving from complex products, need for
customization and variation in manual processes a bottom-up approach for
budgeting is preferred. This guarantees a better accuracy in allocation of
recourses and costs.