Original Date: 01/24/1994
Revision Date: 01/18/2007

Converting its accounting system from the traditional approach to Activity Based Costing (ABC) helped Harris Semiconductor control costs, allocate resources, and improve margins. This effort came about after Harris acquired another company and realized that a costing/accounting methodology needed to be implemented in its worldwide operation to better determine the real cost of producing each of its 30,000 semiconductor products. Harris therefore re- engineered its costing processes and the costing management system.

Previous volume-based overhead allocation in Harris' complex manufacturing environment produced costs for products that were not only not intuitive but in many cases inaccurate. The need for more detailed operational cost data evolved from Harris' TQM strategy and the need to operate at closer profit margins to remain competitive. Harris determined that ABC could highlight where to allocate efforts and resources in the manufacturing process for maximum effect. Because of Harris' cost structure, ABC was initially implemented in the manufacturing area. ABC implementation has begun in administrative areas such as selling, marketing, and research and development.

With initial help from Ernst & Young and the strong backing of the company's Controller, Harris has introduced ABC for use in its U.S.-based facilities as well as Harris manufacturing plants in Singapore, Malaysia, and Ireland. The ABC program implementation required four phases. Phase One was an assessment phase that included project planning, team training, development of resource matrices, and coordination with MIS and quality assurance organizations within the company. Phase Two, an analysis phase, included functional area interviews, identification of the scope of the detailed information needed, identification of activities and activity drivers, and establishment of a timetable for identifying data collection needs. The design phase (Phase Three) involved model building for resources, activities, and cost objects as well as confirming the results. The fourth phase was the implementation of the ABC methodology into the various operations and plants around the world. This included verification and validation of the model results, interfacing with the local MIS system, and institutionalizing a lessons learned approach for correcting and improving the ABC system.

ABC is also a tool in the Activity Based Management (ABM) effort of the complete manufacturing process. ABM not only determines product costs more accurately but also determines capital/resource expenditure prioritization, allows better organization redesign, identify areas for cost reduction, pinpoints where efficiency improvement should have the greatest impact, and provides accurate performance measurements.

Harris maintains that the ABC methodology, in place since 1992, has major benefits such as its easy implementation on most standard mainframe/mini computers; its positive impact on price negotiations and customer relations; the provision of accurate cost data in support of decision making; the acceptance and use of only one set of product cost data; enhanced understanding of what constitutes product profitability; provision of data for better prioritization of resources for process improvement and cost reduction; improved insight into the budgeting process in general; and its impetus for producing a heightened interest in ABM techniques.

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