Activity-based Management at Stream International Harvard Case Solution & Analysis

Why an activity based costing  useful prior to initiating a business process re engineering project?

Activity based costing allocates costs based on the amount of the resources consumed by a product or service. This type of costing method is useful for business such as Stream International that provide different types of services  to consumers. This process would allocate the indirect  costs of the business of the product to identify its true costs (Eileen Rojas, n.d.).

In this method, as costs are allocated according to the cost drivers ,which are the factor that drives the costs. As a result of this method, Mike Michalski would come to know about the products or services consuming most of the costs and not adding value equal or above the costs.Therefore, it will allow Stream International to identify the non-value added activities which can be stopped and resources allocated to areas which create real value (Eileen Rojas, n.d.).

The ABC method accounts for costs similar to the way production works , hence allowing the business to better understand where overhead costs are incurred. The reports produced by the analysis of the Activity based costing would allow Stream International to identify wasteful products and the costs which are unnecessary to perform. This advantage may allow SI to make its processes and efficiency. Furthermore, it would also allow fixing pricing errors which may be over priced or under priced (Eileen Rojas, n.d.).

Why would Mike Michalski be attracted to an ABC project at SI?

Mike Michalski is under pressure due to the changing market conditions and the rapid pace with which the new technology is introduced in the industry in which it operates. He expects that the division can struggle to maintain its leadership position in the market he does not do anything.New shareholders of the business also require the division to reduce costs. They are driven by their self-interest which is to get more dividends or capital appreciation which is not possible without higher return on assets and possibly the business growth. Furthermore, software companies like Microsoft have now begun offering packages including word processors, spreadsheets, database managers and graphics presentation packages that were sold separately in the past. As these software packages are cheaper when they are sold collectively, they are forcing suppliers like Stream International to reduce their prices, which may not be possible without the reduction in the costs to provide products and services by Stream International

The traditional costing method does not have the capability to show Mike the costs of individual business, creating  problems in their performance evaluation. Furthermore, as costs are not known for divisions, the resources are allocated to them without knowing its importance.Mike held the view that the ABM would allow a more accurate way of  assigning costs to jobs and  result in fair prices for customers. It would allow the business to know the range of costs and services provided to each customer. It would also allow Steam to predict profit trends and the costs of any new activity

Activity-based Management at Stream International Case Solution

Evaluation of development and Implementation of ABC model at SI

KPMG has been employed as a consultant for training purposes of employees managing the process. This is a positive thing because the ABC costing analysis require expertise of specialists as it is a very complex process. Moreover, the ABC costing analysis software was used to produce the activity costs  and a variety of reports and the graphical presentations of results. This way saves time and produces more accurate results for the senior managers to make decisions.

The thorough process was performed to identify the activities performed in the division. One of the positive approaches also includes the involvement of employees who were comforted that the activity does not have the objective to throw them out of the company and the employees would be transferred to the Book division if there is a need to remove them. Employers were crucial to get the appropriate inputs. If they were demotivated by the fact that they would lose their jobs  due to this process, they would not inform about the exact time they take to complete an activity and quote less time to indicate their efficiency and secure their jobs. This activity only takes overhead costs into account as avoiding direct costs mean shutting down the activity altogether. Therefore, the management knows that the indirect costs can only be reduced..................................

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