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A Good Mystery Never Fails To Capture The Imagination. Money Is Stolen or Lost, Property Disappears, or

LG Electronics implemented activity-based costing to analyze its procurement system. The analysis revealed that most resources were spent on administrative rather than strategic tasks, and administrative tasks were done manually at high cost. This led LG Electronics to change procurement practices to focus on high-value activities and develop a global procurement strategy. As a result, LG Electronics reduced materials costs by 16% in 2008 and expects further $5 billion in cost reductions by 2011. Activity-based costing provided insights that helped LG Electronics significantly cut costs and improve efficiency.

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258 views2 pages

A Good Mystery Never Fails To Capture The Imagination. Money Is Stolen or Lost, Property Disappears, or

LG Electronics implemented activity-based costing to analyze its procurement system. The analysis revealed that most resources were spent on administrative rather than strategic tasks, and administrative tasks were done manually at high cost. This led LG Electronics to change procurement practices to focus on high-value activities and develop a global procurement strategy. As a result, LG Electronics reduced materials costs by 16% in 2008 and expects further $5 billion in cost reductions by 2011. Activity-based costing provided insights that helped LG Electronics significantly cut costs and improve efficiency.

Uploaded by

Millania Thana
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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A good mystery never fails to capture the imagination.

Money is stolen or lost, property disappears, or


someone encounters foul play. On the surface, what appears unremarkable to the untrained eye can turn
out to be quite a revelation once the facts and details are uncovered. Getting to the bottom of the case,
understanding what happened and why, and taking action can make the difference between a solved case
and an unsolved one. Business and organizations are much the same. Their costing systems are often
mysteries with unresolved questions: Why are we losing a lot of money? Are we pricing our products
accurately?

LG Electronics Reduces Costs and Inefficiencies Through Activity-Based Costing

LG Electronics is one of the world’s largest manufacturers of flat screen televisions and mobile phones.
In 2009, the Seoul, South Korea-based company sold 16 million liquid crystal display televisions and 117
million mobile phones worldwide.

To make so many electronic devices, LG Electronics spends nearly $40 billion annually on the
procurement of semiconductors, metals, connectors, and other materials. Costs for many of these
components have soared in recent years. Until 2008, however, LG Electronics did not have a centralized
procurement system to leverage its scale and to control supply costs. Instead, the company had a
decentralized system riddled with wasteful spending and inefficiencies.

To respond to these challenges, LG Electronics hired its first chief procurement officer who turned to
activity-based costing (ABC) for answers. ABC analysis of the company’s procurement system revealed
that most company resources were applied to administrative and not strategic tasks. Furthermore, the
administrative tasks were done manually and at a very high cost.

The ABC analysis led LG Electronics to change many of its procurement practices and processes,
improve efficiency and focus on the highest-value tasks such as managing costs of commodity products
and negotiating with suppliers.

Furthermore, the company developed a global procurement strategy for its televisions, mobile phones,
computers, and home theatre systems by implementing competitive bidding among suppliers,
standardizing parts across product lines, and developing additional buying capacity in China.

The results so far have been overwhelming. In 2008 alone, LG Electronics reduced its materials costs by
16%, and expects to further reduce costs by $5 billion by the end of 2011.

Most companies—such as Dell, Oracle, JP Morgan Chase, and Honda—offer more than one product (or
service). Dell Computer, for example, produces desktops, laptops, and servers. The three (3) basic
activities for manufacturing computers are (a) designing computers, (b) ordering component parts, and (c)
assembly. The different products, however, require different quantities of the three (3) activities. For
example, a server has a more complex design, many more parts, and a more complex assembly than a
desktop.

Required: Identify the impact of using activity-based costing for the company.
Activity-Based Costing (ABC) allows the organization to gain a better understanding of the price
and pricing of various products. ABC can be used to correctly assign indirect and overhead costs to
products and services based on cost drivers. This will allow for a more meaningful cost assignment than
just assigning overhead costs to various products and services. In the example given, the corporation was
able to determine that the majority of resources were spent on administrative duties rather than strategic
ones. This enables the organization to take steps toward optimizing its procedures and concentrating on
high-value activities. It had a huge financial impact because the company's costs were drastically lowered.
ABC assists management in making informed decisions about various product and service initiatives, as
well as providing a more accurate costing breakdown and analysis.

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