Toward an activity-based costing system for product families and product platforms in the early stages of development

Abstract

As the marketplace has been changing so rapidly, it has been a key issue for companies to best meet customers’ diverse demands by providing a variety of products in a cost-effective and timely manner. In the meantime, an increasing variety of capability and functionality of products has made it more difficult for companies that develop only one product at a time to maintain competitive production cost and reclaim market share. By designing a product family based on a robust product platform, overall production cost can be more competitive than competitors selling one product at a time while delivering highly differentiated products. In order to design cost-effective product families and product platforms, a production cost estimation framework was presented in order that relevant costs are collected, estimated, and analysed. Since the framework is quite broad, this paper is dedicated to refining the estimation framework in a practical way by developing an activity-based costing (ABC) system in which activity costs are mapped to individual parts in the product family, which is called cost modularization, and the activity costs affected by product family design decisions are restructured to make the costs relevant to these decisions. A case study involving a family of power tools is used to demonstrate the proposed use of the ABC system.