The power of allocation : A case study at a company concerning the differences in total production costs between Sweden and China.
Background: China is one of the most popular countries to relocate and outsource production units to. This country has a big advantage when it comes to the manual working cost which is very low. This difference between Sweden and China is huge; the cost of the manual working force is less than one twentieth of the Swedish.Problem: Massive global relocation of production units can affect some countries in a negative way. One of the most important foundations in the society is that there is a high level of employment and this also contributes for economic growth. This is in terms of both tax incomes for the public society as well as self-esteem for the people.Purpose: The purpose with this thesis is to examine the differences in total production costs, including allocation of overhead costs for product development and production in Sweden vs. China at a company, in this thesis referred to as Manufacturer AB.Method: Case study approach with in-depth interviews, phone calls and e-mail follow up. In total 9 respondents consisting of managers in leading positions at Manufacturer AB in Sweden.Conclusion: The manufacturing cost in the Chinese production unit is about 40-60 per cent compared to the Swedish unit. In the current situation the overhead allocation is 4 % overhead of MC at the Chinese production unit and 133 % at the Swedish unit. The total production costs are not reflected in a correct way per unit. To do a more true allocation, the overhead costs in the Company Group must be identified and allocated in the right proportions on their respective production unit.By creating an average- and in next step an estimated allocation model we succeeded to do a more justified allocation of the overhead costs on the production units in Sweden and China. This model should be relative simple to implement on product- or unit level and gives a more correct allocation than the current.However, it is the decision of Manufacturer AB to allocate their overhead as they like, but the estimated allocation model gives a base for strategic decisions on production unit level, referring to; where to locate the production units to reach competitive advantage.
School:Högskolan i Jönköping
Source Type:Master's Thesis
Keywords:absorption costing allocation overhead cost accounting variable full
Date of Publication:08/07/2007