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Cost Analysis Case Study, Small Chinese Manufacturer, Activity Based Costing, Rule of Thumb Costing
This study investigated whether a small firm, China Umbrella Factory Limited (CUFL), and in fact any firm in a developing country (mainland China), could benefit from a formal, activity-based costing system. Many small firms, even more so than larger firms, find themselves particularly vulnerable to competitive challenges because the smaller firms lack the know-how and resources to know their true costs and profit margins. Smaller firms tend to use heuristics, or rules-of-thumb, in their estimation of costs as opposed to the bonafide use of more sophisticated and validated costing systems, whether traditional or activity-based costing (ABC). Comparisons of this firms current estimations of costs were made using both of these costing systems. Results indicated differences across the three methods. It was discovered that cost distortions that disfavored the estimation and traditional methods favored the ABC method. Notwithstanding the benefits found with using ABC, the firm decided not to adopt this method. A major constraining factor rested with the limitation of human resources particularly with training in ABC as well as general management accounting. Furthermore since ABC, in a greater fundamental sense, benefits firms with significant overhead (when measured as a proportion of total cost), ABC would only provide limited benefits relative to the cost of implementation given the low-tech, primarily labor-based nature of this firm and its products.