Comparative analysis of two costing systems in a steel manufacturing plant

Abstract

Today’s challenging economy has businesses focusing more than ever on increasing their competitive advantage. Companies are under increasing pressure to optimise and advance their operations in order to improve their overall profitability. As steel organisations worldwide strive to increase their market share in a highly competitive and saturated market, pressure is placed on steel manufactures to produce their steel products at highly competitive prices without compromising on quality and to deliver the products on time to their customer. With increased steel imports and a suppressed market the need for companies to have better cost control and better understanding of which activities drive the cost of manufacturing their products is required. The aim of this study was to determine if a platform for a more refined management tool in the form of an activity-based costing system could be used to provide a better understanding of the costs incurred by ArcelorMittal’s Plate Mill plant in Vanderbijlpark. The primary objective of this study was to compare two costing systems in a steel manufacturing plant based on a case-study approach. Initially the need for a more refined system within the context of the current economic and manufacturing environment is put into perspective. To address the above objective the study followed a retrospective analysis of the current traditional costing methodology as compared to an activity-driven costing method. The empirical study was executed through the implementation of an activity-based costing model and by comparing the results to that of the current costing system. The results indicate that there is a difference between the product costs as determined by the two different costing methodologies. It was found that three of the four selected steel products were understated. However the financial impact of costing done on the activity-based costing method was limited due to the relatively low overheads incurred by this plant. Thus the more accurate allocation of the overhead costs to the various products resulted in limited product cost correction.