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Journal of Manufacturing Technology Management

A generic activity-dictionary-based method for product costing in mass customization


Zhaoxun Chen, Liya Wang,
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JMTM
18,6 A generic activity-dictionary-
based method for product costing
in mass customization
678
Zhaoxun Chen and Liya Wang
Department of Industrial Engineering and Management,
Received January 2006
Revised November 2006 School of Mechanical Engineering, Shanghai Jiao Tong University,
Accepted January 2007 Shanghai, People’s Republic of China
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Abstract
Purpose – Estimating product cost at the design stage, often referred to as product costing, is vitally
important in the product configuration process in the mass customization paradigm. There are three
research streams in this field: analogous, statistical, and analytical methods. However, in a mass
customization environment, these methods suffer the drawbacks of poor accuracy, low-agility and an
undesirable degree of detail. It is imperative to develop an efficient framework for product costing in
mass customization. The paper aims to address these issues.
Design/methodology/approach – Activity-based costing (ABC) becomes a new trend in product
costing which alleviates the shortcomings discussed above. However, the complexity of ABC probably
increases in mass customization with a high degree of variety. In this research, a framework is
formalized for product costing in mass customization, in which a generic activity definition is proposed
to simplify and catalyze ABC practice in high-variety production. Moreover, an activity dictionary with
a hierarchical structure is developed to bring commonality and modularity to the storage and retrieval
of activity data.
Findings – A generic activity-dictionary-based method for product costing in mass customization is
developed.
Research limitations/implications – The method proposed for product costing provides valuable
cost data for product specifications, as well as the activities to create them. Therefore, a product
configuration solution can be financially evaluated and optimized.
Practical implications – Based on the methodology proposed, a prototype system has been
developed and implemented in a computer-assembling company.
Originality/value – This paper alleviates the negative impact of activity variety on product
costing.
Keywords Estimation, Mass customization, Activity based costs
Paper type Research paper

1. Introduction
Product costing is defined as a process of estimating the cost of a final product at
design stage (Sheldon et al., 1991). Whitney (1987) pointed out the predominant
Journal of Manufacturing Technology percentage of manufacturing cost of a product is determined at product design
Management stage. Therefore, estimating cost at design stage, i.e. product costing, is one of the
Vol. 18 No. 6, 2007
pp. 678-700
q Emerald Group Publishing Limited
1741-038X
This research is supported by the National Natural Science Foundation of China and Hong Kong
DOI 10.1108/17410380710763859 Research Grants Council (Grant No. 70418013, 70471022, 70501021, and N_HKUST625/04).
vital enablers for accurate pricing in customer negotiation. Moreover, product Generic activity-
costing is able to discover the linkages between design specifications and cost dictionary-based
factors and then find the method to reduce cost at early stage.
Product costing has received enormous attention and popularity in industry and method
academia. The prevailing approaches can be classified into three categories: analogous
methods, statistical methods and analytical methods (Alexander et al., 2002). Analogous
methods adopt functional or geometrical similarity to find similar components by variant 679
estimation; statistical estimation evaluates massive historical data to gain information
about the linkages between product features and costs and then approximates the cost;
analytical approaches depict the relevant processes of product creation in detail and then
derive and aggregate the costs incurred. To improve the performance of analytical
method, a new trend in product costing is the inclusion of manufacturing system costs in
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the estimation of a part’s cost (Koonce et al., 2003). Activity-based costing (ABC) is a
typical method in this research trend. ABC has been proved to be a method to calculate cost
more accurately than traditional methods (Kaplan and Cooper, 1997; Innes and Mitchell,
1990; Hundal, 1997). It has also been applied to cost estimation to provide the insight into
manufacturing process, cost drivers and the allocation of resource pools (Jiao and Tseng,
1999a; Ozbayrak et al., 2004). However, the complexity of ABC method hinders its
application. Sheldon et al. (1991) pointed out ABC requires detailed activity analysis which
is difficult to achieve. Jiao and Tseng (1999a) also suggested that the efforts to analyze cost
drivers, unit price of each activity and consumption of each cost driver are deemed to be
overwhelming. In particular, the complexity of ABC probably explodes in mass
customization environment with high degree of variety.
Mass customization is proposed to deliver individualized products with the
efficiency of mass production (Pine, 1993). As a nascent field, mass customization has
gotten much attention in last decade and becomes matured rapidly (Tseng and Piller,
2003; Tseng and Jiao, 2001). The research in this paper tries to solve the problem of
complexity explosion of ABC in mass customization. Such complexity explosion
manifests itself in following directions.

1.1 Difficulty to identify various sophisticated activities


There are various activities in the process of delivering an artifact to final customer.
These activities are difficult to identify (Hundal, 1997). Especially, in mass
customization, the efforts to clarify all the relationships among activities, activity
drivers, and the criteria for allocating resource pools are time consuming.

1.2 Redundancy in traditional activity database


In traditional manner, each activity item is defined and stored by fixed linguistic
description. Because of the increasing product variety, the volume of traditional
activity database probably proliferates greatly despite different activities may have
common characteristic and can be grouped together.

1.3 Cost-distortion arising from indirect resource cost driver


Indirect resource cost drivers, like the utilization level of resource pool or the usage of
standard time, are often proposed to be unified and intermediate criteria for allocating
resource pools. This helps to alleviate the complexity of allocating resource pools to
specific activities. However, because the actual or direct cost drivers of resource pools
JMTM possibly vary greatly in mass customization and overhead cost plays an important role
18,6 in total product cost, indirect resource cost drivers bring obvious cost distortion.
To address above issues, this paper proposes a generic activity-dictionary-based
approach for product costing. In next section, a review of related work is given.
The procedure of reversed activity-based costing (R-ABC) is depicted in Section 3.
In Section 4, generic product data model is developed, and the concepts of activity-related
680 features (AF), activity-related situations (AS), A-GBOM are also introduced. As the main
body of this paper, the technical details of generic activity dictionary are introduced in
Section 5. Section 6 formalizes the calculation of total product cost. Section 7 introduces the
integration of R-ABC and ABC. A closed-loop framework for ABC practice is also
formalized. Section 8 discusses some assumptions in this research. The method proposed
in this research has been implemented in a computer assembling company. Case study is
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represented in Section 9. Finally, in Section 10, conclusion is given.

2. Literature review
Product costing aims at estimating the cost of a product without complete information
of process plan or other production data. There are a number of research perspectives
in industry and academia. Alexander et al. (2002) narrowed these methods down to
three categories: analogous method, statistical method and analytical method.
Analogous methods suggest that similar products have similar costs. These
methods describe similarity as the level of correspondence of relevant characteristics
(Alexander et al., 2002). The degree of similarity in function or geometry is computed
as the distance between two similar items. One of the drawbacks of analogous methods
is the limitation of the number of characteristics. In addition, the information provided
to search for a similar product at early design stage is insufficient and the values of
some characteristics may be missing. Moreover, part of overhead cost (like inventory
cost) is not related with the specifications of product. Therefore, analogous methods are
only suitable to estimate the costs related with product features.
There are two streams in prevailing statistical models: parametric methods and
neural network methods. Parametric methods mostly involve the techniques of fuzzy
logic and regression. Jahan et al. (1999) adopted fuzzy sets and probability
distribution approaches to tackle the problem of uncertainty in product costing.
Smith and Mason (1997) compared multi-regression approaches with neural network
methods in product costing research. Jung (2002) proposed a feature-based method to
estimate product cost, which linked manufacturing features to cost factors and then
predicted manufacturing cost through specific cost functions. Most parametric
methods are built on detailed and specific design descriptions and static production
processes. Although these methods are able to provide comparatively acceptable cost
estimates, the foundation of them are probably demolished as new product
knowledge emerges. Compared with parametric methods, neural network does not
lead to parametric cost function but builds and trains network of neurons to estimate
product cost. Product characteristics which are related with product cost are the
inputs of neural network. Relations between features and costs are weighted and
transferred through the network that is well trained. Finally, the information
requested, i.e. cost estimate, is output. Zhang and Fuh (1998) applied neural network
to estimate manufacturing cost in packaging product. Bode (2000) discussed the
applicability of neural network for product costing and suggested a modified neural
architecture for performance improvement. One of the shortcomings of applying Generic activity-
neural network to product costing, which was concluded by Bode (2000), is the dictionary-based
low-performance as the number of parameters is high. In addition, because of the
“black box” of neural network, the process of cost calculation is opaque. method
Analytical model provides differentiated cost estimation process, which relies on
the summation of the steps in production process (Koonce et al., 2003). Analytical
approaches are mostly process-oriented. They break each process down to 681
sub-processes. The process that cannot be divided is considered as cost actuator, by
which product cost is aggregated properly. Eversheim et al. (1998) proposed a
design-to-cost method to evaluate system cost based on resource-oriented process cost
analysis. Jiao et al. (2000) developed generic bill-of-materials-and-operations (BOMO) to
integrate product and production data. Based on generic BOMO, product costing
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procedure was differentiated and detailed to the production operation level. A big
challenge for analytical methods is how to accurately derive the cost that each process
actuates. Most analytical models focused on the derivation of detailed processes but
lack of adequate consideration on the cost that each process broken down takes.
A new trend in product costing is the inclusion of manufacturing system costs in
the estimation of a part’s cost (Koonce et al., 2003). This trend can be considered as
the enhancement to analytical models in the perspective of providing reasonable cost
allocation rules. ABC is a typical method in this view. ABC is able to provide an
insight into more detailed production information and links final product cost to
resource consumption with specific activities (Cooper, 1993). Ozbayrak et al. (2004)
applied ABC method to cost estimation in push/pull advanced manufacturing system
with the support of simulation technique. The resource consumption was acquired
through simulation and the anticipated product cost was calculated. Staub-French
et al. (2003) developed a feature-driven ABC estimation process for construction cost
estimation. A model was built to map component features and intersection features to
specific activities. Then cost estimator adjusted construction cost with some changes
in prior building design. Locascio (2000) developed an ABC method to model
manufacturing cycle time and cost. The factory operating costs were broken down by
time and cost was allocated to each product according to the processing it requires.
Jiao and Tseng (1999a) proposed a pragmatic approach for product costing based on
standard time estimation. ABC concept was adopted in their research and the
allocation of cost was based on processing time which was estimated by Maynard
Operation Sequence Technique. The shortcomings of above approaches adopting
ABC concept can be narrowed to three aspects. Firstly, as the foundation of ABC,
how to define activities properly has not been well addressed. Secondly, the internal
variety of mass customization inevitably brings various activities, the issue of how to
improve the efficiency of activity data organization has not been discussed in current
research. Thirdly, the approaches adopting ABC concept mostly choose indirect
intermediate drivers to allocate resource pools. Although these drivers could alleviate
the complexity of ABC, they bring errors to resource cost allocation. Especially, in
mass customization, the cost estimates may be distorted in the allocation of
plant-wide overhead cost, where the measurements of different resource pools vary
greatly.
In summary, the majority of traditional methods for product costing suffer
the drawbacks of poor accuracy, low-agility and undesirable degree of detail
JMTM (Alexander et al., 2002). Though ABC method becomes a new trend in product costing that
18,6 alleviates above drawbacks, the high level of complexity hinders its application. Some
efforts have been made. However, the problem of complexity explosion in mass
customization has not been well addressed. Additionally, the alleviation of complexity by
using indirect cost drivers inevitably sacrifices the accuracy of cost estimate and valuable
information about activity efficiency. In most cases, such tradeoff is difficult to decide and
682 the essence of ABC is likely to be confounded. Differing from the methods mentioned
above, this paper admits the complexity of ABC rather than eliminate it, and focuses on the
efficiency in managing the complexity of activity data.

3. Reversed activity-based costing procedure


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Traditional ABC process is carried out through three sequential steps (Figure 1):
(1) determine how much the organization is spending on each resource;
(2) determine what and how many resources the organization is spending on each
activity; and
(3) determine what and how many activities the organization is spending on each
cost objects.

Traditional Reversed ABC


ABC Process Process in Product Costing

Resource Resource

Resource Resource
Cost
Allocate Retrieve
Cost
Drivers Resource Expense Required Resources Drivers

Activities Activities

Activity Activity
Cost Allocate Retrieve Cost
Drivers Activity Cost Required Activities Drivers

Figure 1.
Traditional ABC process
and reversed ABC process Cost Objects Cost Objects
Based on these steps, traditional ABC process is input with consumed resource cost, and Generic activity-
then allocates the cost based on different resource drivers and activity drivers. However, dictionary-based
in product costing, the resource consumption is unknown before real production.
Although simulation technique can be adopted to predict resource consumption with method
product demands in next production period (Asiedu and Besant, 2000), the resource
consumption in mass customization is difficult to anticipate because of random orders
from customers for various products (Tseng and Jiao, 2001). To formalize an ABC-based 683
procedure for product costing, a R-ABC method is proposed. The detailed steps are
shown as follows (Figure 1):
(1) determine the design specification of cost object as well as the activity-related
features and situations;
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(2) retrieve required activities and activity driver consumption by product


specifications which are determined at design stage;
(3) determine required resource pools and resource driver consumption for
corresponding activities retrieved in step 2; and
(4) acquire unit price of each resource from updated accounting system.

Above four steps depict the fundamental procedure of product costing in this research.
Several issues exist including the description of product and its attributes,
the construction of activity data model and resource pools, and the representation of
the knowledge about the linkages among product features, activities, and resources.
The answers to these issues form the main body of this paper.
4. Generic product data modeling
Product and product family design is important in mass customization research.
Several models and approaches have been developed (Fujita, 2002; Du et al., 2001; Jiao
et al., 2000). Purposing to support activity-based product costing, the standpoint of
product data modeling in this research is to build a common structure to represent
and retrieve activity-related information in product family.

4.1 Generic bill-of-materials


Generic bill-of-materials (BOM) is adopted in this research to represent the structure
of product family. Traditional approach for variant handling is to treat each variant
as a separate product by specifying a unique BOM. This method results in a large
number of BOM structures in mass customization. Generic BOM (Hegge and
Wortmann, 1991) is put forward to handle this problem, which provides a means of
describing a large number of variants in a product family with limited amount of
data. Many research literatures tackle product family representation based on
generic BOM model (Van Veen, 1992; Erens et al., 1994; Mckay et al., 1996) and the
application of generic BOM in mass customization has been verified by Tseng and
Jiao (2001).

4.2 Activity-related index in product data model


In traditional ABC practice, cost driver usage of each activity is determined by
engineers or operators. As a new activity emerges, comprehensive activity-oriented
analysis must be carried out to establish the cost driver and driver consumption.
Activity-related indices are proposed and investigated to support and facilitate
JMTM above analysis in this research. They are abstracted from prior production
18,6 knowledge and treated as factors to infer activity driver usage. These indices are
classified into two different categories: AF and AS.
4.2.1 Activity-related features and A-GBOM. The concept of AF is proposed to
identify the features embodied in activity object which determine the consumption of
activity drivers. For example, the quantity of connectors of a component determines
684 the labor hour of connect activity. The establishment of AFs is based on existing
product design and prior production data, including product geometric characteristics
(like shape, dimensions, symmetry), material characteristics (like weight, skin
resistance), and assembling characteristics (like the quantity of connectors, quantity of
interfaces, the level of difficulty to engage), etc.
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Practically, it is difficult to collect and manage all AFs embodied in the components
with high degree of variety. A generative method is required to represent, manage and
retrieve AFs. Fortunately, generic BOM provides an efficient way to describe a large
number of variants with limited amount of data. Therefore, attached with the
information of AFs, a special generic BOM, which is called A-GBOM (Figure 2), is
formalized.
In A-GBOM, each instantiated part has a set of AFs (AFI). And the value of each
AF (AFIi) in the set is determined by both generic constituent item and the instances of
parameters. It assumes that there is an instantiated part I, which is an instance of
generic item G. There are N AFs embodied in G and M variety parameters for G. The
formulas to establish AFI of I are shown as follows:

Constituent item
a-part-of relation
Variety parameter

a-kind-of relation I0 Instance of parameter

x1 x1
Activity-related feature
I1 I2 “V” means the value of that AF
V

x1 x2

I11 I12 P2-1 P2-2


AFG2 AFG3 AFG4
V10 V11 V12

AFG1 AFG2 AFG3 P11-1 P11-2 P12-1


V1 V2 V3 AFG2 AFG4 V2-1-1 V2-1-2
V6 V7
V2-2-1
V11-1-1 V11-2-1 V12-1-1 V2-2-2
V11-1-2 V11-2-2 V12-1-2

AFP24
Figure 2. V9
AFP11 AFP22 AFP14
Structure of A-GBOM
V4 V5 V8
AFI ¼ {AFI1 ; AFI2 ; . . . ; AFIi ; . . . ; AFIN } Generic activity-
dictionary-based
X
M
AFIi ¼ AFGi þ AFPki method
k¼1

where AFI is the set of AFs of I; AFIi is the value of the i-th AF of I, i [ [1, N ]; AFGi is
the value of the i-th AF of G; i [ [1, N ]; AFPik is the value of the i-th AF of the k-th 685
parameter of G, i [ [1, N ], k [ [1, M ].
4.2.2 Activity-related situations. AF can be adopted to facilitate the estimation of the
usage of manufacturing and assembling activities. However, they cannot reflect the
measurements of preliminary activities, logistic activities, and other support activities
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in plant-wide. To have a comprehensive view of the factors related to activities, the


concept of AS is introduced.
AS is defined as the situation of an activity object which can be used to predict the
consumption of support activities. For instance, the average distance between
warehouse and work center is related with delivery activity. Possibly, there are several
ASs in each activity object and each AS can be shared by several activities. The
establishment of ASs is based on the object types or classes they belong to.
To illustrate, the ASs of purchased part or raw materials may include the quantity in
storage, time in storage, distance between warehouse and work center; the ASs
embodied in assemblies may include the area of work center; the ASs of product may
include the distance between plant and distributor; the ASs of order may include the
volume and some special requirements proposed by customer.

5. Generic activity data modeling


The primary drawback hindering the implementation of ABC is the difficulty to carry
out comprehensive analysis for activities in terms of activity driver, the usage of
activity driver, and the consumption of related resource pools. This drawback
probably results in complexity explosion when enterprises carry out ABC in mass
customization environment. Linguistic activity data modeling is the traditional manner
to express and store activity information. However, this method faces great challenges
in mass customization. Firstly, linguistic description results in much more efforts on
activity defining. Generally, it is difficult to determine suitable scale for activity item
with linguistic sentence. If an activity item tries to describe too many operations, it
may have more than one activity driver and the allocation of resources will be less
reasonable. On the other hand, if activities are too trivial, they inevitably result in too
many activity items, as well as unnecessary measurement and management cost.
Secondly, linguistic activity description probably causes the redundancy of activity
database. In many cases, different activities may have common characteristic, by
which they can be grouped together to share specific activity information. However, in
linguistic manner, this kind of commonality cannot be easily achieved and the
redundancy of activity database is inevitable. Thirdly, there are numbers of activities
in the processes of getting materials, manufacturing products, delivering items, etc.
Particularly, the process of producing and delivering highly individualized products to
customers in mass customization brings more activities arising from internal variety.
This brings challenges to activity data organization and an efficient activity data
model must be reconstructed.
JMTM To alleviate the problems discussed above, a generic activity data model, called
18,6 activity dictionary, is developed to support and catalyze ABC practice. The rationale of
activity dictionary will be introduced next, including the pattern of generic activity
definition (GAD) and the hierarchical structure of activity dictionary.

5.1 Generic activity definition


686 The data involved in ABC process are classified into three domains in this research:
product domain, activity domain and resource domain. The essence of ABC is to
develop qualitative (what) and quantitative (how many) relationships among them.
To integrate the data from these three domains, a method called GAD is shown in
Figure 3. GAD incorporates several perspectives to define an activity in the context of
ABC. The attributes include operation, object, sub-object, parent, activity driver and
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resource set. According to the production orders to manufacture a specific product


variant, GAD generates corresponding activity variants (Figure 3).
5.1.1 Operation. Operation is the key attribute to describe an activity which
represents the action required to do an activity. The instance of operation is selected
from activity database.
5.1.2 Activity driver. Activity driver forms the linkage between activity and cost
object. The usage of activity driver is calculated with the data of production records,
like production orders, maintaining records, etc.
5.1.3 Object. Activity object is defined as physical target for an operation. In
linguistic activity description, operation and its object are often combined together as
the whole concept of activity. This probably brings redundancy in activity database.
To umbrella the large number of activities by a common structure through GAD,
activity object is separated.
5.1.4 Sub-object. Activity sub-object is defined as an item which is physically
related to activity object. For example, considering the activity described as install a
CD driver to a computer casing, CD driver is the object and computer casing is the
sub-object.
5.1.5 Parent. Parent is a subassembly or an end product, which consists of at least
two components referred to as activity object and sub-object.
In traditional linguistic manner, people do not pay much attention to activity object,
sub-object and parent. Consequently, activity expression is often implicit and mostly

Product
Domain
Sub-
Casing
Object
Ha river
Ob

fra in

rd
nt

me

d
Ma
jec
e

dis
Par

Generic
t

Activity Activity
Generate Variant
Definition
SF S=2.5
Re Set

ble
n
tio

S=
A
sou

sem
Re main

era

17.
rce
Do
sou

As
Op

Activity 17.5
rce

Driver m ain Labor hour


Figure 3. Do
ity
tiv
Generic activity definition Ac
isolated from product domain. To abridge the gap between product domain and Generic activity-
activity domain, activity object, sub-object and parent should be investigated and dictionary-based
added to activity definition pattern (Figure 4).
5.1.6 Resource set. Resource set represents the resource pools required to do an method
activity. It includes two kinds of data: related resource pools (qualitative data) and the
driver consumption of them (quantitative data).
687
5.2 Activity dictionary
In ABC practice, activity database is required to organize activity information (Kaplan
and Cooper, 1997). The potential implementation of activity database in ABC is also
pointed out by Burke and Barthold (1990). However, the academic research on activity
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database is quit limited. Guidance on activity database modeling must be provided to


the enterprises which plan to develop ABC system independently. To suggest a
framework for activity database construction in mass customization environment,
activity dictionary with hierarchical structure is proposed. A schematic structure of
activity dictionary is shown in Figure 5.
The organization of activity dictionary is similar to the structure of general
dictionary. As Figure 5 shows, there is a limited defining vocabulary in general
dictionary, based on which normal words are defined. Phrases are compounded with
normal words to express specific meanings. Therefore, people are able to easily make
sentences using phrases rather than express the meanings word by word. Similarly,
activity dictionary establishes its hierarchical structure based on the pattern of GAD,
which involves operation activity level, task activity level, and activity phrases.
5.2.1 Operation activity level. Operation level of activity dictionary abstracts normal
activities into basic object-independent elements, which is well refined and assigned a
unique AF or AS. The primary attributes operation activity contains include operation
class, activity driver and resource set. Because operation activity is independent of
activity object, it can be standardized and shared to define various production tasks.
In substantiation, operation activity mount-screw can be adopted to define several
specific activities like mount screw to hard disk, mount screw to casing panel, and
other activities with the operation of mount-screw. The inclusion of resource set
enables operation activity to identify the consumption of each resource pool. Since, the
production knowledge operation activity describes is limited in a narrowed scale, the
establishment of resource set for each operation activity is comparatively easy.
5.2.2 Task activity level. Task activity is a set of operation activities which can be
encapsulated to fulfill a specific production task. Operation level and task level suggest

Component A Component B Component C Component D Figure 4.


Concept of activity object,
sub-object and parent
Activity : Install B(Object) to C(Sub-object) to form P(Parent)
JMTM Dictionary Activity Dictionary
18,6

Defining
688 Vocabulary
Operation Activities

Task Task
Word Word
Activity Activity
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Activity Activity
Phrase Phrase
Phrase Phrase

Figure 5.
Structure of general Sample Sentence Production Order
dictionary and activity
dictionary
Structure of a general dictionary Structure of an activity dictionary

a configurable means to manage a great number of activities (Figure 6). Operation level
maintains highly abstracted activities which are only related to AFs or ASs rather than
various activity objects. Task level provides pointers to organize operation activities
and encapsulates them to describe more sophisticated production tasks. This kind of
structure makes operation activities reusable to compose different tasks, and also
makes tasks configurable and adjustable.
5.2.3 Activity phrases. The concept of activity phrase is proposed to map product
specifications to production knowledge. It is defined as a set of task activities
associated to fulfill specific assembling or manufacturing orders. As Figure 7 shows,

Operation Activity Level


Decomposition tree
Activity Phrases Operation Item
Task Activity Level
Operation Item
Product Specification Task Item Operation Item
Task Item Operation Item
Task Item Operation Item
Task Item Operation Item
Task Item Operation Item
Task Item Operation Item
Task Item Operation Item
Task Item Operation Item
Task Item Operation Item
Task Item Operation Item
Figure 6. Task Item Operation Item
Fundamental structure of Task Item Operation Item
activity data model Operation Item
Operation Item
Generic activity-
Parent C : Main frame
Parent C Component A : Main board
dictionary-based
Component B : Casing
method
Task Content:

#1 Deliver : A And B : To Form C

#2 Install : A And B : To Form C


689
#3 Inspect : A and B : To Form C Figure 7.
Component A Component B #4 Mount screw : A And null : To Form C
A sample of activity
IFF B.Type = “Y” phrase
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activity phrase is object-oriented. Each activity phrase describes a basic goes-into


relationship with two generic components and one parent item. Since, product design
problem in product family is combinatorial in nature (Simpson, 2003; Fujita and
Yoshida, 2001), each activity phrase with simple goes-into relationship can be
considered as a basic building block to aggregate the structure of Generic BOM
(Figure 6).
Specific task activities are collected and encapsulated as the content of activity
phrase. There are two different mechanisms in the selection of task activities. One of
them is structure-driven mechanism. As Figure 7 shows, tasks 1, 2 and 3 are included
because of the goes-into relationship in product structure. The other one is
parameter-driven mechanism. In Figure 7, task 4 is activated if and only if the instance
Y of the type of casing is selected.

5.3 Activity driver usage calculation


Some assumptions are made in this research, which will be discussed in Section 8. One
of them suggests each well-abstracted operation has a unique AF or AS. The rate of it
is defined as the measurement of activity driver which is spent on unit AF (or AS).
Therefore, the usage of activity driver of an operation activity is the product of the rate
of its AF (or AS) and the value of corresponding AF (or AS) in its object. The derivation
of the value of AF (or AS) is shown as follows (Figure 8):

AF: # of Operation Refer Task Refer Refer # of


Activity Object
screw eyes activity to activity to to connectors
phrase
=4
Select Figure 8.
Procedure to establish the
# of value of AF or AS
Set the value
of corresponding AF screw associated with operation
eyes=4 activity
JMTM .
operation activity inquires the task it belongs to about task object;
18,6 .
to answer the inquiry, corresponding task retrieves object data from the key
attribute (product component) of the activity phrase it belongs to; and
.
the value of corresponding AF or AS embodied in that component is calculated
through A-GBOM and replies to operation activity.
690 The rates of AF (or AS) reflect the efficiency of operation activities. As the decrease of
the rate, operation activity consumes less cost driver. In other words, the efficiency of
operation activity is improved. These rates are recorded (called rate edition) in each
accounting period so as to track the improvement or deterioration of operation
activities. Moreover, the rates in new accounting period are able to be predicted using
previous rate editions.
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5.4 Initialization of resource pools


With well-abstracted activity information provided by operation activities, resource
consumption data can be established in the scale of direct cost driver. Unit prices of
direct cost drivers are mostly time consecutive. Therefore, they are more predictable
and reliable than indirect cost drivers. To initialize the resource pools before product
costing, unit price of each resource pool must be estimated. The estimation is based on
the allocation criteria and the cost data recorded in existing accounting system in
company.

6. Total product cost calculation


Total cost of a product consists of material cost and activity cost. Material cost is
determined by the components of final product. The types and quantities of
components can be derived from instantiated generic BOM. The prices of
corresponding components could be acquired from market or suppliers. As to
activity cost, based on the framework described in previous sections, cost estimators
are able to collect corresponding activities and resource information to estimate
activity cost from product specifications. The framework is schematically illustrated
by IDEF0 in Figure 9.
The formulas for total product costing are shown as follows:
X
n
Material cost ¼ p i qi
i¼1

X
m rj
X
Activity cost ¼ uj dj p0k q0k
j¼1 k¼1

X
n X
m rj
X
Total product cost ¼ Material cost þ Activity cost ¼ pi qi þ uj dj p0k q0k
i¼1 j¼1 k¼1

where n is the number of the kinds of components; m is the number of required


activities; rj is the number of required resource pools to perform activity j; pi is the
estimated price of component i; qi is the quantity of component i in final product; uj is
the value of corresponding AF or AS to activity j; (dj is the rate of AF/AS for activity j;
Cost Estimator
Generic activity definition
Activity Dictionary (Operation Level) Generic activity-
Activity Dictionary (Task Level) dictionary-based
method
Product Specification Retrieve Task Required Task Activities
Activities
A0 691
Identify
Operation Required Operation Activities
Activities
A*2

Establish Consumption of Activity Drivers


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Consumption
of Activity
Drivers
A*3

Activity Cost
Establish
Activity Cost
Figure 9.
A*4
Framework of generic
activity data model in
Mapping Rules From Task to Operation
Activity Phrases Product Data Model Allocation of Resource Pools IDEF0 diagram

p0k is the unit price of per cost driver of resource pool k; q0k is the consumption of cost
driver of resource pool k.

7. Integration of ABC and R-ABC


The proposed R-ABC process does not contradict traditional ABC process. The
introduction of R-ABC does not mean that cost estimators can find proper activities,
cost drivers, resource cost pools without conducting traditional ABC process.
Comprehensive and detailed ABC process is required and also important in the first
accounting period. After that, R-ABC process makes use of prior cost data to estimate
product cost at design stage. Meanwhile, at the end of each accounting period,
traditional ABC process is catalyzed through the verification and modification of
estimation details in current period. The integration of ABC and R-ABC transforms
traditional ABC practice into a closed-loop framework (Figure 10), which improves the
reusability of prior activity cost data and support product costing with updated
accounting information.

8. Discussion
The research in this paper makes several fundamental assumptions about the product
family and production process. Firstly, this research assumes that product family is
combinatorial in nature (Simpson, 2003; Fujita and Yoshida, 2001). Therefore, the list of
operation activities for each product can be acquired through the combination of
activity phrases. Secondly, it assumes that if an activity is well abstracted, a factor
called activity related index can be figured out to infer activity driver consumption.
Thirdly, detailed prior production process and accounting information in the first
accounting period must be in hand. Based on these data, activity dictionary can be
initialized. Lastly, the rate of AF or AS of operation activity in one accounting period is
JMTM
First Second Third
18,6 Accounting Accounting Accounting
Period Period Period

Initialize
Activity
692 Dictionary

Activity Dictionary
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R-ABC process (except


first accounting period) Update or expand
activity dictionary
Product costing
Accounting period

ABC process for


Figure 10. previous accounting Provide activity-
Integration of ABC and period related information
R-ABC Buffer zone between
accounting periods

assumed to be a constant. At the stage of product costing in mass customization, it is


very difficult to predict volume information. Although the activity cost of the same
operation activity in different production volume may not be identical in real
production, to continue our research, the rate of AF or AS of operation activity in one
accounting period is assumed to be unchanged.

9. Case study
The method proposed in this paper has been implemented in a computer assembling
company. A prototype system has been developed to facilitate traditional ABC process
and product costing (R-ABC).

9.1 Product data modeling


A product family data management module is built to organize the A-GBOM of
selected computer family, including the structure, constituent items, parameters,
instances and activity-related indices. Part of the A-GBOM is schematically shown in
Figure 11. The structure of A-GBOM can be mapped onto the abstraction and the
inheritance architectures of an object-oriented data model (Jiao and Tseng, 1999b) and
then finally implemented by relational database technologies. Figure 12 shows the
product family data model with unified modeling language class diagrams.

9.2 Activity data modeling


The activities in computer assembling in selected company are investigated. The
activities in operation level and task level are listed in Tables I and II, respectively.
MB Fixer
CD Fixer
+4
+2 A CD Fixer –2 Generic activity-
HD Fixed
Pow Connector
+2
+3
Type
B
HD Fixed –2
dictionary-based
... ...
Mainframe
C
method
Yes Pow Connector –2
Casing Power

Generic
No
693
Constituent Item
PCIE +2
Variety Parameter ... ... Intel
Supplier
AMD
Instance of Parameter
Mainboard
Activity-related Pluged PCIE –2
VRAM
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Feature and its Value


DDR Con. 0 Un-Pluged
A-part-of SDRAM Con. 0
... ...
A-kind-of DDR DDR Con. +1
Activity-related Type
features Pointer SDRAM SDRAM Con. +1
RAM Figure 11.
Part of the A-GBOM for
selected product family

Personal Computer
– Common AFs
– Common ASs Generalization/
– Product ASs Specialization
– Parameters
– Specialized ASs
+Common retrieve method() Aggregation
+Retrieve AFs()
+Set ASs() 1*
Product +...()
– Common AFs
– Common ASs 1
– Product ASs *
+ Common retrieve method()
Main frame
– Common AFs
Assembly – Common ASs
Physical Item – Assembly ASs
– Common AFs
– Common AFs – Parameters
– Common ASs
– Common ASs – Specialized ASs
–Assembly ASs
+ Common retrieve method() + Common retrieve method()
+ Common retrieve method() +Retrieve AFs()
+Set ASs()
+...()
Part
– Common AFs 1 1
* *
– Common ASs
– Part ASs
+Common retrieve method() CPU Hard Disk
– Common AFs – Common AFs
– Common ASs – Common ASs
– Part ASs – Part ASs
– Parameters – Parameters
– Specialized ASs – Specialized ASs Figure 12.
+ Common retrieve method()
+ Retrieve AFs()
+ Common retrieve method()
+ Retrieve AFs()
Product family data model
+ Set ASs() + Set ASs() for computer assembling
+...() +...()
with UML class diagrams
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18,6

694

Table I.
JMTM

Operation activities
Resource (no. of resource driver)
Activity operation Activity driver AF/AS Rate of AF/AS SFS AS TS ... DD Costper driver

Assemble Work hours Number of slots/components 0.0009 1 0.12 0.03 ... 0.62 1,168.49
Get Work hours Distance to worker (cm) 0.000014 1 0.23 0.00 ... 0.00 32.50
Pre-position Work hours Distance to holder (cm) 0.000006 1 0.12 0.03 ... 0.03 127.14
Position Work hours Number of slots/connectors 0.001373 1 0.12 0.03 ... 0.62 1,168.49
Select Work hours Difficulty level of selecting 0.0003 1 0.12 0.03 ... 0.62 1,168.49
Search Work hours Difficulty level of searching 0.0005 1 0.12 0.03 ... 0.62 1,168.49
Disassemble Work hours Number of slots/connectors 0.0008 1 0.12 0.08 ... 0.62 1,169.06
Task activity Operation activities
Generic activity-
dictionary-based
Prepare-II Delivery-II; get
Prepare-II(D) Delivery-II; get; disassemble
method
Prepare-I Get
Prepare-I(D) Get; disassemble
Install Position; assemble; mount screw
Install (T) Get; position; assemble; fix; pre-position
695
Connect Position; assemble
Connect (L) Search; select; position; assemble
Inspect Search; check
Pack/delivery Assemble; pack; delivery-I (veh)
Receive order Reception; order input
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Configurate product Check compatibility; product planning Table II.


... ... Task activities

In the realization of activity phrase, each activity item in activity phrase is treated as
an allocation rule. Therefore, a special allocation rule base is developed to manage
activity phrases. The general form of the rules is shown as follow:

IF ðobject AND sub_object AND object_parentÞ THEN ðoperation_IDÞ

To illustrate:

IF ððHardisk classÞ AND ðCasing classÞ AND ðMainFrame classÞÞ


THEN ðMountScrewÞ

The logical expression of rules can be well organized by relational database


technique and detailed data of operation activities and resource pools can be elicited
(Figure 13).

9.3 Comparison and integration of ABC and R-ABC


The method has been implemented in selected company for six accounting periods.
To validate the results of product costing, the third accounting period is selected as the
time period for comparison. Ten costing cases happened in this period are
randomly collected. Corresponding costing results and the cost calculated by
ABC process at the end of the period are both provided by the prototype system.
Table III shows the errors between selected product costing results and ABC results.

AllocationRule_OtoP Operation_Table1 AllcationRule_RtoO ResourcePool_Table


PK Object PK Operation_ID PK, FK1 Operation_ID PK ResourcePool_ID
PK Subobject PK, FK2 ResourcePool_ID
PK Objectparent Operatioin_Description ResourcePool_Description
PK,FK1 Operation_ID ActivityDriver ... Resource Driver Figure 13.
... ... Allocation rule in database
...
JMTM
Product costing result ABC result in the end
18,6 Case No. in the third accounting perioda of the third accounting perioda Percentage of error

1 261.8 245.8 6.5


2 172.4 172.4 0.0
3 247.1 240.5 2.7
696 4 180.0 167.1 7.7
5 247.1 240.5 2.7
6 198.5 184.5 7.6
7 211.0 208.6 1.2
8 173.0 173.0 0.0
9 200.9 189.5 6.0
Table III. 10 255.5 248.4 2.9
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Comparison of R-ABC
and ABC Note: aThe costing result and ABC result here stand for activity cost for selected case

Through further comparison of the results of R-ABC and ABC, the insight into the
difference is able to be figured out. For example, as Table IV shows, the efficiency of
position is improved in this accounting period: the rate of AF is decreased from 0.0015
to 0.0014.
According to the discussion in Section 5, product costing in the third accounting
period is based on the cost data in the first and second period. Therefore, the difference
between the results of ABC and R-ABC reflects the improvement or deterioration of
corresponding activity or resource consumption between current accounting period
and prior ones (Figure 14). If the changes of activity performance and resource
consumption discovered by ABC process in current period are regular, corresponding
rate of AF (or AS) and resource consumption for unit activity are renewed to update
activity dictionary then support product costing in next accounting period.
Additionally, traditional ABC process at the end of each accounting period makes
use of prior activity information and can be transformed to the process of verification
and modification of prior costing details.

10. Conclusions
The major shortcomings of traditional ABC method for product costing include the
difficulty to identify various activities; the redundancy in activity database; the cost
distortion arising from indirect resource cost driver. In this research, a generic
activity-dictionary-based method is proposed to alleviate, if not eliminate, these
drawbacks. Through the hierarchical structure of generic activity dictionary, product
family data, production knowledge, and accounting data are able to be integrated.
Consequently, the difficulty of identifying sophisticated activities can be reduced, the
redundancy of activity database can be eliminated, and the resource pools can be
allocated to activities with actual resource cost drivers. Meanwhile, through the
integration of ABC and R-ABC process, a closed-loop framework for ABC practice is
formalized, which improves the reusability of prior activity cost data and provides
updated accounting data for product costing.
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Product costing (R-ABC) ABC


Activity
phrase Task activity Operation activity Operation list
No. of Cost per Activity Rate of Activity
A B C ID Task content ID Operation AF/AS Rate of AF/AS driver cost AF/AS cost

I11 I13 I1 T0 Prepare-I: A and null:


to C M0-1 Get 800 0.000014 32.50 0.36 0.000014 0.36
T1 Prepare-I: null and B:
to C M1-1 Get 300 0.000014 32.50 0.14 0.000014 0.14
T2 Connect: A and B: to
C M2-1 Position 4 0.0015 1168.49 7.01 0.0014 6.54
M2-2 Assemble 4 0.0009 1168.49 4.21 0.0009 4.21
I11 I18 I1 T3 Prepare-I: A and null:
to C Overlap 0.00 0.00
T4 Prepare-II (D): null
and B: to C M4-1 Delivery-II 1200 1 0.00285 3.42 1 3.42
M4-2 Get 300 0.000014 32.50 0.14 0.000014 0.14
M4-3 Disassemble 6 0.0008 1,169.06 5.61 0.0008 5.61
T5 Install (T): A and B:
to C M5-1 Get 400 0.000014 32.50 0.18 0.000014 0.18
M5-2 Position 4 0.0015 1,168.49 7.01 0.0014 6.54
M5-3 Assemble 4 0.0009 1,168.49 4.21 0.0009 4.21
M5-4 Fix 4 0.0003 1,470.58 1.76 0.0003 1.76
M5-5 Pre-position 400 0.000006 127.14 0.31 0.000006 0.31
M43-2 Order input 1 1 5.91 5.91 1 5.91
... ... ... ... ... ... ...
Total activity cost
(TAC) ¼ 261.80 TAC ¼ 245.8
dictionary-based
Generic activity-

Details of product costing

comparison
method

result of the first case in


697

Table IV.
JMTM Position
18,6 Activity driver : labor hour (in second)
AF or AS : slot/connector

200501 1.626
698 200502 1.549
200503 1.373

Rate of AF (or AS)


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1.8
1.626 1.549
1.6
1.373
1.4
1.2
1.0
0.8
0.6
Figure 14.
0.4
Rates of labor hour for
position in three 0.2
accounting periods 0
200501 200502 200503

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About the authors


700 Zhaoxun Chen is a PhD Candidate of Department of Industrial Engineering and Management,
School of Mechanical Engineering, Shanghai Jiao Tong University, China. He holds a bachelor’s
degree in Industrial Engineering and a master’s degree in Management Science and Engineering
from Shanghai Jiao Tong University in China. His research interests include mass
customization, product design, cost management and management information system.
E-mail: tomtom@sjtu.edu.cn
Downloaded by National University of Singapore At 08:31 04 February 2018 (PT)

Liya Wang is a Professor of Department of Industrial Engineering and Management,


Shanghai Jiao Tong University, China. She holds a BS degree in Computer Engineering from the
Harbin Engineering University in China, a PhD in Automation from the Shanghai Jiao Tong
University in China. She has worked as an Associate Professor in CIM Research Institute of
Shanghai Jiao Tong University in China. Her research interests include mass customization,
decision support systems, and information system application. Liya Wang is the corresponding
author and can be contacted at: wangliya@sjtu.edu.cn

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