Off-shoring by US Multinational corporations
Introduction
Offshoring
Offshoring is the transferring of substantial business operations or production abroad or to
other countries. Their main purpose in most instances is to benefit in terms of reduced cost of
production and labor. Companies and major international corporations engage in global
businesses to expand sales or their external market, to acquire more resources and to diversify
their business operations and participate in reduction of associated production risks.
Multinational corporations (MNC) are companies with international or foreign direct
investments. They can also be referred to as Multinational enterprises (MNE) or transnational
companies (TNC). A firm can be involved in international business by participating in various
operating modes, that’s through exporting and importing merchandise and direct or indirect
services, direct and portfolio investments and management and other collaborative arrangements
with other corporations for instance franchising business operations and production processes.
The major reasons why companies move are diverse and wide. Most Multinational
companies target horizontal growth that’s extending similar business activities to a different
Off-shoring by US Multinational Corporations
2
location or relocating to countries with suitable or convenient environmental policies. When
operating in foreign countries, companies are required to adjust their usual trading and
production processes. This is because foreign conditions and environment often dictate the more
suitable and practical method to operate besides international business differ from the usual
domestic market.
To operate and survive within a company’s or Corporation’s external environment, its
managers must not only understand the business operations but must have working knowledge of
the natural and basic social sciences in political, law, psychology, sociology and economics.
Provide an overview of this case analysis; summarize the key points.
Offshoring involves the movement of business operations to foreign countries with the main
motive of expanding the domestic market to international market. These Multinational
Corporations target countries with friendly and suitable environmental production policies and a
general environmental where they can diversify their business operations and widen their
external market. The notion of low wages and low production cost play very little role in making
off-shoring decisions, it’s the market propensity that matters and that’s the reason why major
companies have decided to transfer most of their operations to high income countries like
Australia and Canada. These is also the reason why workers from less developed countries are
relocating to high income countries.
Product costing using Activity Based Costing technique.
Activity Based costing technique is a new way of costing product by applying the costs to the
Off-shoring by US Multinational Corporations.
3
ata and care must be taken when future forecasts are being made. The identification of the cost
drivers and centers are not always straight forward and obvious. When the choice of cost drivers
is inaccurate then the whole system will be wrong.
When allocating costs to the cost centers care must be taken to control the costs by the
manager as the responsibilities are spread in all the departments. The emphasis is on the cause of
cost not on the actual cost, care must be taken not mistake the two. The original problems are
associated with the emphasis on cost.
When businesses and companies expand and grow over a certain period of
time, the nature of their transactions progressively become more complex. The costs incurred
due to the complexity of businesses vary no necessarily because of the volume. A business that
produces for instance a hundred complex and sophisticated items will need advanced support
functions than a business that produces one or two simple items. When costs are apportioned and
allocated on the basis of their volume, then the products whose outputs are the highest receive
the most or the highest level of apportioned costs. Items whose volumes are smaller take a
disproportionate length of time and material to produce but will only be apportioned and
allocated a minor proportion of the support cost.
Most costing methods are based and rely on financial costing systems and are therefore
unsuitable for critical decision making purposes. Only the production overhead costs can be
absorbed into the cost of the product for reasons of inventory valuation, while ignoring the
administrative expenses. (Staubus, 1971)
Labor hours are used as the major basis for absorption even though they form a relatively
small proportion of the total cost.
Off-shoring by US Multinational Corporations
4
The impact of Activity based accounting has been felt mostly in management accounting. The
identification and allocation of costs with the activities that cause them is clear and the cause and
effect contributes to the management control.
The identified cost drivers can be used as a cost measure and also as a performance
measure. The identification and determination of costs from cost drivers is of great assistance to
budgeting within each support department.
The existence of cost driver rates can be used and implemented as an input into the
design of all the new products and eventually modification of existing ones
While overcoming some of the historical problems related with cost allocation, the
availability of costing information is viewed positively and with confidence with relevant line
managers.
In comparison with the traditional concepts, costs are allocated and apportioned in
different proportions while pointing out the products that should be removed or improved.
Reasoned argument whether ABC should be used for decision making purposes
Activity based costing should be used by large companies because of its complex nature. A
company dealing in a limited number of products should use other types of costing methods like
absorption costing which are simple and direct instead of using the activity based method which
is complex though relatively accurate compared to the other methods.ABC requires extra
information before it can apply. For instance the number of orders and units available, the total
items or components produced and the number inspected. Some of this kind of information may
be difficult to obtain or may be unavailable or even inaccurate. These result in inaccurate
Off-shoring by US Multinational Corporations.
5
allocation of costs due to incorrect basis of allocation. The major weakness for ABC costing
technique lies in identification and determination of cost drivers and its subsequent complexity
of its calculations. When making management decisions I would certainly rely on ABC costing
technique, as of all the costing methods, it’s the most reliable one. The method used and the
composition of the cost drivers will determine its accuracy.
References
Lodge, G (1995). Managing Globalization in the Age of Interdependence. Kuala Lumpur.
Golden Books Center
Off-shoring by US Multinational Corporations
6
Weatherford, J. (2004). Genghis Khan and the Making of the Modern World, NY: Three Rivers
Press.
Hobson, M. (2004). The Eastern Origins of Western Civilization. Cambridge: Cambridge
University Press,
Steger, M. (2009). Globalization: A Very Short Introduction. New York: Oxford University Press.
Saggi, K. (2002). Trade, Foreign Direct Investment, and International Technology Transfer:
World Bank Research Observer
Held, D. et al. (1999). Global Transformations Cambridge: Polity Press
Larsson, T. (2001). The Race to the Top: The Real Story of Globalization Washington, D.C.:
Cato Institute
Giddens, A. (1991). The Consequences of Modernity Cambridge: Polity Pre
Albrow, M., King, E. (Eds) (1990). Globalization, Knowledge and Society London: Sage
