This sample essay on Destin Brass Case provides important aspects of the issue and arguments for and against as well as the needed facts. Read on this essay’s introduction, body paragraphs, and conclusion.
In the analysis we focus on the company Destine Brass, their competitors have been reducing the price and Destine Brass has not been able follow. We address this issue and by comparing activity based costing with the cost systems they already us ingrain looking for a way in which they can be more competitive on the market.
Cover page Table of Content 1. Use the Overhead Cost Activity Analysis in Exhibit 5 and other data on man factoring costs to estimate product costs for valves, pumps, and flow controllers Q. 1 When Activity Based Costing (Hetman, 2010, p. 5) is used to calculate the m monthly cost per nit, two types of costs are distinguished. Firstly the direct costs, consisting of the direct manufacturing costs and the run labor costs, and secondly the indirect costs, consisting of the machine usage costs or depreciation and the overhead costs.
These costs allow w us to calculate the monthly cost per unit, see Appendix 1 for the Excel file of the calculations. Some minor deviations from the correct cost per unit are possible since the o overhead percentages of the packing and shipping given in Exhibit 5 are rounded off and sum up to 99% instead of 100%. . Compare the estimated costs you calculate to existing standard unit costs ( Exhibit 3) and the revisited unit costs (Exhibit 4). What causes the different product costs Eng methods to produce such different results? The differences in cost can fundamentally be attributed to the difference in AC counting methods.
In Exhibit 3 Standard Unit Cost is the applied accounting method. In which all overhead is solely allocated as a percentage of the direct labor cost the (overhead rate), In this case 439%. This overhead rate is determined by dividing the total overhead c cost by the total cost of labor hours.
In which the total overhead cost is determined by us miming the sots of machine depreciation, labor, the receiving, materials handling, engine erring, packaging/ shipping, and the cost of maintenance. This percentage is then directly applied to the direct labor cost of each product. Thus albeit not evenly applied d to every product, the overhead cost is proportionately applied to each product in reggae rd to direct labor. Ultimately material cost, direct labor cost, and overhead cost are sum deed up to determine the standard unit cost of each product. Burns, 1 997, exhibit 3) This causes the pumps to appear relatives expensive in comparison to the other products cause this product is relatively labor intense. (Burns, 1997, exhibit 2) Exhibit 4 uses Revised Unit Costs as accounting method. In which the overhear allocated to a material overhead and another overhead base, based on the m aching hours, as well as accounting for the set up labor costs for every run. The mate Arial related overhead is determined by dividing the material related overhead by t he total material costs, generating a material overhead rate in this case of 48%.
The to her overhead rate is determined by dividing the total other overhead costs by the total number Of machine ours in this case generating Of $42. 9 per machine hour. This results in much of the costs being allocated to Valves instead of Flow Controller RSI, making the Flow Controllers appear much cheaper . (Burns, 1 997, exhibit 4) Unlike Standard Unit Costs as a method of accounting Revised Unit Costs allow the overhead costs to be allocated with respect to the differences in material intent ones production products and product production heavy in other production asset s.
Since valves pumps and flow controllers infant do differ in these regards among 10th errs, their respective revised standard costs and standard unit costs differ. The method we decided to use in question one is called Activity Based Pricing, where we allocate the total overhead based on the different activities In manufacture Eng. When it comes to ABACA costing, costs are assigned different activities which in term are allocated to products. This allows overhead costs to be allocated more directly to differ .NET units.
This is where ABACA costing differs from the other costing methods, the overhear ads are allocated proportionately to the cost drivers of each activity cost pool. Thus in Exhibit 5 we can see the level of “demand” of a specific production activity derived fro m each individual product. Allowing us to accurately allocate the overhead costs. Give n the fact that each of these activities have a different cost rate and that each product r squires proportionately different amounts of handling, receiving, packing and shipping g, engineering and maintenance, the total overhead allocated to each product w ill differ.
This allows us to differentiate the overhead costs of for example handling intent enslave products and maintenance intensive products, allowing us not only to see who chi products demand the highest production costs but also how and where in the production process costs are incurred. Which is the case for all production factors and pr ducts in the production process (Hetman, 2010, p. 85). 3. What are the strategic implications of your analysis? What actions would you u recommend to the managers at Destine Brass The strategic implication of our analysis is that the cost of the production can be allocated differently.
Destine Brass has not been making enough profit on their pumps, while the competitors have been decreasing their price. (case 1). When you c ampere ABACA with standard and revised costing you see that the ABACA allocates more of costs to the flow machines and less on the pumps and this could be the reason why they had problems to compete on the pump market. And pumps being 55% o f Destine brass revenue while flow controllers 21% of revenue. And also there is almost competition on the flow controllers, Destine raised the price recently with 12% with no apparent effect on demand(CASE 2).
Therefore, our first recommendation is t hat they should use the ABACA system for tracing their costs. For Destine brass this would mean having to raise the price on the flow controllers, which is a smaller part of rev menu and less competition and therefore being able to lower the price on the pumps m Nanning they would become more competitive on the pump market. Our sec Although the net income stays the same for Destine Brass, the profit margin of r each product will differ.
Although calculations show a slight difference in nominal profitability these did preferences are minute and are due to rounded off numbers and percentages. The new method of allocating cost (Activity Based Costing) allows Destine Bras s to better see the gross margins of each product thus allowing them to make MO re informed decisions on which product to drop and which to invest in ND recommendation is that they should decrease the production run of the FL intercooler 10 per month and the pumps 5 per month to one single run, mea inning that the unit cost will be highly decreased.
The third recommendation is that Destine BRB ass should consider is decreasing the amount of transaction of the flow controllers. At the e moment they have 100 transactions, if Destine could redesign their plant and strategy, a ND therefore reduce the transactions, that would mean that their handling and r excelling cost would be decreased.