| Body was 2 casionally, 2 customer ‘ofan earlier body, but mos tions caused changes in ds THE CONLEY SYSTEM Kem leared from the article that Conley also manu- factured track bodies bu that these Were of standard design. Conley had 12 models that produced in quate based on managements estimates of de- san December ofeach yeaa plan, or ules for ‘pe ralowing years operations was agreed On, which soe ed estimates of cots and profs as Well aS of sales volume. Tecded inthis budget were depatment-by Dare ment estimated cost foreach ofthe 12 models of Ime pies. These costs wee determined by totaling mated labor at an expected wage rate, estimated tral at an expected cost per unit, and an alloca~ pen or overhead that was based on the proportion of {timated total overhead costs to estimated tora direct ‘sum of the labor, materials, and labor dollars. The ‘overhead estimates for each model became the stan- dard cost of the model. 'No attempt was made in Conley’s accounts 10 record the actual costs of each model. Costs were a¢- ‘Gumulated for each of the four direct produetion de~ arments and for several service departments, Labor oats were easily obtainable from payroll records, Since all employees assigned to a production depart- nent were classified as direct labor for that depart, Trent Mateilsento the department was charged tit to the basi of signed requisition slips. Overhead costs rere charged to the department on the basis of *he ‘would reorder an exe 1 of the time som ign and hence in cost + copyright © bythe Presiden and Fellows of Harvard ‘Coage, Harvard Business Schoo cae 161-001. same perventage of direct labor 25 that weg mining the standard cost. Mee, Since Conley’s management also knew hoy truck bodies of each model were worked on Bay | epartnent monthly, te total standard cose me nt could easily be calculated by mul sty of that model produced by its anda ost As the year progressed, MANABeent vate Slosely the diffrence between the departmental ang cost and standard cost. ach truck body was complete, it cs wa ‘added to finished goods inventory at the standard cos figure. When the truck body was sold, the standard cos the cost of sales figure. This system of cox ‘ded the necessity of accumulating de ered actual costs on each specific body that was yet the company ‘could estimate, reasonably wel te Jas of its products, Moreover, manaBement belived thatthe differences between actual and standard cost provided a revealing insight into cost fluctuations tat rrentualy should lead to better cost control. AX ils ate tbultion of the costs for Depart 4% Shown in Exhibit 1. No incomplete work remained it this department ether at the beginning Ot the endof the month. poe quantity of a given materi ny units oar fe neat, pounds, nd SO on—was mult Len by apache con pert ret re See rant vee, Malmenance of cumulative Sal cel ae ty: ode number made teil cost ofeach job easy to determine. ruck Serial labor costs of making & 2 record Ya a 8 worker moved from job jab, “ica ten |(Chapter 19. Stand Cons, trate Conn Stems, Quality Cot and ln Coss 599 1 summary of Costs, Department $, November ere: Materia Labor | overhead Number | Per Per | per oftodies_| Unit_| Tort | unit | Tota | Unit | Total wo | sais | $14,150 | $2079 | $20,790 | 42079 | $20,790 3 1890 | 15120 | 7,656 | 13.248 | 16s6 | 13248 " 2985 | 31735 | 1984 | ayaa | i984 | 21824 2 895 1832 | 36640 | 1ja32 | _36,640 3 | ies0e 352502 | 24,026 94,026 1524 $1,524 dt wrkrs weekly wages were divided among sin proprio othe amount of time spent on TTroughout the shop the time of any person og onanybing direct related to an order—Job ig, fer example—as ultimately converted to a or cost and charged that job, aly Bennet overhead costs that could not be di- ssocted with @ particular job were allocated gal oson the proportional bass of direct lbor- voted. Ths, fin some month 135 direct labor- ere penton Job No. 437, and this was S percent Ralph: ‘of the 2,700 ditec labor-hours spent on ll jobs at Ben- ‘ett that month, then Job No, 437 received 5 pereent of all the overhead cost—supplies, salaries, deprecation, ‘and so forth—for that month Under this system, Bennett's management knew at the end of each month what each body job in process ‘cost to date. They could also determine total factory cost and therefore gross profit atthe completion of each job. ‘The note that Mr. Bennett attached to the magazine article read: Hlase review the system of cost accounting described in this article withthe view of possible applications to our company. Asde from the overall comparison, {am interested particularly in your opinion on Cost of paperwork and recordkeeping, 2s compared with our system, 2 Possible reasons for cost diferences between the actual and standard costs under Conley’ system. 3, How you think Conley develops the standard cost of factory overhead fora particular model forthe purpose of preparing the budge. Whether you think that we should change our period fr determining the ‘overhead allocation cate from monthly to annual Ifo, why? ‘5. Which system is better fom the standpoint of controling costs? These are ust afew questions which might be helpful in your overall analysis | would tke to discuss this question atthe next executive committee meeting. Thank you. Paul Bennett Yestions ASMé Kem, what would , you be prepared to say in "sftse to Mr. Bennett's memorandum? 2. How, if at all, should Bennett modify its present system?