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0est|n rass: 6ase Ana|ys|s

0r. 0uncan
Fa|| 2011










Croup Hembers:
K|mber|y |ou|n
0enn|s Core
ryden Tweedy

1} Use the 0verhead 6ost Act|v|ty Ana|ys|s |n Exh|b|t 5 and other data on manufactur|ng costs to est|mate
product costs for va|ues, pumps, and f|ow contro||ers.
DESTN BRASS PRODUCTS CO.
ABC overhead aIIocation VaIves Pumps ControIIers
Monthly production (UNTS) 7,500 12,500 4,000
(1 run) (5 runs) (10 runs)
Driver Activity
Receive each component once per run $20,000 4 transactions 25 transactions 100 transactions
3% $600 19% $3,800 78% $15,600
Handle each componenet once per run $200,000 4 transactions 25 transactions 100 transactions
3% $6,000 19% $38,000 78% $156,000
One packing order per shipment $60,000 1 transaction 7 transactions 22 transactions
3% $1,800 23% $13,800 73% $43,800
Estimated engineering work order % $100,000 20% $20,000 30% $30,000 50% $50,000
Machine hours basis (HRS) $30,000 3,750 $10,417 6,250 $17,361 800 $2,222
35% 58% 7%
$410,000 $38,817 $102,961 $267,622
Receiving 0.08 0.30 3.90
Handling 0.80 3.04 39.00
Shipping 0.24 1.10 10.95
Estimated engineering 2.67 2.40 12.50
Machine hours 1.39 1.39 0.56
Overhead allocation per unit 5.18 8.24 66.91
Material 16.00 20.00 22.00
Direct labor $16 per hour
Set up labor 0.02 0.05 0.32
Run labor .25 hr per unit 4.00 .5 hr per unit 8.00 .4 hr per unit 6.40
Machine depreciation .5 hr per unit 12.50 .5 hrs per unit 12.50 .4 hrs per unit 5.00
Unit cost each 37.69 48.79 100.63


2) 6ompare the est|mated costs you ca|cu|ate to ex|st|ng standard costs (Exh|b|t 3} and the rev|sed un|t
costs (Exh|b|t 4}. what causes the d|fferent product cost|ng methods to produce such d|fferent resu|ts?
1he LradlLlonal cosLlng sysLem lumps LogeLher all overhead cosLs as an average for each producL 1he
dlfflculLy wlLh uslng Lhls meLhod ls some producLs requlre more or less LransacLlons wheLher because of
excesslve runs or Lhe complexlLy of producLlon meLhod ln Lhe LradlLlonal meLhod all acLlvlLles are
accounLed equally wlLhouL regard Lo declslons LhaL could be made day Lo day wlLhln Lhe managemenL
Leam AcLlvlLy base cosLlng provldes dlrecL Lraclng Lo speclflc acLlvlLles uslng cosL drlvers 1he
managemenL Leam can beLLer see whaL causes cosL Lo affecL proflLablllLy
Where Lhe dlsparlLy lles uslng Lhe LradlLlonal meLhod ls flow conLrollers caused a skewed vlew of
overhead for Lhe Lwo lesser expenslve producLs valves and pumps 1herefore Lhe sales prlce of valves
and pumps are Loo hlgh and flow conLrollers are Loo low 1hls causes uesLln Lo be sLraLeglcally non
compeLlLlve lnsLead uslng an overhead percenLage of 33 Lhe overhead percenLage needs Lo be
drlven by lLs acLlvlLy 1hls would change Lhe overhead cosL for each producL Lo 3 (valves) 19
(pumps) and 78 (flow conLrollers)
under Lhe revlsed meLhod by conLrasL valves and pumps appear more expenslve and flow conLrollers
appear subsLanLlally less expenslve compared Lo uslng AcLlvlLy base cosLlng 1hls ls because Lhe revlsed
meLhod applles overhead aL an absorpLlon raLe based on maLerlal relaLed overhead llow conLrollers
have only sllghLly maLerlal Lhan pumps buL do use much more labor Powever Lhls ls noL reflecLed ln
Lhe revlsed sLandard unlL cosLs 1herefore flow conLrollers do noL have enough overhead assoclaLed
wlLh Lhe labor golng lnLo maklng Lhls producL lnsLead Lhe overhead was belng allocaLed Lo pumps and
valves
When comparlng LradlLlonal cosLlng and acLlvlLy base cosLlng for uesLln Lhe slgnlflcanL dlfference ls Lhe
allocaLlon of Lhe overhead Lo Lhe overall producL cosL uslng AcLlvlLybase cosLlng Lhe company can
see a clearer plcLure of how overhead ls used when drlven by Lhe acLlvlLy funcLlon lnsLead of a slmple
averaglng 1he managemenL Leam can now make a more exacL declslon for lLs proflLablllLy 8ecause
Lhese producLs are dlverse ln naLure and markeLlng sLraLegy acLlvlLy cosLlng would be Lhe mosL accuraLe
meLhod Lo undersLandlng Lhe producL and lLs manufacLurlng lmpllcaLlons
lease see aLLachmenL 1 and 2 for Lhe compleLe comparlson

3) what are the strateg|c |mp||cat|ons of your ana|ys|s? what act|ons wou|d you recommend to managers at
0est|n rass Products 6ompany?
Cur analysls currenLly shows Lhe proflL margln for valves ls 33 umps ls 40 and for llow ConLrollers
ls ( 4) As well Lhe acLlvlLy base cosLlng ls a beLLer sysLem for Lhe complex naLure of Lhls
manufacLurlng process lrom Lhe acLlvlLy base cosLlng flgures (ALLachmenL 3) we can make
recommendaLlons for Lhe overall managemenL sLraLegy
llrsL ManagemenL needs Lo conslder Lhe perLlnenL facLs of Lhls case
12 lncrease ln sales prlce for flow conLrollers dld noL affecL quanLlLy demanded
uesLln's repuLaLlon for quallLy ls based upon each producL as well as how Lhey complemenL each
oLher
ach ls needed Lo malnLaln Lhe quallLy of Lhe oLher producL
uesLln ls sLruggllng remaln compeLlLlve wlLh prlce for Lhelr pumps
1he new acLlvlLybase cosL reveals several mlsconcepLlons wlLhln Lhe proflLablllLy of Lhe producLs
uesLln's proflL goal does noL accounL for Lhe markeL facLors surroundlng each producL
ManagemenL Leam ls assumlng all producLs are homogeneous ln behavlor
uesLln 8rass does noL caLer Lo a varleLy of cusLomers
uesLln LargeLs cusLomers who requlre hlgh level of speclflcaLlon
CompeLlLlon ls currenLly erodlng Lhelr markeL share by underblddlng Lhem
uesLln 8rass operaLes on a !l1 producLlon schedule Powever Lhls schedule ls causlng Lhelr
recelvlng and handllng cosLs Lo be Loo hlgh for Lhe flow conLrollers !l1 ls managed besL as a flnlshed
goods lnvenLory sysLem uesLln 8rass ls creaLlng Lhe flnlshed good Powever Lhelr componenLs are
closer Lo Lhe raw maLerlals sLaLe when recelved
We could esLlmaLe !l1 ls cosLlng an assumed 3 of more premlum from lL foundrles
uesLln should conslder Lhelr poslLlon ln Lhe manufacLurlng process
8rass (8M) loundry componenLs(Wl) uesLln 8rass(lC) CusLo mer
1he managers are looklng aL each verLlcal producL as slngle producL llnes ln reallLy each producL
complemenLs Lhe oLhers 1he shorLLerm recommendaLlons deal wlLh Lhe verLlcal analysls 1he long
Lerm recommendaLlons requlre looklng aL Lhe horlzonLal supply chaln 8ememberlng LhaL Lhe uesLln's
quallLy had Lo remaln consLanL whlle Lhe sales prlce needs Lo be compeLlLlve we make Lhe followlng
recommendaLlons
ConverL Lhe currenL accounLlng sysLem Lo acLlvlLy base cosLlng 1hls glves a clearer plcLure of Lhe
lndlvldual producL's cosL Lo Lhe company
llow conLrollers are acLually loslng money on each unlL sell

An analysls of Lhe markeL demand and supply wlll need Lo be done Lo undersLand Lhe mosL
advanLageous proflL margln uesLln's managemenL goals could Lhen be resLrucLured Lo be a
reflecLlon of Lhe markeL and compeLlLlon

Conslder longLerm loglsLlcal changes Lo decrease handllng cosL (1hls would requlre an analysls on
posslble shorLLerm and longLerm componenL sLorage as compared Lo sLralghL !l1) 1he research
should show lf uesLln should change Lo a modlfled !l1 orderlng process
Modlfled !l1 could reduce handllng and recelvlng cosLs by 30 Powever uesLln would have
conslder Lhe added expense of shorL Lerm sLorage for flow conLroller componenLs

1he followlng Lable shows a summary of Lhe dlfference ln cosLlng LhaL could occur wlLhln each
producL caLegory 1he flrsL row shows Lhe resulL of Lhe 1radlLlonal CosLlng 1he second row shows
Lhe changed cosL resulL from swlLchlng Lo AcLlvlLy 8ase CosLlng 1he Lhlrd row shows an esLlmaLed
resulL of changlng Lo AcLlvlLy 8ase CosLlng and applylng Modlfled !l1 lnvenLory sysLem 1he lasL row
deflnes Lhe currenL sales prlce
valves umps llow ConLrollers
1radlLlonal cosL 3736 6312 3630
AcLlvlLy 8ase CosLs* 3769 4879 10063
AcLlvlLy base wlLh
recommendaLlons
3769 4879 4732
Sales prlce 3778 8126 9707

* see aLLachmenL 4


4) Assume that |nterest |n a new bas|s for cost account|ng at 0est|n rass Products rema|ns h|gh. |n the
fo||ow|ng month, quant|t|es produced and so|d, act|v|t|es, and costs were a|| at standard. how much h|gher
or |ower wou|d the net |ncome reported under the act|v|tytransact|onbased system be than the net |ncome
that w||| be reported under the present, more trad|t|ona| system? why?
uslng Lhe numbers ln xhlblL 1 here ls how uesLln 8rass Company neL lncome would look
resenL 1radlLlonal SysLem
valves umps llow ConLrollers
unlL CosLs $3736 $6312 $3630
Selllng rlce $3778 $8126 $9707

1ota|s 51S16S000 52267S000 516228000

Net Income 5S4068000

AcLlvlLy1ransacLlon 8ased
valves umps llow ConLrollers
unlL CosLs $3769 $4879 $10063
Selllng rlce $3778 $8126 $9707

1ota|s 51S067S00 540S87S00 (51424000)

Net Income 5S4231000

Net Income D|fference 5163000

1he maln dlfference for Lhls lncrease ln neL lncome ls Lhe amounL of overhead applled Lo Lhe llow
conLrollers ln Lhe presenL LradlLlonal sysLem Lhese producLs Lake on Lhe overhead of Lhe pumps and
Lhe valves boLh of whlch are much hlgher Lhan Lhe flow conLrollers

ALLachmenL 1 Cverhead raLe 1radlLlonal
DESTN BRASS PRODUCTS CO.
$tandard Unit Costs VaIves Pumps ControIIers
(1 run) (5 runs) (10 runs)
Material 16.00 20.00 22.00
Direct labor 4.00 8.00 6.40
Overhead @ 439% of
direct labor $ 17.56 35.12 28.10
37.56 63.12 56.50
Machine depreciation $270,000
Set up labor $2,688
Receiving $20,000
Material handling $200,000
Engineering $60,000
Packing & shipping $100,000
Maintenance $30,000
Total overhead $682,688
Total run labor = 9,725 hours x $16 = $155,600
Overhead rate 682,688 = 439%
155,600



ALLachmenL 2 Cverhead AbsorpLlon 8aLe
DESTN BRASS PRODUCTS CO.
#evised $tandard Unit Costs VaIves Pumps ControIIers
Monthly production (UNTS) 7,500 12,500 4,000
(1 run) (5 runs) (10 runs)
Material 16.00 20.00 22.00
Material overhead (48%) 7.68 9.60 10.56
Set up labor 0.02 0.05 0.48
Direct labor 4.00 8.00 6.40
Other overhead (machine hour basis) 21.30 21.30 8.52
Revised standard cost 49.00 58.95 47.96
MateriaI #eIated Overhead
Receiving $20,000
Material handling $200,000
Total $220,000
Overhead absorption rate
$220,000 = 48% (material cost basis)
$458,000
Other Overhead
Machine depreciation $270,000
Engineering $60,000
Packing & shipping $100,000
Maintenance $30,000
Total $460,000
Overhead Absorption #ate
$460,000 = $42.59
10,800 hrs


ALLachmenL 3 AcLlvlLy 8ase CosLlng
DESTN BRASS PRODUCTS CO.
ABC overhead aIIocation VaIves Pumps ControIIers
Monthly production (UNTS) 7,500 12,500 4,000
(1 run) (5 runs) (10 runs)
Driver Activity
Receive each component once per run $20,000 4 transactions 25 transactions 100 transactions
3% $600 19% $3,800 78% $15,600
Handle each componenet once per run $200,000 4 transactions 25 transactions 100 transactions
3% $6,000 19% $38,000 78% $156,000
One packing order per shipment $60,000 1 transaction 7 transactions 22 transactions
3% $1,800 23% $13,800 73% $43,800
Estimated engineering work order % $100,000 20% $20,000 30% $30,000 50% $50,000
Machine hours basis (HRS) $30,000 3,750 $10,417 6,250 $17,361 800 $2,222
35% 58% 7%
$410,000 $38,817 $102,961 $267,622
Receiving 0.08 0.30 3.90
Handling 0.80 3.04 39.00
Shipping 0.24 1.10 10.95
Estimated engineering 2.67 2.40 12.50
Machine hours 1.39 1.39 0.56
Overhead allocation per unit 5.18 8.24 66.91
Material 16.00 20.00 22.00
Direct labor $16 per hour
Set up labor 0.02 0.05 0.32
Run labor .25 hr per unit 4.00 .5 hr per unit 8.00 .4 hr per unit 6.40
Machine depreciation .5 hr per unit 12.50 .5 hrs per unit 12.50 .4 hrs per unit 5.00
Unit cost each 37.69 48.79 100.63